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The SAB provides a mechanism for EPA to receive peer review and other advice in the use of science at EPA. The SAB is authorized to, among other things, review the adequacy of the scientific and technical basis of EPA’s proposed regulations. The SAB and its subcommittees or panels focus on a formal set of charge questions on environmental science received from the agency. Depending on the nature of the agency’s request, the entire advisory process generally takes 4 to 12 months from the initial discussion on charge questions with EPA offices and regions to the delivery of the final SAB report. Figure 1 depicts the stages of the SAB advisory process. CASAC provides independent advice to EPA on “air quality criteria.”Under the Clean Air Act as amended, CASAC is to review the criteria and the existing NAAQS every 5 years and make recommendations to EPA for new standards and revisions of existing standards, as appropriate. In addition, CASAC is directed to advise EPA of the areas in which additional knowledge is required to appraise the adequacy and basis of the NAAQS and describe the research efforts necessary to provide the required information. CASAC also is directed to advise EPA of the relative contribution to air pollution of concentrations of natural as well as human activity, and any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of the NAAQS. CASAC’s advisory process is similar to the SAB’s process, including the option of establishing subcommittees and panels that send their reports and recommendations to CASAC. As federal advisory committees, the SAB and CASAC are subject to FACA, which broadly requires balance, independence, and transparency. FACA was enacted, in part, out of concern that certain special interests had too much influence over federal agency decision makers. The head of each agency that uses federal advisory committees is responsible for exercising certain controls over those advisory committees. For example, the agency head is responsible for establishing administrative guidelines and management controls that apply to all of the agency’s advisory committees, and for appointing a Designated Federal Officer (DFO) for each advisory committee. Advisory committee meetings may not occur in the absence of the DFO, who is also responsible for calling meetings, approving meeting agendas, and adjourning meetings. As required by FACA, the SAB and CASAC operate under charters that include information on their objectives, scope of activities, and the officials to whom they report. Federal advisory committee charters must be renewed every 2 years, but they can be revised before they are due for renewal in consultation with GSA. An analysis of changes in the SAB’s charter regarding to whom the SAB is to provide advice is included in appendix I. requested advice from the SAB regarding two reviews the SAB was conducting. According to EPA officials, this was the first time representatives of a congressional committee formally requested advice from the SAB. Both requests were addressed and submitted directly to the SAB Chair and the Chair of the relevant SAB panel and sent concurrently to the SAB staff office and EPA Administrator. While ERDDAA does not outline a role for EPA in mediating responses from the SAB to the designated congressional committees, EPA identifies such a role for itself under FACA. Specifically, EPA points to the DFO’s responsibility to manage the agenda of an advisory committee. Also under FACA, EPA is responsible for issuing and implementing controls applicable to its advisory committees. Responses to the committee’s requests for scientific advice were handled by the SAB staff office and EPA’s Office of Congressional and Intergovernmental Relations (OCIR). The SAB staff office and, later, OCIR responded to the committee’s first request for advice, and OCIR responded to the committee’s second request for advice. See table 1 for more information on these requests. EPA’s procedures for processing congressional requests for scientific advice from the SAB do not ensure compliance with ERDDAA because the procedures are incomplete and do not fully account for the statutory access designated congressional committees have to the SAB. Specifically, EPA policy documents do not clearly outline how the EPA Administrator, the SAB staff office, and members of the SAB panel are to handle a congressional committee’s request for advice from the SAB. In addition, EPA policy documents do not acknowledge that the SAB must provide scientific advice when requested by select congressional committees. EPA’s written procedures for processing congressional committee requests to the SAB are found in the SAB charter and in the following two documents that establish general policies for how EPA’s federal advisory committees are to interact with outside parties: EPA Policy Regarding Communication Between Members of Federal Advisory Committee Act Committees and Parties Outside of the EPA (the April 2014 policy), and Clarifying EPA Policy Regarding Communications Between Members of Scientific and Technical Federal Advisory Committees and Outside Parties (the November 2014 policy clarification). Collectively, the SAB’s charter, EPA’s April 2014 policy, and EPA’s November 2014 policy clarification provide direction for how EPA and the SAB are to process requests from congressional committees. However, these documents do not clearly outline procedures for the EPA Administrator, the SAB staff office, and members of the SAB panel to use in processing such requests. At the time of the House committee’s two requests to the SAB in 2013, the SAB charter was the only EPA document that contained written policy relating to congressional committee requests under ERDDAA. The SAB charter briefly noted how congressional committees may access SAB advice, stating; “While the SAB reports to the EPA Administrator, congressional committees specified in ERDDAA may ask the EPA Administrator to have SAB provide advice on a particular issue.” (GAO italics) Beyond what the charter states, however, no EPA policy specified a process the Administrator should use to have the SAB provide advice and review a congressional request. In response to a request from the SAB staff office that EPA clarify the procedures for handling congressional committee requests, EPA, through an April 4, 2014, memorandum informed the SAB that committee members themselves and the federal advisory committees as a whole should refrain from directly responding to these external requests. Attached to the memorandum was the April 2014 policy that stated: “if a FACA committee member receives a request relating to the committee’s work from members of Congress or their staff, or congressional committees, the member should notify the DFO, who will refer the request to the EPA OCIR. OCIR will determine the agency’s response to the inquiry, after consulting with the relevant program office and the DFO.” This policy, however, did not provide more specific details on processing requests from congressional committees under ERDDAA. In November 2014, EPA issued a clarification to the April 2014 policy, specifying that SAB members who receive congressional requests pursuant to ERDDAA should acknowledge receipt of the request and indicate that EPA will provide a response. The November 2014 policy clarification does not identify the SAB as having to provide the response. The November 2014 policy clarification also stated that the request should be forwarded to the appropriate DFO and that decisions on who and how best to respond to the requests would be made by EPA on a case-by-case basis. While the November 2014 policy clarification provides greater specificity about processing requests, it is not consistent with the SAB charter because the policy indicates that congressional committee requests should be handled through the DFO, whereas the charter indicates that they should be handled through the EPA Administrator and provides no further information. A senior-level EPA official stated that the agency considered that the charter and the November 2014 policy clarification differed in the level of detail, but not in the broad principle that the agency is the point of contact for congressional requests to the SAB (and SAB responses to those requests). However, under the federal standards of internal control, agencies are to clearly document internal controls, and the documentation is to appear in management directives, administrative policies, or operating manuals. While EPA has documented its policies, they are not clear, because the charter and the November 2014 policy clarification are not consistent about which office should process congressional requests. Agency officials said that the SAB charter is up for renewal in 2015. By modifying the charter when it is renewed to reflect the language in the November 2014 policy clarification—that congressional requests should be forwarded to the appropriate DFO— EPA can better ensure that its staff process congressional committee requests consistently when the agency receives such a request. Moreover, neither the April 2014 policy nor the November 2014 policy clarification clearly documents EPA’s procedures for reviewing congressional committee requests to determine which questions would be taken up by the SAB consistent with the federal standards of internal control. Because EPA’s procedures for reviewing congressional committee requests are not documented, it will be difficult for EPA to provide reasonable assurance that its staff are appropriately applying criteria when determining which questions the SAB will address. EPA officials told us that internal deliberations in response to a congressional request follow those that the agency would apply to internal requests for charges to the SAB. Specifically, officials told us that EPA considers whether the questions are science or policy driven, whether they are important to science and the agency, and whether the SAB has already undertaken a similar review. In addition, under ERDDAA, the SAB is required to provide requested scientific advice to select committees, regardless of EPA’s judgment. As EPA has not fully responded to the committee’s two 2013 requests to the SAB, by clearly documenting its procedures for reviewing congressional requests to determine which questions should be taken up by the SAB and criteria for evaluating requests, the agency can provide reasonable assurance that its staff process these and other congressional committee requests consistently and in accordance with both FACA and ERDDAA. Furthermore, the charter states that when scientific advice is requested by one of the committees specified in ERDDAA, the Administrator will, when appropriate, forward the SAB’s advice to the requesting congressional committee. Neither the charter nor the April 2014 policy and November 2014 policy clarification specify when it would be “appropriate” for the EPA Administrator to forward the SAB’s advice to the requesting committee. Such specificity would be consistent with federal standards of internal control that call for clearly documenting internal controls. Without such specification, the perception could be created that EPA is withholding information from Congress that the SAB is required to provide under ERDDAA. EPA officials stated that the EPA Administrator does not attempt to determine whether advice of the SAB contained in written reports should be forwarded to the requesting committee and that all written reports are publically available on the SAB website at the same time the report is sent to the EPA Administrator. By modifying the charter or other policy documents to reflect when it is and when it is not appropriate for the EPA Administrator to forward the advice to the requesting committee, EPA can better ensure transparency in its process. In general, under FACA, as a federal advisory committee, the SAB’s agenda is controlled by its host agency, EPA. As such, the SAB generally responds only to charge questions put to it by EPA although, under ERDDAA, the SAB is specifically charged with providing advice to its host agency as well as to designated congressional committees. In addition, it is EPA’s responsibility under GSA regulations for implementing FACA to ensure that advisory committee members and staff understand agency-specific statutes and regulations that may affect them, but nothing in the SAB charter, the April 2014 policy, or the November 2014 policy clarification communicates that, ultimately, SAB must provide scientific advice when requested by congressional committees. For example, we found no mechanism in EPA policy for the SAB to respond on its own initiative to a congressional committee request for scientific advice unrelated to an existing EPA charge question. A written policy for how the SAB should respond to a congressional committee request that does not overlap with charge questions from EPA would be consistent with federal internal control standards. Moreover, such a policy would better position the SAB to provide the advice it is obligated to provide under ERDDAA and for EPA to provide direction consistent with GSA regulations for implementing FACA. CASAC has provided certain types of advice related to the review of NAAQS. The Clean Air Act requires CASAC to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. According to a senior-level EPA official, CASAC has carried out its role in reviewing the air quality criteria and the NAAQS, but has never provided advice on adverse social, economic, or energy effects related to NAAQS because to date EPA has not asked CASAC to do so. This is in part because NAAQS are to be based on public health and welfare criteria, so information on the social, economic, or energy effects of NAAQS are not specifically relevant to setting NAAQS. In a June 2014 letter to the EPA Administrator, CASAC indicated that, at the agency’s request, it would review the impacts (e.g., the economic or energy impacts) of strategies for attaining or maintaining the NAAQS but stressed that such a review would be separate from reviews of the scientific bases of NAAQS. In response to such a request, the letter stated that an ad hoc CASAC panel would be formed to obtain the full expertise necessary to conduct such a review. A senior-level EPA official stated that EPA continues to examine this issue and is considering how to proceed. Information from EPA-requested reviews could be useful for the states, which implement the strategies necessary to achieve the NAAQS. EPA is required to provide states, after consultation with appropriate advisory committees, with information on air pollution control techniques, including the cost to implement such techniques. 42 U.S.C. § 7408(b)(1) (2015). According to a senior-level EPA official, EPA collects this information from other federal advisory committees, the National Academy of Sciences, and state air agencies, among others, and EPA fulfills its statutory obligation by issuing Control Techniques Guidelines and other implementation guidance. EPA has policies and guidance to help ensure that its federal advisory committees maintain their independence from the agency when performing their work. Under GSA regulations for implementing FACA, agencies must develop procedures to ensure that the federal advisory committees are independent from the agency when rendering judgments. EPA policies and guidance to help ensure the independence of its federal advisory committees include general discussions of FACA requirements that apply to all of EPA’s federal advisory committees as well as those specifically for the SAB. For example, the April 2014 Policy refers to the agency’s responsibilities under FACA to maintain its separation from its federal advisory committees. In addition, EPA’s Scientific Integrity Policy sets out the expectation that all agency employees, including scientists, managers and political appointees, will ensure, among other things, that the agency’s scientific work is of the highest quality and free from political interference or personal motivations. This policy states that EPA prohibits managers and other agency leadership from intimidating or coercing scientists to alter scientific data, findings, or professional opinions or to inappropriately influence scientific advisory boards. The agency has also developed the EPA Peer Review Handbook to provide guidance to EPA staff and managers who are planning to conduct peer reviews. The handbook includes information on planning and conducting a peer review as well as the types of peer reviews performed by external peer reviewers, such as federal advisory committees. Specifically, the handbook provides information on the independence aspects of a peer review, such as how closely EPA officials should interact with peer reviewers when a review is being conducted to maintain independence. The SAB staff office has also developed documents that contain some references to how the SAB and CASAC can maintain their independence from EPA. Specifically, the SAB Office developed a handbook for SAB members that includes a section on how SAB members should expect to For example, the handbook states that maintain their independence.SAB committee and panel members are expected to avoid interaction with anyone—including agency representatives or members of the interested public—who might create a perception of conflict of interest. The SAB handbook also has a section on the role of the agency during the SAB’s report preparation phase. This section states that the agency should not in any way approve or attempt to influence the content of draft panel or committee reports. In addition, EPA officials explained that the agency does not review or comment on drafts of SAB or CASAC products, so that it cannot influence them in their final form. Finally, the SAB office, as part of a fiscal year 2012 list of initiatives to enhance public involvement in SAB and CASAC activities included a statement that the SAB office and federal advisory committees would not accept a charge from EPA that unduly narrows the scope of an advisory activity. EPA’s SAB plays an important role assisting the agency in using high- quality science by providing EPA with scientific advice on a wide range of matters and reviewing scientific research the agency uses when developing environmental regulations. Under ERDDAA, the SAB is also required to provide scientific advice to designated congressional committees when requested. In November 2014, EPA issued a clarification revising its policy for how it processes congressional committees’ requests for scientific advice from the SAB. However, shortcomings exist with EPA’s policy documents. First, the November 2014 policy clarification differs from the SAB’s charter regarding which offices should receive and process congressional requests. As a result, EPA staff may not process congressional committee requests consistently, since the treatment will vary depending on whether staff follow the policy clarification or the charter. Agency officials said that the SAB charter is up for renewal in 2015. By modifying the charter when it is renewed to reflect the language in the November 2014 policy clarification, that congressional requests should be forwarded to the appropriate DFO, EPA can better ensure that its staff process congressional committee requests consistently when the agency receives them. Additionally, EPA has not documented its procedures for reviewing congressional committee requests to determine which questions should be taken up by the SAB or criteria for evaluating those requests. By documenting the agency’s procedures and criteria, EPA can provide reasonable assurance that its staff handle congressional requests consistently and in accordance with both FACA and ERDDAA. Furthermore, the SAB’s charter states that the Administrator will forward the SAB’s response to a committee’s request when appropriate, but EPA has not specified in policy documents when it would be appropriate for the Administrator to forward the SAB’s advice to the requesting committee. Without such specification, the perception could be created that EPA is withholding information from Congress that the SAB is required to provide under ERDDAA. By clarifying procedures to reflect when it is and when it may not be appropriate for the Administrator to forward the advice to the requesting committee, EPA can better ensure transparency in its process and consistency with ERDDAA. Finally, it is EPA’s responsibility to ensure that advisory committee members and staff understand agency-specific statutes and regulations that may affect them under regulations for implementing FACA. However, EPA policy documents do not specify how the SAB would respond on its own initiative to a congressional committee’s request for scientific advice unrelated to an existing EPA charge question, as it must do under ERDDAA. By documenting procedures on how the SAB should respond to a congressional committee request that does not overlap with charge questions from EPA, the agency would better position the SAB to provide the advice it is obligated to provide under ERDDAA and EPA itself to provide direction consistent with regulations for implementing FACA. To better ensure compliance with ERDDAA when handling congressional requests for scientific advice from EPA’s SAB, we recommend that the EPA Administrator take the following four actions: Clarify in the charter when it is renewed which offices should receive and process congressional requests. Document procedures for reviewing congressional committee requests to determine which questions should be taken up by the SAB and criteria for evaluating such requests. Clarify in policy documents when it is and when it is not appropriate for the EPA Administrator to forward advice to the requesting committee. Specify in policy documents how the SAB should respond to a congressional committee’s request for scientific advice unrelated to an existing EPA charge question. We provided EPA with a draft of this report for review and comment. In written comments, reproduced in appendix II, EPA stated that it concurred with the recommendations in the report and provided information on planned actions to address each recommendation. EPA also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the EPA Administrator, 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 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 contributions to this report are listed in appendix III. The Environmental Research, Development, and Demonstration Authorization Act of 1978 (ERDDAA) mandated that EPA establish the SAB and required the SAB to provide the EPA Administrator with scientific advice as requested. Congress amended ERDDAA in 1980 to require EPA’s SAB to provide scientific advice to designated congressional committees when requested. Below is our analysis of the changes to the charter regarding to whom the SAB is to provide advice. In 1978, the Charter Objectives and Responsibilities stated that: “The objective of the Board is to provide advice to EPA’s Administrator on the scientific and technical aspects of environmental problems and issues. The Board reports to the Administrator. It will review issues, provide independent advice on EPA’s major programs, and will perform special assignments as requested by the Agency and as required by the ERDDAA of 1978 and the CAA Amendments of 1977.” In response to the ERDDAA amendments, EPA changed the charter in 1981 to reflect that certain congressional committees could also request advice. Additional changes to the charter over the years regarding to whom the SAB is to provide advice are reflected in the table below. In addition to the individual named above, Vincent Price and Janet Frisch, Assistant Directors; Ulana Bihun; Antoinette Capaccio; Greg Carroll; and John Delicath made key contributions to this report. | EPA formulates rules to protect the environment and public health. To enhance the quality and credibility of such rules, EPA obtains advice and recommendations from the SAB and CASAC—two federal advisory committees that review the scientific and technical basis for EPA decision-making. ERDDAA requires the SAB to provide both the EPA Administrator and designated congressional committees with scientific advice as requested. Amendments to the Clean Air Act established CASAC to, among other things, provide advice to the Administrator on NAAQS. GAO was asked to look into how the SAB and CASAC are fulfilling their statutory obligations in providing such advice. This report examines (1) the extent to which EPA procedures for processing congressional requests to the SAB ensure compliance with ERDDAA; (2) the extent to which CASAC has provided advice related to NAAQS; and (3) policies EPA has to ensure that the SAB and CASAC maintain their independence when performing their work. GAO reviewed relevant federal regulations and agency documents, and interviewed EPA, SAB, and other relevant officials. The Environmental Protection Agency's (EPA) procedures for processing congressional requests for scientific advice from the Science Advisory Board (SAB) do not ensure compliance with the Environmental Research, Development, and Demonstration Authorization Act of 1978 (ERDDAA) because these procedures are incomplete. For example, they do not clearly outline how the EPA Administrator, the SAB staff office, and others are to handle a congressional committee's request. While the procedures reflect EPA's responsibility to exercise general management controls over the SAB and all its federal advisory committees under the Federal Advisory Committee Act (FACA), including keeping such committees free from outside influence, they do not fully account for the specific access that designated congressional committees have to the SAB under ERDDAA. For example, EPA's policy documents do not establish how EPA will determine which questions would be taken up by the SAB. EPA officials told GAO that in responding to congressional requests, EPA follows the same process that it would apply to internal requests for questions to the SAB, including considering whether the questions are science or policy driven or are important to science and the agency. However, under ERDDAA, the SAB is required to provide requested scientific advice to select committees, regardless of EPA's judgment. By clearly documenting how to handle congressional requests received under ERDDAA consistent with federal standards of internal control, EPA can provide reasonable assurance that its staff process responses consistently and in accordance with the law. The Clean Air Scientific Advisory Committee (CASAC) has provided certain types of advice related to the review of national ambient air quality standards (NAAQS), but has not provided others. Under the Clean Air Act, CASAC is to review air quality criteria and existing NAAQS every 5 years and advise EPA of any adverse public health, welfare, social, economic, or energy effects that may result from various strategies for attainment and maintenance of NAAQS. An EPA official stated that CASAC has carried out its role in reviewing the air quality criteria and the NAAQS, but CASAC has never provided advice on adverse social, economic, or energy effects related to NAAQS because EPA has never asked CASAC to do so. In a June 2014 letter to the EPA Administrator, CASAC indicated it would review such effects at the agency's request. EPA has policies and guidance to help ensure that its federal advisory committees—including the SAB and CASAC—maintain their independence from the agency when the advisory committees perform their work. Under General Services Administration regulations for implementing FACA, an agency must develop procedures to ensure that its federal advisory committees are independent from the agency when rendering judgments. EPA policies and guidance to help ensure the independence of its federal advisory committees include guidance specifically for the SAB and general requirements that apply to all of EPA's federal advisory committees, including the SAB and CASAC. For example, EPA's Scientific Integrity Policy states that EPA prohibits managers and other agency leadership from intimidating or coercing scientists to alter scientific data, findings or professional opinions, or inappropriately influencing scientific advisory boards. GAO recommends that to better ensure compliance with ERDDAA, EPA take steps to improve its procedures for processing congressional committee requests to the SAB for advice. EPA agreed with GAO's recommendations. |
those sectors where USTR has negotiating authority because of some countries’ expected opposition to further tariff reductions. At Singapore, proposals are expected for WTO members to begin work on the next generation of trade issues. However, because these issues include areas heretofore outside the scope of detailed trade negotiations—environmental protection, investment rules, competition policy, labor standards, and bribery and corruption—it is unlikely members will reach consensus on the WTO’s role. Of these issues, only environment is on the WTO agenda already, but members have not decided how to reconcile environmental concerns with trade objectives. USTR strongly supports discussing labor standards as part of the WTO agenda. USTR may begin to address bribery and corruption issues indirectly as it seeks to expand participation in the Agreement on Government Procurement. However, many other members are just as strongly opposed to including these two issues. On the other hand, the United States is not yet prepared to agree to a negotiating program for competition policy and would prefer discussions on investment policy to take place primarily in the Organization for Economic Cooperation and Development (OECD). In earlier testimony we noted that it will take time and resources to (1) completely build the WTO so that members can address all its new roles and responsibilities; (2) make members’ national laws, regulations, and policies consistent with new commitments; (3) fulfill notification requirements and then analyze the new information; and (4) resolve differences about the meaning of the agreements and judge whether members have fulfilled their commitments. It is critical that USTR monitor implementation of the agreements to ensure that other WTO members are honoring their commitments and thus that the agreements’ expected benefits are being realized. USTR and the Departments of Commerce and Agriculture have created specific units to try to monitor foreign government compliance with trade agreements, including those of the Uruguay Round. created some new bodies; however, these bodies address new areas of coverage, for example, the Councils for Trade in Services and for Trade-Related Aspects of Intellectual Property Rights. Other bodies, such as the WTO Committee on Antidumping Practices, were “reconstituted” from previous GATT committees but were given new responsibilities by the Uruguay Round agreements and now have broader membership. The WTO Secretariat, headed by its Director General, facilitates the work of the members. The work of the bodies organized under the WTO structure is still undertaken by representatives of the approximately 123 member governments, rather than the Secretariat. Early meetings of some WTO committees were focused on establishing new working procedures and work agendas necessary to implement the Uruguay Round agreements. The ministers will be judging the progress of members in implementing numerous agreements to date, based on information collected from the many notification requirements placed upon member governments. These notifications are aimed at increasing transparency about members’ actions and laws and therefore encourage accountability. Notifications take many forms. For example, one provision requires members to file copies of their national legislation and regulations pertaining to antidumping measures. WTO committees began reviewing the notifications they received from member governments in 1995. The information provided allows members to identify general problems with implementing the terms of the agreements, as well as monitor each others’ specific activities and, therefore, to enforce the agreements. Limitations in members’ reporting may make it difficult for the ministers to assess progress in some areas. The WTO Director General noted some difficulties with members’ fulfilling their notification requirements in his report in December 1995. Some foreign government and WTO Secretariat officials told us in 1995 that the notification requirements had placed a burden on them and that they had not foreseen the magnitude of information they would be obligated to provide. The WTO Secretariat estimated that the Uruguay Round agreements specified over 200 notification requirements. It also noted that many members were having problems understanding and fulfilling the requirements within the deadlines. While developing countries reportedly faced particular problems, even the United States missed some deadlines for filing information on subsidies and customs valuation laws. To address concerns about notifications, WTO formed a working party in February 1995 to simplify, standardize, and consolidate the many notification obligations and procedures. This working party may make recommendations for changes for the ministers to consider. The WTO dispute settlement mechanism is intended to be a central element in providing security and predictability to this multilateral trading system. Through it, members have a system to resolve disputes that result from violations of WTO obligations or impairment of benefits from WTO agreements. The new dispute resolution mechanism incorporates several objectives that were particularly important to the United States—time limits for each step in the dispute settlement process and elimination of a country’s ability to block the adoption of resolutions from dispute settlement panel reports. The new Dispute Settlement Understanding established time limits for each of the four stages of a dispute: consultation, panel review, appeal, and implementation. Also, unless there is unanimous opposition in the WTO Dispute Settlement Body, the panel or appellate report is to be adopted. Further, the recommendations and rulings of the Dispute Settlement Body can neither add to or diminish the rights and obligations provided in the Uruguay Round agreements nor directly force members to change their laws or regulations. However, if members choose not to implement the recommendations and rulings, the Dispute Settlement Body may authorize trade retaliation. From January 1, 1995, to August 30, 1996, formal WTO dispute settlement procedures have been invoked in 53 instances. Most of the cases are still in progress—35 are either in the consultation phase, under panel review, or on appeal. Of the 18 closed cases, 16 have been settled or abandoned, and 2 have been closed after a final appeal. The United States has availed itself of the dispute settlement mechanism more than any other member. The United States has initiated 17 cases on a variety of issues including patent protection in India, Portugal, and Pakistan; meat import restrictions in South Korea and the European Union (EU); and restrictions on the importation of magazines into Canada. There are currently four pending cases against actions or measures taken by the United States—two involve import restraints concerning textile and apparel products, one relates to an antidumping investigation of tomatoes from Mexico, and the other concerns the Cuban Liberty and Democratic Solidarity Act of 1996. As of the end of August 1996, dispute settlement panels have reached decisions involving five cases. The two closed cases, which were combined into a single panel, involved a challenge by Venezuela and Brazil to a U.S. Environmental Protection Agency regulation setting forth the methods by which importers of gasoline were to determine characteristics of gasoline imported and sold in the United States in 1990. The panel found that the regulation was inconsistent with a GATT 1994 provision concerning national treatment of imported products. On appeal, the dispute settlement Appellate Body modified the panel’s report but upheld the panel’s conclusion. The other three cases, also combined into one panel, were brought by the United States, Canada, and the EU against Japan’s liquor tax. The panel found the Japanese tax to be inconsistent with GATT 1994, on national treatment grounds. Japan has filed an appeal, which is currently pending. It is unclear to what extent the ministers at the WTO Singapore meeting will analyze the implementation of the new dispute settlement process and what criteria they would use to do so. USTR officials view this process as a success, in part because complaints can be resolved even before a panel hears the case. In addition, USTR has recently testified that the new mechanism is proving to be a very effective market-opening tool. However, it may be difficult to objectively evaluate the results of a dispute settlement process. We observed in our previous work on 5 years of dispute settlement under the U.S.-Canada Free Trade Agreement (CFTA)that it may take many years before a sufficiently large body of cases accrues to permit statistically significant observations about the process. In that report we focused on the possible effects of panelists’ backgrounds, the types of U.S. agency decisions appealed, and the patterns of panel decision-making. We learned that any effort to evaluate the functioning of the dispute settlement process presents significant analytical challenges. example, increase market access in key sectors and improve protection of intellectual property rights. Under the Uruguay Round Agreement on Textiles and Clothing, textile quotas are to be phased out over a 10-year period beginning in January 1995. Because of the 10-year phase-out, the effects of the textiles agreement will not be fully realized until 2005, after which textile and apparel trade will be fully integrated into WTO and its disciplines (practices). Integration is to be accomplished by (1) completely eliminating quotas on selected products in four stages and (2) increasing quota growth rates on the remaining products at each of the first three stages. By 2005, all bilateral quotas maintained under the agreement on all WTO members are to be removed. During the first stage of product integration (1995 through 1997), virtually no quotas were removed by the United States and other major importing countries. The United States is the only major importing country to have published a list of products to be removed from quota for all three stages; other countries, such as the EU and Canada, have only published their integration plan for the first phase. Under the U.S. integration schedule, 89 percent of all U.S. apparel products under quota in 1990 and 67 percent of textile and apparel products combined will not be integrated into normal WTO rules until 2005. Importer and retailer representatives have expressed concern about the delay in lifting the majority of textile and apparel quotas until the end of the phase-out period. However, U.S. officials have pointed out that the Statement of Administrative Action accompanying the U.S. bill to implement the Uruguay Round agreements provided that “integration of the most sensitive products will be deferred until the end of the 10-year period.” During the phase-out period, the safeguards provision of the textiles agreement permits a country to impose a new quota only when it determines that increased imports of a particular textile or apparel product are seriously damaging, or present an actual threat of serious damage to, its domestic industry. The agreement further provides that any quotas imposed during the phase-out period be reviewed by a newly created Textiles Monitoring Body (TMB) within WTO, which is to supervise the textile agreement’s implementation. TMB consists of individuals from 10 countries, including the United States. The United States and Brazil are the only WTO members thus far to have imposed new quotas on imports they found were harming their domestic industries under the agreement’s safeguard procedures. In 1995, the United States issued 28 requests for consultations (or “calls”) to impose quotas and has issued 2 calls thus far in 1996 to a total of 19 countries (11 WTO members and 8 nonmembers). Brazil has issued calls to four countries to date. As of August 1996, TMB had reviewed the imposition of seven quotas (where no agreement was reached with the exporting country). All of these quotas had been imposed by the United States. TMB found that the threat of serious damage to domestic industry had been demonstrated in one case. In three cases, TMB found that the threat of serious damage had not been demonstrated, and the quotas were subsequently rescinded; in three other cases, TMB could not reach consensus. TMB has not published details about the reasons for its decisions. Three of the cases TMB reviewed were subsequently brought before the Dispute Settlement Body by the countries subject to the U.S. safeguard action. The United States rescinded one action, and the other two cases are currently pending. report on the textile agreement’s implementation to the WTO General Council in early November. Liberalizing agricultural trade was a key U.S. objective during the Uruguay Round. The United States anticipated that better rules and disciplines on government policies in this area would foster a more market-oriented trading system and improve the competitive position of the U.S. agriculture sector. Therefore, monitoring other members’ implementation of their Uruguay Round agricultural commitments is essential to securing anticipated U.S. gains. Several important issues are likely to be discussed at the ministerial meeting, as the reports of two WTO committees and one WTO working party focus on, or relate to, agricultural trade. First, the WTO Committee on Agriculture will report on implementation of the agriculture agreement, including any aspects needing additional attention or review. This Committee’s report is expected to address two other issues: (1) a decision to review the impact of the agreement on net food-importing countries and (2) preparations necessary to resume the agreement’s required negotiations in 1999. Second, the WTO Committee on Sanitary and Phytosanitary (SPS) Measures will report on implementation of the SPS agreement. Third, the WTO Working Party on State Trading Enterprises will report on its efforts to better document and understand the role of STEs in WTO. implementation issue was discussed outside the Committee under the dispute settlement process, when the United States requested consultations with the EU to resolve its concerns about EU implementation of market access commitments for grain imports. In addition to implementation issues, the Committee’s report is expected to address its responsibility for monitoring WTO members’ commitment to review levels of food aid available to net food-importing countries. This commitment recognized that least-developed and net food-importing developing countries might experience negative effects from Uruguay Round agricultural reform if it affected the availability of food supplies from external sources at reasonable terms and conditions. WTO members agreed to establish appropriate mechanisms to ensure that agricultural reform does not have an adverse impact on the provision of sufficient levels of food aid. The recent rise in global commodity prices and the near-record lows in international grain reserves have increased the cost of food imports for some countries. Some least-developed and net food-importing countries have already indicated they are concerned about the impact of agricultural reform on their countries, but U.S. officials do not believe the limited reforms implemented so far are responsible for shortages or price increases. Still, net food-importing countries expect action to be taken within the Committee to review food aid levels and establish a sufficient level of aid to meet legitimate needs. The Committee is considering whether and how such a review should be conducted and hopes to resolve this issue before the ministerial meeting. However, if resolution is not achieved within the Committee, the issue is likely to be discussed at the World Food Summit in November 1996 and again in Singapore. implementation of the agreement, preparing for negotiations to resume is also important. The second Committee report that will address agricultural issues is the Committee on SPS Measures. The SPS agreement recognizes that members have a right to adopt measures to protect human, animal, and plant life or health. However, it requires, among other things, that such measures be based on scientific principles and not act as disguised trade restrictions. The United States was a key supporter of this agreement, recognizing that the lack of sufficient disciplines on the use of SPS measures could undermine the intent of the agriculture agreement if members were allowed to replace tariffs and quotas with unscientific animal and plant health or food safety measures. The United States has signalled its intent to use WTO channels to challenge unscientific SPS measures. For example, through WTO consultations in 1995, the United States persuaded South Korea to modify its practice for determining product shelf-life, which was adversely affecting U.S. meat and other exports. Also, in May 1996, the United States requested a dispute settlement panel be convened to review the EU’s long-standing ban on hormone-treated meat, which has substantially blocked U.S. beef imports since 1989. potential to distort trade. This framework helps clarify that being sanctioned by the government does not necessarily mean that an STE is distorting trade; rather, a key factor is the presence of direct or indirect subsidies that can give an STE a greater potential to distort trade. We reported that another factor in evaluating the trade-distorting effect of STEs (or private commercial firms) is share of the world market. The working party on STEs is developing an illustrative list of STE attributes and practices in WTO and continues to study the questionnaire used to collect information about them. The United States is working within the forum to develop a modified questionnaire that would help make STE activities more transparent. U.S. government and agricultural industry officials hope to negotiate additional disciplines on STEs when agricultural negotiations resume in 1999. Negotiations in several service sectors and on market access for certain goods were left unfinished at the end of the Uruguay Round and may be discussed by ministers at Singapore. USTR has pursued trade liberalization and market access in these areas since the Uruguay Round, but in many cases the outcome of these efforts remains uncertain. For example, within the framework of the General Agreement on Trade in Services (GATS), negotiations covering the financial, telecommunications, and maritime service sectors have not yet resulted in final agreements. In addition, USTR hopes to achieve further market access through new tariff reductions for a variety of goods but has testified that considerably more work remains to build “the necessary international consensus” for making such reductions. because U.S. negotiators, in consultation with the private sector, concluded that other members’ offers to open their markets to U.S. financial services firms, especially those of certain developing countries, were insufficient to justify broader U.S. commitments (with no most-favored-nation exemption or other limitations). At the end of 1997, members, including the United States, will have an opportunity to modify or withdraw their commitments. Thus, the final outcome and impact of the financial services agreement are still uncertain. USTR has testified that negotiations for a financial services agreement are expected to resume in the first half of 1997, and the ministers may discuss this at Singapore. WTO members were also not able to reach agreement on a basic telecommunications services agreement by the original deadline of April 30, 1996, and negotiations were subsequently extended to a new deadline of February 15, 1997. The United States has noted that while some members made offers that matched that of the U.S. offer in terms of openness, many others did not, thus the United States would not accept the agreement. In addition, the United States has said that in order for the extended negotiations to succeed, “more and better” offers must be made by members, including both developed and developing nations. Similarly, negotiations for a multilateral maritime services agreement were unsuccessful and were suspended in June 1996 until the year 2000, when negotiations for all services sectors will be reopened. When suspending the negotiations, participating members agreed to refrain from applying new measures that would affect trade in this area during this time. The United States has said that other participating members to the negotiations did not offer “to remove restrictions so as to approach current U.S. openness in this area.” The United States did not submit an offer in maritime services because USTR believed that other countries were not serious about liberalization. spirits, nonferrous metals, oilseeds and oil products, and certain chemical and pharmaceutical products, but expects opposition in some of these areas from several major trading partners. Members are debating what work should be done by WTO on new issues related to international trade at Singapore. As tariff and nontariff barriers to trade are reduced, other areas (traditionally seen as domestic) have drawn attention as potential international trade barriers. These include (1) environmental protection, (2) investment rules, (3) competition policy, (4) labor standards, and (5) bribery and corruption issues. Although these are not traditionally discussed as trade policy topics, they reflect a broader concept of what some WTO members believe are factors affecting market access opportunities in a global economy. For example, some WTO members believe that enforcing certain environmental and labor standards can be a disguise for protectionist policies. Also, activities such as price-fixing, market sharing, and noncompetitive procurement practices can lead to market distortions and reduce access for foreign competitors. The WTO has begun to address some of these issues, but no consensus has been reached on the extent to which they should be dealt with in the WTO. Some of these negotiations in new areas could be quite controversial, based on the previous experience with including areas like agriculture and services in the Uruguay Round negotiating agenda. Of the emerging issues, environment has developed the furthest within the WTO. At Marrakesh in 1994, members decided to establish a Committee on Trade and Environment. Trade and environment issues overlap because some government measures to balance economic growth with environmental concerns are perceived as protectionist and may conflict with WTO obligations. At the same time, some trade policies may impede the development of sound environmental policies. In the past, GATT dispute panels have ruled against measures that conflicted with national treatment principles or that appeared to apply to areas outside a country’s sovereign jurisdiction. The United States believes that free trade and environmental protection policies can be mutually supportive and plans to convey this message at the Singapore ministerial meeting, in keeping with the 1992 United Nations Declaration in Rio de Janeiro. The WTO Committee on Trade and Environment is to identify the relationship between trade and environmental measures and make appropriate recommendations within the context of open and equitable trade. The Committee is expected to present a report at Singapore, but it is unclear what the report will include because of the complex issues and divergent views. Members generally agree that promoting free trade and environmental protection is not inherently contradictory; however, they have not agreed on specific ways to address these issues. Several items are under discussion, including ecolabeling programs; the relationship between multilateral environmental agreements and the WTO; and the effect of environmental measures on market access, particularly in relation to developing countries. Ecolabeling programs have received a great deal of attention by the Committee. Some members believe these programs act as trade barriers, and members have not reached an agreement about whether or not ecolabeling programs need greater transparency. USTR firmly believes that all forms of ecolabeling are subject to the WTO’s Technical Barriers to Trade (TBT) Agreement, which requires transparency and public participation when applying product standards. Other members, however, have expressed doubts about whether all ecolabeling programs are covered by the TBT agreement. USTR anticipates the WTO Committee will need to discuss this and other issues after Singapore. specific service sectors, including business services and construction and engineering services. Countries are debating in which forums to pursue further liberalization in investment. Therefore, any Singapore proposals to establish a work program for WTO on investment issues will have to take into account negotiations in other forums. Most notable is the OECD, whose members are working to establish a Multilateral Agreement on Investment in 1997 that would be open to both OECD and non-OECD members. Nevertheless, the EU and Canada favor discussing investment rules in the WTO because its membership is larger than the OECD. There is a wide divergence of views among other members; some lesser-developed members oppose negotiations in the WTO, according to USTR. On the other hand, the United States and other nations would like to continue focusing on the OECD negotiations rather than negotiating in the WTO, believing that (1) the OECD has the potential to achieve a higher standard of liberalization (that is, on a par with NAFTA and U.S. bilateral investment treaties) than the WTO could and (2) some WTO members are not ready for such an agreement. Still, the United States supports creating a modest work program to educate WTO members on these issues. National competition or antitrust policies of other countries can affect opportunities and benefits for U.S. exporters and consumers. For example, price-fixing, market sharing, and other monopolistic business practices have been recognized as potential trade barriers. By distorting market competition, these practices can diminish market access opportunities, consumer choices, and other intended benefits of liberalized trade. Anticompetitive practices can also lead to trade disputes. For example, the United States has initiated two WTO dispute settlement proceedings against Japan in cases involving photographic films and paper and distribution services. before determining whether any sort of negotiating program in the WTO is appropriate. USTR has emphasized that the United States will not accept any initiative in the WTO that would threaten U.S. antitrust or antidumping laws. The United States has participated in creating guidelines and in undertaking studies of competition policy issues at the OECD, along with Japan and EU member states. WTO members are currently considering the role of labor standards in the international trade regime. The desire to link international trade and labor issues is not new, but labor issues have been the province of the International Labor Organization (ILO), a specialized agency of the United Nations created in 1919. ILO, whose purpose is to improve working conditions and living standards for workers throughout the world, provides a forum for consideration of various labor issues including the establishment of core labor standards, which currently vary from country to country. At the conclusion of the Uruguay Round negotiations, several members, most notably the United States and some members of the EU, proposed that labor issues be formally brought into the world trading system. However, other WTO member countries in both the developed and the developing world have been concerned that mandated international labor standards may either inhibit their economic development or act as protectionist barriers to their exports. The United States, based on a provision of the Uruguay Round Agreements Act, recommended that the WTO establish a working party to examine the relationship between trade and internationally recognized worker rights. The U.S. proposal does not envision negotiations but seeks to begin discussions limited to how core labor standards and trade can be mutually supportive in promoting growth and development. Thus far, no consensus currently exists either on bringing labor issues into the WTO, or on developing potential linkages between the WTO and ILO, a possible first step. transparency in government procurement. Bribery and corruption increase the cost and risk of conducting business in foreign countries. The difference in the way that U.S. and foreign laws treat these activities can also reduce U.S. companies’ access to foreign markets. For example, U.S. legislation passed in 1977 prohibits U.S. companies from engaging in bribery of foreign public officials. In contrast, some other countries do not have criminal penalties for engaging in the bribery of foreign public officials, and in some countries businesses are allowed to take tax deductions for bribery expenses. Other multilateral organizations have already taken steps to address bribery and corruption, with U.S. encouragement. For example, OECD members have agreed to criminalize the acceptance and payment of bribes. Members of the Organization of American States have entered into a treaty that would make this conduct criminal. The OECD has also recommended that member countries eliminate tax deductions for the payment of bribes. The Association of Southeast Asian Nations foreign ministers in a recent forum on the WTO agenda rejected the U.S. proposal to include corruption and other “social clauses” that they did not consider trade related. The United States is promoting efforts to reduce bribery by foreign companies and government officials by encouraging WTO members to sign the Agreement on Government Procurement. To date, only 22 industrialized countries, including the United States, have done so; and none of the least developed countries are signatories. The provisions of the new agreement, which went into effect in 20 countries on January 1, 1996, promote transparency in government procurement procedures and require that countries not discriminate against foreign or foreign-owned suppliers or otherwise allow practices that would preclude competitive procurement. negotiations with individual WTO members over tariff and market access commitments. After these negotiations are concluded, the working party submits a Protocol of Accession and a report to the Ministerial Conference for approval. Accession is approved by a two-thirds majority vote of WTO members. The United States expects the Singapore ministerial meeting to address the broad range of accession applications—rather than single out any particular application for attention. USTR reports there are 31 countries whose applications for accession have been accepted; active negotiations are under way on about 20 of them. Four nations have completed accession negotiations since the WTO entered into force. The United States supports accession of countries capable of and willing to (1) undertake WTO obligations and (2) provide commercially viable market access commitments for goods and services to the WTO. The United States also uses the negotiations to address outstanding bilateral trade issues covered by the WTO. For example, USTR reports that Taiwan has made significant concessions in its bilateral negotiations with the United States over market access, services, and government procurement. Nevertheless, significant issues remain outstanding. The accession of China to the WTO is an issue of intense U.S. interest. China gained observer status to the GATT in 1982 and requested accession to the GATT in 1986. The United States and other nations have insisted that China’s accession be approved on the basis of China’s willingness to make commercially viable commitments that provide greatly expanded market access and ensure compliance with WTO obligations. U.S.-China bilateral negotiations are ongoing, and a WTO working party meeting on China’s accession is scheduled for October 1996. This concludes my statement for the record. Thank you for permitting me to provide you with this information. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the implementation of the Uruguay Round agreements and the World Trade Organization's (WTO) operations in the context of the upcoming Singapore ministerial meeting. GAO noted that: (1) implementation of the Uruguay Round agreements is complex, and the Singapore meeting will provide WTO member countries with the opportunity to take stock of their implementation efforts; (2) limitations and variations in the amount of information reported by member countries has made it difficult for WTO committees and working groups to oversee implementation of the agreements and a new dispute settlement mechanism; (3) implementation of the WTO Agreement on Textiles and Clothing has been a major area of contention between exporting and importing countries; (4) the United States has many concerns regarding the implementation of commitments to liberalize agricultural trade, and has indicated that it will propose further agricultural reform negotiations; (5) it is not clear whether efforts to liberalize trade in the services sector will be successful, since WTO member countries have been unable to reach final agreements covering some sectors; and (6) it is expected that WTO members will begin work on the next generation of trade issues in such areas as environmental protection, investment rules, competition policy, labor standards, and bribery and corruption at the Singapore meeting. |
DOD uses a combination of governmentwide and DOD guidance as the policy and procedural foundation for incurring premium class travel. The Federal Travel Regulation (FTR), issued by GSA, implements statutory and Office of Management and Budget (OMB) requirements and policies for travel by federal civilian employees and others authorized to travel at government expense, including guidelines governing the use of premium class travel. The purpose of the FTR is to ensure that official travel is conducted responsibly and at a minimal administrative expense. Pursuant to various statutes, DOD issued the Joint Federal Travel Regulations (JFTR), which applies to uniformed service members, and the Joint Travel Regulations (JTR), which applies to DOD civilian personnel. The DOD travel regulation for military personnel mirrors the GSA regulation, and DOD travel regulations for civilian personnel are subject to GSA’s travel regulation. In addition, each military service has issued implementing guidelines that, to varying degrees, provide additional guidance on when premium class travel is authorized. GSA and DOD regulations authorize the use of premium class travel under specific circumstances. The JTR and the JFTR limit the authority to authorize first class travel to the Secretary of Defense, his or her deputy, or other officials as designated by the Secretary of Defense. However, while both the JTR and JFTR provide that the authority to authorize first class travel may be delegated and re-delegated, the regulations specify that the authority must be delegated to “as high an administrative level as practicable to ensure adequate consideration and review of the circumstances necessitating the first class accommodations.” Further guidance is found in a DOD directive on transportation and traffic management, which specifically states that the secretaries within their military services and secretariats are the authorizing authorities for first class travel. The service secretaries may re-delegate authorizing authority for first class travel to under secretaries, service chiefs or their vice and/or deputy chiefs of staff, and four-star major commanders or their three-star vice and/or deputy commanders, but authorizing authority may not be delegated to anyone other than these officials. DOD regulations also require that authorization for premium class accommodations be made in advance of the actual travel unless extenuating circumstances or emergency situations make advance authorization impossible. Specifically, the JTR and JFTR state that first class accommodation is authorized only when at least one of the following conditions exists: coach class airline accommodations or premium class other than first class airline accommodations are not reasonably available; the traveler is so handicapped or otherwise physically impaired that other accommodations cannot be used, and such condition is substantiated by competent medical authority; or exceptional security circumstances require such travel. The JTR and JFTR allow the transportation officer, in conjunction with the official who issued the travel order, to approve premium class travel other than first class. In accordance with the FTR, DOD restricts premium class travel to the following eight circumstances: regularly scheduled flights between origin and destination provide only premium class accommodations, and this is certified on the travel voucher; coach class is not available in time to accomplish the purpose of the official travel, which is so urgent it cannot be postponed; premium class travel is necessary to accommodate the traveler’s disability or other physical impairment, and the condition is substantiated in writing by competent medical authority; premium class travel is needed for security purposes or because exceptional circumstances make its use essential to the successful performance of the mission; coach class accommodations on authorized/approved foreign carriers do not provide adequate sanitation or meet health standards; premium class accommodations would result in overall savings to the government because of subsistence costs, overtime, or lost productive time that would be incurred while awaiting coach class accommodations; transportation is paid in full by a nonfederal source; or travel is to or from a destination outside the continental United States, and the scheduled flight time (including stopovers) is in excess of 14 hours. However, a rest stop is prohibited when travel is authorized by premium class accommodations. Both GSA and DOD regulations allow a traveler to upgrade to premium class other than first class travel at personal expense, through redemption of frequent traveler benefits. GSA also identified agency mission as one of the criteria for premium class travel. Appendix II includes more detailed information concerning the process by which DOD military and civilian personnel would properly obtain premium class airline tickets. For fiscal years 2001 and 2002, DOD spent nearly $124 million on over 68,000 airline tickets containing at least one leg of premium class travel.Since DOD did not maintain centralized data on premium class travel, we extracted this information from Bank of America’s fiscal years 2001 and 2002 databases of DOD centrally billed account travel, which included over 5.3 million transactions for airline tickets valued at over $2.4 billion. Although we were able to report this aggregate information, we were unable to obtain any breakdowns of the data, such as the amount of premium class travel by military service or the amount of premium class travel used for domestic versus overseas flights. As discussed later in this report, because DOD does not obtain or maintain management information on premium class travel, it cannot monitor its proper use, identify trends, or determine alternate, less expensive means of transportation. As shown in table 1, the total dollar amount DOD spent on travel that included at least one leg of premium class airfare was about $57 million in fiscal year 2001 and about $67 million in fiscal year 2002. First class travel accounted for 2.4 percent of the total dollars spent for premium class travel for the 2 fiscal years, while business class accounted for the remaining 97.6 percent. DOD’s premium class air travel accounts for a very small percentage of DOD travel overall. It represents 1 percent of total DOD airline transactions and 5 percent of total DOD dollars spent on airline travel charged to the centrally billed accounts. However, to put the amount that DOD spends on premium class travel in perspective, we noted that the $124 million DOD spent on premium class related travel during these 2 fiscal years exceeded the total travel and transportation expenses—including airfare, lodging, and meals—spent by 12 major agencies covered by the Chief Financial Officers Act of 1990, including the Social Security Administration; the Departments of Energy, Education, Housing and Urban Development, and Labor; and the National Aeronautics and Space Administration. The difference between a premium class ticket and a comparable coach class ticket can range from negligible—particularly if the traveler traveled within Europe—to thousands of dollars. In one instance, a traveler’s first class flight between Washington and Los Angeles was 14 times, or about $3,000 more than, the price of a coach class flight. We also found that higher-ranking civilian personnel and military officials accounted for a large part of premium class travel. Based on our statistical sample, we estimated that DOD civilian employees under the General Schedule (GS) grade GS-13 to GS-15 (supervisors and managers), Senior Executive Service (SES) (career senior executives), presidential appointees with Senate confirmation, and DOD senior military officers O-4 and above accounted for almost 50 percent of premium class travel. The remaining 50 percent in our statistical sample comprised mostly other officers, senior enlisted personnel, and technical or professional staff. We consider travel by high-ranking officials, in particular senior-level executives, to be a sensitive payment area because of its susceptibility to abuse or noncompliance with laws and regulations. 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. GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999) Significant breakdowns in key internal control activities resulted in a significant level of improper premium class travel and increased DOD travel cost. Specifically, we estimated, based on our statistical sample, that 72 percent of the DOD centrally billed travel transactions containing premium class travel for fiscal years 2001 and 2002 were not properly authorized, and 73 percent were not properly justified. (See app. I for further details of our statistical sampling test results.) Using our statistical sample and data mining results, we found numerous examples of premium class travel without authorization or adequate justification, illustrating the improper use of premium class travel and the resulting increase in travel costs. Further, we used data mining techniques to identify the most frequent users of premium class travel. Our analysis of these cases showed that almost all were senior-level employees whose travel, although properly authorized, generally was not adequately justified. We selected two key transaction-level controls for statistical sampling testing. As shown in table 2, we estimated that 72 percent of premium class travel was unauthorized. Because the FTR and DOD regulations provide that premium class travel must be specifically authorized, transactions that failed this test also failed the justification test. In addition, we found two transactions in our statistical sample were properly authorized but failed the justification test as they were not supported by the documentation provided or did not adhere to the FTR and DOD travel regulations. Requiring premium class travel to be properly authorized is the first step in preventing improper premium class travel. The FTR requires premium class travel to be specifically authorized. DOD specifies that premium class travel must be authorized in advance of travel, unless extenuating or emergency circumstances make authorization impossible, in which case the traveler is required to request written approval from the appropriate authority as soon as possible after the travel. In addition to the FTR and DOD regulations, we also applied the criteria set forth in our internal control standards and sensitive payments guidelines in evaluating the proper authorization of premium class travel. For example, while DOD travel regulations and policies do not address subordinates authorizing their supervisors’ premium class travel, our internal control standards consider such policy to be flawed; therefore, a premium class transaction that was approved by a subordinate would fail the control test. Using these guidelines, we found that transactions failed the authorization test in the following three categories: (1) the premium class airline ticket was purchased, but the authorization of premium class travel was not noted on either the travel order or on additional documentation supporting the travel order, (2) the travel order authorizing premium class travel was not signed, and (3) premium class travel was authorized by a subordinate. Premium class travel not specifically authorized. Based on our statistical sample, we estimated that the travel order and other supporting documentation for 64 percent of the premium class transactions did not specifically authorize the traveler to fly premium class, and thus the commercial travel office should not have issued the premium class ticket. Further, we estimated that 5 percent of the transactions lacking specific authorization were intra-European flights covered under a blanket authorization issued in February 2002 by the U.S. Army Transportation Management Center, Europe, located in Germany. The blanket authorization permitted the commercial travel office to automatically purchase business class tickets on 65 flights between Frankfurt, Munich, or Stuttgart and other selected European cities. The blanket authorization stated that business class was authorized for these routes because it was the lowest unrestricted fare. Consequently, DOD considered these transactions to have been authorized. However, we disagree that a blanket authorization can be used for premium class travel because it is not consistent with GSA and DOD requirements that all premium class travel be specifically authorized and, wherever possible, minimized. Further, the importance of having individual authorization for premium class travel is illustrated by our independent evaluation of the 65 flights, which showed that business class tickets were not necessarily equal to or lower than the cost of unrestricted coach, as claimed in the blanket authorization. For example, according to the travel agency that served GAO, the business fare between Munich, Germany, and Tbilisi, Georgia (located near Turkey), was $3,232 and the unrestricted economy fare was $992, a difference of $2,240. Travel order not signed. We also estimated that 6 percent of premium class transactions were related to instances where the travel order authorizing business class was not signed at all or the travel order authorizing first class was not signed by the service secretary or his designee, as required by DOD regulations. Ensuring that travel orders are signed by an appropriate official is a key control to preventing improper premium class travel. If the travel order is not signed, or not signed by the individual designated to do so, DOD has no assurance that the substantially higher cost of the premium class tickets was properly reviewed and represented an efficient use of government resources. Premium travel authorized by a subordinate. We estimated that 2 percent of the premium class transactions involved situations where a subordinate approved a superior’s travel. Although these limited instances do not necessarily indicate the existence of a significant systemic problem, allowing subordinates to approve their supervisors’ premium class travel is synonymous to self-approval and reduces scrutiny of premium class requests. Our internal control standards state that “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.” Another internal control weakness identified in the statistical sample was that the justification used for premium class travel was not always provided, not accurate, and/or not complete enough to warrant the additional cost to the government. As previously stated, premium class travel is not an entitlement. In fact, recent changes to the DOD regulations state that premium class travel, in the context of lengthy flights, should only be used when exceptional circumstances warrant and that alternatives should be explored to minimize unnecessary premium class travel. In reviewing whether premium class travel was justified, we looked at whether there was documented authorization and, if there was, whether the authorization for premium class travel was supported by evidence of a valid reason. As shown in table 2, an estimated 72 percent of premium class transactions were not authorized and therefore could not have been justified. An additional 2 transactions in the statistical sample were authorized but not justified in accordance with DOD’s criteria. In one instance for example, although the flight time exceeded 14 hours, the traveler had a layover in route, which should have precluded the traveler from being authorized premium class travel. Table 3 contains specific examples of unauthorized travel from both our statistical samples and data mining work. The table also contains examples of premium class travel that was unjustified. Without authorization or adequate justification, these cases illustrate the improper use of premium class travel and the resulting increase in travel costs. Following the table is more detailed information on some of these cases. Traveler #1 is a GS-14 at the Department of the Navy; he along with three family members flew a combination of first and business class when they were relocated from London to Honolulu. The cost to the government for those four first and business class tickets was almost $21,000, compared to an estimated total cost of about $2,500 for four coach class tickets. An audit of the travel orders for this trip indicated that the DOD civilian employee and his family were not authorized to fly first or business class. Consequently, the traveler failed both the authorization and the justification test. Despite the lack of specific authorization, the traveler was issued premium class tickets for this trip, resulting in additional cost to the government of more than $18,000. Upon being contacted, the traveler agreed that his travel order did not specifically state that premium class was authorized, and stated that he inquired about business class tickets from the commercial travel office because his flight lasted more than 14 hours. Based on the issuance of premium class tickets for other permanent change-in-station moves exceeding 14 hours in total travel time, the commercial travel office issued the premium class tickets to the traveler. Traveler #4 is a GS-13 at the Department of the Navy. In March 2002, the traveler flew business class round-trip from San Francisco to Osaka, Japan, where he had an overnight layover before proceeding to Busan, Korea. The travel order DOD provided us did not authorize business class travel. Further, because the traveler had an overnight layover in route to Korea, the 14-hour rule would not apply. The cost of the ticket was $3,695, compared to an estimated cost of $2,161 for a comparable unrestricted ticket in coach. Without authorization or valid justification, the additional $1,534 spent on the business class ticket was improper. Traveler #7 is a GS-13 in the Navy. In March 2002, the traveler flew business class from San Francisco to Tokyo on a ticket costing $3,168. Although the flight to Tokyo lasted more than 14 hours, the use of premium class travel was not properly authorized because the travel order was not signed by the appropriate official. In comparison, the estimated cost of an unrestricted government fare in coach was $610. Traveler #9 was a GS-13 in the Department of the Army who flew most of his trip from Tucson to Bahrain and then from Bahrain to Los Angeles in business class, at a cost of $8,308. The estimated cost of an unrestricted coach class ticket for the same route was $4,966. The justification for the additional cost of the business class ticket was that the flight lasted more than 14 hours. However, the traveler stopped overnight in London at the government’s expense on both the outbound and return portions of the trip. The FTR and JTR specifically prohibit premium class flights when the traveler has a rest stop en route at the government’s expense. Traveler #10 was a GS-15 in the Department of the Navy who flew premium class from Washington, D.C., to Amsterdam and back on the basis of a medical condition. The duration of the flight each way was about 8 hours and cost $4,525. The estimated cost of an unrestricted government fare coach class ticket for the same route was $570. The supporting documentation provided to us included a note, written by the traveler’s supervisor, that was prepared more than 18 months after the travel, stating that the traveler had a medical condition requiring the premium class ticket. However, the note was not signed by a doctor nor did it reference a medical professional who recommended the need for premium class seating. The traveler informed us that his supervisor wrote the medical note after our inquiry into his case. In addition, none of the other 9 flights taken by the traveler cited a medical condition, and the traveler flew coach class on a number of flights that lasted longer than his flight from Washington, D.C., to Amsterdam. According to the traveler, he never had been properly authorized to fly business class on the basis of a medical condition. Traveler #11 was a political appointee and a member of the Commission on the Future of the United States Aerospace Industry (Commission), an organization that was almost entirely funded by DOD and for which DOD paid the cost of all airline tickets for Commission members and staff. The traveler flew business class from Washington, D.C., to London, and then traveled by rail from London to Brussels and onto Paris. In Paris, the traveler took a business class flight to Moscow to attend a 2- day conference. According to the travel order, business class travel was authorized because it was mission essential. However, the travel order did not indicate why the cost of business class travel for a trip to a conference was mission essential. Further, mission essential is not a DOD criterion for authorizing business class travel. Our data mining efforts found that DOD paid the travel of a total of 13 individuals—6 commissioners and 7 commission staff—to attend the Moscow conference after stopping off in London, Brussels, and Paris. The 6 commissioners flew business class for all of the flights, while the commission staff flew coach to London and on the return flights, and flew business class while in Europe. None of the commissioners were government employees; however, all of the staff were employed by DOD and other agencies. The average cost of the airline tickets for all 6 commissioners was about $7,500 while the average cost of the airline tickets for the staff was about $3,100. The official told us he authorized premium class travel for the commissioners because they were high- salaried individuals from the private sector who were donating 10 days of their time to the government with no compensation. However, neither the FTR nor the DOD travel regulations authorize premium class travel based on a person’s salary or whether he or she is donating time to the government. Our work also included data mining to identify the individuals who traveled premium class most frequently. We analyzed the 68,090 premium class transactions during fiscal years 2001 and 2002 and identified 28 of the most frequent premium class travelers. As indicated by the examples in table 4, the frequent travelers were almost all senior DOD personnel. Specifically, we found that all but 1 of the 28 most frequent travelers were at least GS-13 civilians or O-4 military officials. Although these frequent travelers were generally authorized to fly premium class by someone at the same or a higher level, we determined that many of the transactions were improper because their justification was not supported by the documentation provided or did not adhere to the FTR and DOD travel regulations. Other cases involving frequent travelers were questionable because the justification documentation was not adequate to determine whether the transaction met DOD’s criteria. Our work indicated that the most frequent travelers were, in most instances, authorized to obtain premium class travel by people at the same or higher levels. Only 3 of the 28 most frequent travelers failed the authorization test because they or their subordinates authorized their travel orders. More often, justification provided by frequent travelers failed the justification test or the justification was not adequate to permit us to determine whether the transaction complied with the FTR and DOD travel regulations. The following provides further details on some of the cases in table 4. Frequent traveler #1 was a GM-14 at the Navy who took 45 round-trip flights during our 2-year audit period. The traveler flew business class on 14 international trips costing about $88,000 but also took 31 domestic trips, in coach class, costing about $12,000. Attached to the travel order for each trip was a doctor’s certification noting that, for health reasons, the traveler needed to fly in premium class. However, we found that the medical certification did not indicate whether premium class travel was needed on all flights or flights of certain duration, but that many of the traveler’s domestic trips, which he took in coach class, were almost as long as some of the international flights he took in business class. For example, the traveler regularly flew in coach class from Washington, D.C., to cities in California and, in one instance, to Honolulu. The flight times for individual legs of these trips ranged from about 5 to 7 hours. The traveler’s business class flights included flights from Washington, D.C., to Frankfurt or Amsterdam. Those flights lasted about 7 hours. When we discussed the trips with this traveler, he stated that although some of the domestic flights that he took were similar in duration to the international flights, his flights to Europe were generally evening flights and the extra room provided in business class enabled him to be less confined and to be ready for meetings the next day. The traveler’s discussion with us and the nature of his coach and premium travel raises questions regarding his medical need to fly business class. Frequent traveler # 3 is an assistant secretary of defense in Washington, D.C., who used a blanket order to authorize and justify business and first class travel based on an unspecified medical condition. We identified a total of 17 first and business class tickets for this traveler totaling nearly $68,000. Neither the travel orders nor the travel vouchers included a physician’s certification identifying the medical justification to fly first or business class. In addition, the traveler occasionally flew in coach class. About a month after we requested additional documentation for these airline tickets, DOD provided us with a letter from a physician dated September 11, 2001, requesting that the traveler be authorized to fly first class so that the traveler could stretch his legs. The records DOD provided concerning the 17 flights indicated that the travel office did not attempt to satisfy the traveler’s need for space by reserving a bulkhead seat or purchasing two coach seats, in accordance with DOD requirements. We estimate that the total cost of these flights, if flown in coach class, would have been about $17,000. The individual who made the premium class reservations told us that she had not been trained on the limitations associated with premium class travel. She also told us that in the future she would get the Deputy Secretary’s approval for first class travel and that she would attempt to limit premium class travel to instances in which less expensive alternatives were not available. Frequent traveler #5 was a GS-15 in the Navy who took 11 first class flights totaling over $35,000 from San Diego to east coast cities including Washington, D.C., during fiscal years 2001 and 2002. The traveler justified the 11 flights based on a certification from a medical authority based on his size and medical condition. However, because his first class travel was not authorized by the Under Secretary of the Navy, as required by Navy regulations, we contacted the traveler to obtain further information on his condition. We estimate that the total cost of these flights if all flown in coach class would have been about $7,000. According to the traveler, his condition was not so severe that he would meet the stringent first class criteria of being “so handicapped or otherwise physically impaired that other accommodations cannot be used.” Consequently, the traveler told us he was no longer authorized to use first class. Traveler #6 in table 4 was a deputy assistant secretary at DOD who flew premium class on 10 flights from September 2000 through September 2001 at a cost of approximately $48,000. A review of the travel orders and additional documentation supporting this travel showed that the individual consistently documented the reasons he needed to fly premium class. However, sometimes the justification provided did not appear applicable to the trip in question. For example, during a 12-day period in late August 2001, the traveler flew business class from Washington, D.C., to six European cities and South Africa at a cost of over $8,800. He then flew business class from South Africa to Atlanta, and first class from Atlanta to Washington, D.C. The documentation supporting the trip was an order, signed by the military assistant to the under secretary, that authorized the traveler to fly first class from Washington, D.C., to Tampa, Florida—destinations that are different from the itinerary in question. Both the traveler and his former secretary told us they did not recall making these flight arrangements. In none of the cases in our statistical sample and data mining for which authorization for premium class was given based on medical needs did DOD submit the medical certification for an informed and independent review. Our analysis found that 12 of the 28 frequent premium class travelers justified their more expensive flights with a medical condition. Further, as discussed in the examples, we identified several anomalies in the application of medical condition justification, as evidenced by travelers who used both coach and premium class accommodations during flights of similar duration and during the same period. This may indicate that additional steps should be taken to verify the validity of the medical certification. During testing, an Army official at the Traffic Management Office informed us that his office forwards all medical certifications to the Surgeon General for an opinion before recommending to the Secretary of the Army that approval be granted for first class travel. The official stated that he did not believe that he was competent to conclude on the medical certification. 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. A positive control environment is the foundation for all other standards. It provides discipline and structure as well as the climate which influences the quality of internal control. GAO’s Standards for Internal Control in the Federal Government (GAO/AIMD-00- 21.3.1, November 1999) Agency internal control monitoring assesses the quality of performance over time. It does this by putting procedures in place to monitor internal control on an ongoing basis as a part of the process of carrying out its regular activities. It includes ensuring that managers and supervisors know their responsibilities for internal control and the need to make internal control monitoring part of their regular operating processes. Ongoing monitoring occurs during normal operations and includes regular management and supervisory activities, comparisons, reconciliations, and other actions people take in performing their duties. GAO’s Internal Control Standards: Internal Control Management and Evaluation Tool (GAO-01-1008G, August 2001) DOD and the services performed no monitoring and oversight activities to obtain assurance that premium class travel was authorized in accordance with regulations. Further, during fiscal years 2001 and 2002, control environment weaknesses exacerbated already weak key internal controls described in the previous section. Consequently, DOD did not have an effective internal control environment, particularly in regard to policies and procedures, to provide assurance that premium class travel costs are incurred only when necessary. Specifically, we found that DOD and the military services did not (1) obtain or maintain centralized management data on the extent to which military and civilian personnel used premium class accommodations for their travel, (2) issue adequate policies related to the approval of premium travel, and (3) require consistent documentation to justify premium class travel. Until we initiated this audit, DOD’s management had not provided an appropriate “tone at the top” to encourage the appropriate use of premium class travel. During the course of our work, DOD updated the JTR and JFTR in April 2003 to articulate more clearly and to make more stringent the circumstances under which premium class travel can be authorized. In addition, the updated JTR and JFTR emphasize, in the context of lengthy flights, that premium class travel must not be common practice and must only be used when exceptional circumstances warrant. The JTR and JFTR also provide examples of when premium class travel should not be authorized. Ineffective oversight of the use of premium class travel was a key contributor to weaknesses in the overall control environment. In general, effective oversight activities would include management review and evaluation of the process for issuing premium class travel and independent evaluations of the effectiveness of internal control activities. Program monitoring provides DOD management an opportunity to obtain reasonable assurance that premium class travel is only obtained with proper authorization and justification. This is particularly important because of both the sensitivity and high cost of premium class travel. However, DOD and the services performed no monitoring and oversight activity to obtain assurance that premium class travel was authorized in accordance with rules and regulations. In addition, as mentioned previously, DOD and the services did not perform reviews to identify the extent of premium class travel. Consequently, it is not surprising that DOD and the services were not aware of the extent of improper premium class transactions. Our internal control standards state that separate evaluations of control should depend on the assessment of risks and the effectiveness of ongoing monitoring procedures. Our Sensitive Payments Guide lists executive travel as a high-risk area susceptible to abuse or noncompliance with laws and regulations. However, we found no evidence of any audits or evaluations of premium class travel. Further, DOD’s failure to adequately monitor premium class travel has resulted in an environment in which there is limited possibility that improper premium class travel will be identified. The lack of oversight is further demonstrated by the fact that travelers, supervisors/managers, and employees at the commercial travel offices (CTO) responsible for issuing airline tickets to the travelers are not adequately informed of governmentwide and DOD travel regulations concerning premium class travel. DOD officials told us that they do not verify whether CTO employees receive training in DOD travel regulations relating to the more expensive premium class travel, and DOD does not track training provided to CTO staff on premium class travel. Thus it was not surprising that officials authorizing the travel and the travelers were not aware of the stringent regulations associated with premium class travel. For example, several DOD travelers and officials told us that they thought DOD travel regulations entitled travelers to business class travel when their flights exceeded 14 hours. These individuals were not aware that the FTR provides that, in order to qualify for business class travel, travelers have to proceed directly to work upon arriving at the duty location. In addition, several DOD travelers and officials from the government and CTOs indicated to us that the numerous CTOs with which DOD contracted did not consistently apply the premium class criteria. A representative from one CTO informed us that his office issued premium class travel if premium class was mentioned on the travel order, even if justification for obtaining premium class travel was flawed, for example, the flight was not at least 14 hours. The Military Traffic Management Command (MTMC), which is responsible for tracking DOD’s first class travel, understated the cost and frequency of first class travel reported to GSA. In addition, MTMC did not track, and therefore did not know, the number of business class trips DOD travelers took during fiscal years 2001 and 2002 or the cost of these premium class trips. As a result, DOD did not have the data needed for monitoring and oversight activities or for identifying trends and determining alternate, less expensive means of transportation. The FTRrequires DOD, along with all other executive and legislative branch agencies, to provide GSA annual reports listing all instances in which the organizations approved the use of first class transportation accommodations. According to the first class travel reports that MTMC submitted to GSA for fiscal years 2001 and 2002, DOD civilian and military personnel took less than 1,000 first class flight segments totaling less than $600,000. These data are supposed to represent all first class transportation expenses, whether charged on the centrally billed accounts or the individually billed accounts. According to the individual responsible for compiling this report, the roughly 1,000 first class segments were identified in what is essentially a data call process in which MTMC personnel aggregated information provided by the CTOs on the number and cost of first class tickets they issued. However, our analysis of Bank of America airline transaction data indicates that both the number and cost of the first class tickets reported by DOD are significantly understated. Based on our analysis, DOD did not report more than half of fiscal years 2001 and 2002 first class segments. As shown in table 1, we found that DOD used the centrally billed accounts to purchase 1,240 airline tickets that contained at least one first class portion. These 1,240 tickets, which did not include first class tickets purchased using the individually billed accounts, contained over 2,000 separate segments with first class accommodations, compared to the less than 1,000 flight segments DOD reported to GSA. These first class tickets costs of about $2.9 million were almost 5 times the amount DOD reported to GSA. The differences between the first class travel that we identified and the amount DOD reported can in part be attributed to omissions in DOD’s methodology for identifying first class tickets. The airlines use a variety of letter codes to identify first class fares, and we found that in extracting first class data DOD omitted several of the first class codes used by some airlines. Further, a comparison of MTMC’s report and our analysis of the Bank of America transaction file showed that a number of cities were omitted from its analysis of first class travel. For example, while DOD data indicated that no first class flight was taken into Washington, D.C., during fiscal year 2001, we found 88 first class flights into Washington, D.C., during fiscal year 2001, including first class round-trips from Washington, D.C., to Honolulu, San Francisco, Denver, St. Louis, and Los Angeles. We also found that DOD did not obtain or maintain centralized data on premium class travel other than first class, that is, business class. Consequently, DOD did not know, and was unable to provide us with data related to, the extent of its premium class travel. As mentioned previously, we were able to obtain such data through extensive analysis and extractions of DOD travel card transactions from databases provided by Bank of America. DOD travelers must follow a complicated array of premium class travel guidance. The applicability of specific regulations depends on whether the traveler is civilian or military. For DOD civilians, GSA’s FTR governs travel and transportation allowances. DOD’s JTR and individual DOD and military service directives, orders, and instructions supplement the FTR. For military personnel, DOD’s JFTR governs travel and transportation allowances. Individual DOD and military service directives, orders, and instructions supplement the JFTR. The executive branch policy on the use of first class travel applicable to the FTR, JTR, and JFTR is found in OMB Bulletin 93-11. When a subordinate organization issues an implementing regulation or guidance, the subordinate organization may make the regulations more stringent, but generally may not relax the rules established by higher-level guidance. Inconsistencies have accumulated within the various premium class travel regulations because DOD did not revise DOD directives, or require the military services to revise their travel policies or implementing guidance, when it modified the JTR or JFTR. For example, DOD first issued the JTR in 1965 and since then had modified it 450 times through April 2003, including 30 modifications since October 2000. While the JFTR has had fewer modifications—196 through April 2003—the JFTR has also been modified 30 times since October 2000. Despite these changes, DOD and the services frequently have not modified their directives and guidance to reflect these changes. For example, DOD Directive 4500.9 was last revised in 1993, while DOD Directive 4500.56 was last updated in 1997. Further, the Navy Passenger Transportation Manual was last updated in 1998; Marine Corps Order P4600.7C, Marine Corps Transportation Manual, was last changed in 1992; and while Air Force Instruction 24-101, Passenger Movement, was last updated in 2002, it contains some provisions that are contrary to our Guide for Evaluating and Testing Controls Over Sensitive Payments and our Standards for Internal Control in the Federal Government. The proliferation of different internal DOD regulations and a failure by DOD to clearly explain the relationship of its different regulations have created confusion for travelers and officials, as evidenced by instances, discussed previously, in which premium class travel had been inappropriately approved. Inconsistencies also exist because DOD and its components have elected to authorize the use of premium class travel in different circumstances or have described the authorization to use premium class travel using different language. For example, see the following: DOD Directive 4500.9,Transportation and Traffic Management (last updated in 1993), contains a section establishing the authority to use premium class flights that differs in several aspects from GSA’s FTR and DOD’s JTR and JFTR as well as other directives issued by DOD. Specifically, DOD Directive 4500.9 grants blanket authority for high- ranking officials to use premium class travel when traveling overseas on official government business. This policy contradicts and is less stringent than the FTR, which does not cite rank as a condition for obtaining premium class travel. The JTR and JFTR (both modified in 2003) also do not cite rank as a criterion for allowing business class travel for international flights. Further, DOD’s General Counsel staff told us this provision was superseded by DOD Directive 4500.56. GSA’s FTR authorizes agencies to approve the use of first class or business class accommodations when required by an agency’s mission, but neither the JTR nor the JFTR adopts this authorization. In contrast, DOD Directive 4500.9 states that the use of business class on domestic travelmay be authorized when necessitated by mission requirements. GSA’s FTR states that premium other than first class travel may be authorized when the origin and/or destination of travel is outside the continental United States and the scheduled flight time is in excess of 14 hours. However, the FTR prohibits premium class travel if the traveler is authorized a rest stop en route or a rest period upon arrival at the duty site. In contrast, DOD’s JTR and JFTR that were in effect at the time of our audit did not indicate whether a rest period upon arrival at the duty station prohibited the authorization of premium class travel. Both DOD directives on travel (4500.9 and 4500.56) do not directly address whether premium class travel is allowed if the flight exceeds 14 hours. Further, the services’ implementing guidance is inconsistent in its application of the 14-hour rule. For example, the Army policy adopts the FTR “rest period upon arrival” limitations, but did not define what is considered a “rest period.” The Navy policy prohibits a “rest period en route.” The Air Force policy states that Air Force travelers might be authorized business class accommodations if they are required to perform a full day (8 hours) of work immediately upon arrival. Finally, the Marine Corpsimplementing guidance does not address this matter. GSA and DOD travel regulations authorize premium class accommodations when they are paid for by a nonfederal source. However, the Navy travel policyprohibits the use of first class accommodations even when those accommodations are paid for by a nonfederal source, such as when a professional association pays for the travel of a Navy employee. DOD and the services have not defined a standard format for documenting authorization and justification for premium class travel. Because premium travel is to be taken only on an exception basis after all other alternatives have been exhausted, the documentation for authorization and justification should be held to the highest standards to provide reasonable assurance that in every case the substantially higher premium travel cost is warranted. In DOD’s case, because authorization and justification for premium travel is not consistently documented, it does not have a documentation trail indicating that the appropriate official approved the travel order and there was adequate justification for the additional cost associated with a premium class ticket. The JTR and JFTR state that approval for premium class travel should be obtained in advance of travel, except in extenuating/emergency circumstances that make authorization impossible, and specify the circumstances under which premium travel is to be permitted. However, the JTR and JTFR do not provide clear and consistent procedures for documenting the approval of premium class travel and the type of supporting documentation to be maintained. In contrast, other federal agencies have issued clear and consistent guidelines related to the documentation of premium class travel. For example, the Department of Agriculture (USDA) approves the use of premium class accommodations on a case-by-case basis and specifies that premium travel be approved by the under secretary except when frequent travel benefits are used. The justification must include the specific circumstances relating to the criteria, such as a medical justification from a competent medical authority, which must include a description of the employee’s disability, medical condition, or special need; approximate duration of the medical condition or special need; and a recommendation of a suitable means of transportation based on medical condition or special need. In addition, USDA requires that the traveler prepare a report documenting first class travel that details the traveler’s name, address, rank, dates of travel with originating and destination cities, the reason for obtaining first class travel and the costs of both the coach fare and the first class fare. As shown in figure 1, other agencies, such as the National Institutes of Health (NIH), have standard forms that travelers must complete when requesting approval for any travel other than coach class accommodations. Information required includes the traveler’s identifying information, the reason for requesting premium class travel, and a comparison of the cost of premium and coach class travel. Such a form would help eliminate the failure to obtain specific authorization for premium class travel that we identified in our statistical testing. Further, we found that other agencies used a separate form to document a medical condition and to justify premium class travel. As shown in figure 2, the disabilities or other special needs form used by NIH requires detail on the nature of the disability or special need and the signature of both the employee and a competent medical authority. NIH’s policies state that the medical statement should specifically address why it is necessary to use upgraded accommodations. The form also limits the authority to a period of 6 or 12 months from the initial date of approval depending on the nature of the disability or special need. In the instance of a permanent disability, NIH policy is that authorized use of premium class accommodations is valid for up to 3 years. Resubmission is necessary to ensure that there continues to be a need for the approval and to keep the authorization records current. During the course of our work, in April 2003, DOD updated the JTR and JFTR to articulate more clearly and make more stringent the circumstances under which premium class travel may be authorized. In addition, the updated JTR and JFTR emphasize, in the context of lengthy flights, that premium class travel must not be common practice and must only be used when exceptional circumstances warrant. They also provide examples of when premium class travel should not be authorized. The revised JTR and JFTR better define the circumstances in which premium class other than first class travel, that is, business class, is authorized for DOD travelers on flights to and/or from points outside the continental United States when the scheduled flight time exceeds 14 hours. Most notably, the revised regulations prohibit the use of business class travel when travelers are authorized a “rest period” or an overnight stay upon arrival at their duty stations. The modified regulations now explicitly state that business class accommodations are not authorized on the return leg of travel. This is a further restriction on premium class travel; before April 2003, DOD did not expressly prohibit travelers from using premium class travel on their return trips to the United States. Finally, in its revised regulations, DOD provides specific guidance on how the proposed use of business class accommodations should be considered by officials and travelers. DOD states that, in the context of authorizing business class accommodations for flights scheduled to exceed 14 hours, “business class accommodations must not be common practice” and that such service should be used only in exceptional circumstances. Further, DOD directs order-issuing officials to “consider each request for business class service individually.” We agree with DOD that decisions regarding the use of premium class travel should be made on a case-by-case basis and based on a preference for coach class. The ineffective management and oversight of premium class travel provides another example of why DOD financial management is one of our “high-risk” areas, with the DOD highly vulnerable to fraud, waste, and abuse. DOD does not have the management controls in place to identify issues such as improper use of premium class travel. As a result, millions of dollars of unnecessary costs are incurred annually. Because premium class travel is substantially more costly than coach travel, it should only be used when absolutely necessary, and the standards for approval and justification must be high. During our audit, DOD began taking steps to improve its policies and procedures for premium class travel. DOD must build on these improvements and establish strong controls over this sensitive area to provide reasonable assurance that its travel dollars are spent in an economical and efficient manner. Recommendations for We are making the following recommendations to improve internal control Executive Action over the authorization and justification of premium class travel and to strengthen the control environment as part of an overall effort to reduce improper premium class travel and related DOD costs. Because of the substantial cost and sensitive nature of premium class travel, we recommend that the Secretary of Defense direct the appropriate under secretary of defense, assistant secretary of defense, or military service officials to direct the implementation of specific internal control activities over the use of premium travel. While a wide range of activities can contribute to a system that provides reasonable assurance that premium class travel is authorized and justified, at a minimum, the internal control activities should include the following: Reiterate to DOD’s personnel the policy that premium class travel be authorized and justified only on a case-by-case basis. Require the travel offices to issue premium class tickets only if properly authorized and justified and documented accordingly. Prohibit the use of blanket authorization for premium class travel. We recommend that the Secretary of Defense direct the appropriate under secretary of defense, assistant secretary of defense, or military service officials to establish policies and procedures to incorporate the regulations specified in GSA’s FTR as well as guidance specified in our Standards for Internal Control and our Guide for Evaluating and Testing Controls Over Sensitive Payments, including the following: Develop procedures to identify the extent of premium class travel, including all business class travel, and monitor for trends and potential misuse. Develop procedures to identify all first class fare codes so that DOD can prepare complete and accurate first class travel reports. Develop a management plan requiring that audits of DOD’s issuance of premium class travel are conducted regularly and the results of these audits reported to senior management. Audits of premium class travel should include reviews of whether commercial travel offices adhere to all governmentwide and DOD regulations for issuing premium class travel. Periodically provide notices to travelers and supervisors/managers that the limitations on premium class travel, the limited situations in which premium class travel may be how the additional cost of premium class travel can be avoided. Provide training to travelers and supervisors/managers that identifies DOD’s premium class policies and procedures. Train or make training materials available to the commercial travel offices so that they may train their employees on premium class policies and procedures. Require that premium class travel be approved by individuals who are at least of the same rank/grade as the travelers. Specifically prohibit the travelers themselves or their subordinates from approving requests for premium class travel. Use a standardized format or modify the format of the existing travel order to document the request and authorization of premium class travel. The standardized form or modified travel order should contain sufficient information to provide a clear audit trail that documents why the additional cost of premium class travel was a necessary expense that could not have been avoided. Develop a policy that articulates what constitutes adequate support to substantiate medical, disability, or special needs. Such a policy should address the length of time a medical certification is valid. Determine the feasibility of requiring that the medical certification for premium class travel be reviewed by an independent medical professional to verify that the medical condition justifies the additional cost of premium class travel. Revise DOD’s directives on travel, when necessary, to ensure that they are at least consistent with, or more stringent than, GSA’s travel regulations. For example, issue the update to DOD Directive 4500.9 that removes the provision authorizing certain presidential appointees and three-star and four-star generals/admirals to fly premium class on flights when flying to or from overseas destinations. Revise the military service directives, orders, and policies to make them consistent with the JTR and JFTR. On September 10, 2003, DOD, Air Force, Army, Marine Corps, and Navy officials representing the offices of the under secretaries of defense for Acquisitions Technology and Logistics, Personnel and Readiness, and Comptroller provided oral comments on a draft of this report. The officials said they agreed with the findings presented in the draft report and generally concurred with our recommendations for resolving the control weaknesses. The officials explained that because responsibility for travel program management is spread across three under secretaries, they were not yet sure who would be responsible for monitoring implementation of the recommendations. Those DOD officials pointed out that two of our recommendations could be addressed in different ways than contemplated in the draft report. First, they said the justification for premium class travel could be documented by modifying or augmenting the existing DOD travel order rather than using a separate form. We have modified the text of these recommendations to be less prescriptive as to the corrective actions and instead focus on the intent of the recommendations for having clear, well-supported justifications and written audit trails of the authorization to spend additional funds on premium class travel. Second, in regard to training commercial travel office personnel on premium class travel limitations, they expressed a preference for DOD providing training materials to the commercial travel offices so that they, rather than DOD, could train their personnel, and facilitating just- in time or other training for commercial travel office personnel. As agreed with your offices, unless you announce the contents of this report earlier, we will not distribute it until 30 days from its date. At that time, we will send copies to interested congressional committees; the Secretary of Defense; the Under Secretary of Defense, Comptroller; the Secretary of the Army; the Secretary of the Navy; the Secretary of the Air Force; and the Director of the Defense Finance and Accounting Service. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact Gregory D. Kutz at (202) 512-9505 or [email protected], John J. Ryan at (202) 512-9587 or [email protected], or John V. Kelly at (202) 512-6926 or [email protected] if you or your staffs have any questions concerning this report. Major contributors to this report are acknowledged in appendix III. We audited the controls over the authorization and issuance of premium class travel charged to the Department of Defense’s (DOD) centrally billed travel accounts during fiscal years 2001 and 2002. Our assessment covered the following: The extent to which DOD uses the centrally billed travel accounts to purchase premium class travel. Testing a statistical sample of premium class transactions to assess the implementation of key management controls and processes for authorizing and issuing premium class travel, including approval by an authorized official and justification in accordance with regulations. We also identified other selected transactions throughout the premium class travel transactions to determine if indications existed of improper transactions. DOD’s oversight and monitoring of the use of premium travel and key elements of the control environment, including the (1) consistency of premium class travel procedures among the services and (2) adequacy of documentation to justify the additional cost of premium class travel. To assess the magnitude of use of premium class travel, we obtained from Bank of America a database of fiscal year 2001 and 2002 travel transactions charged to DOD’s centrally billed travel card accounts. We queried the database to isolate those transactions specifically related to airline travel. The airline industry uses certain fare and service codes to indicate the class of service purchased and provided. The database contained transaction- specific information, including the fare and service codes used to price the tickets DOD purchased. We identified the fare basis codes that corresponded to the issuance of first, business and coach class travel. Using these codes, we selected all airline transactions that contained at least one leg in which DOD paid for premium class travel accommodations. We also used these data to identify the number of transactions in which DOD purchased an entirely coach class ticket, but the transactions contained at least one segment of the ticket that was upgraded to a premium class accommodation. We tested a statistical sample of premium class transactions to assess the implementation of key management controls and processes for approving and issuing premium class travel, and used data mining for additional examples of transactions that illustrate improper or questionable premium class travel. The population from which we selected our transactions for testing was the set of positive debit transactions for both first and business class travel that were charged to DOD’s centrally billed travel accounts during fiscal years 2001 and 2002. Because our objective was to test controls over travel card expenses, we excluded credits and miscellaneous debits (such as fees) that would not have been for ticket purchases from the population of transactions. We further limited the business class transactions to those costing more than $750 because many intra-European flight business class tickets cost less than $750 and the corresponding coach class tickets were not appreciably less. By eliminating from our sample business class transactions less than $750, we avoided the possibility of selecting a large number of transactions in which the difference in cost was not significant enough to raise concerns of the effectiveness of the internal controls. The total number of transactions excluded was 15,887, costing approximately $8 million. While we excluded business class transactions costing less than $750, we (1) did not exclude all intra-European flights and (2) potentially excluded nonauthorized business class flights. Limitations of the database prevented a more precise methodology of excluding lower cost business class tickets. To test the implementation of key control activities over the issuance of premium class travel transactions, we selected a stratified random probability sample from the subset of centrally billed account transactions containing at least one premium class leg and in which the business class ticket cost more than $750. Specifically, we selected 15 first class transactions from a population of 1,240 transactions, totaling about $3 million, and 122 business class transactions from a population of about 51,000 transactions, totaling about $113 million. For each transaction sampled, we requested that DOD provide us the travel order, travel voucher, travel itinerary, and other related supporting documentation. We used that information to test whether documentation existed that demonstrated that DOD had adhered to key internal controls over authorizing and justifying the premium class ticket. Based on the information DOD provided, we assessed whether a valid official approved the premium class travel and whether the premium class travel was justified in accordance with DOD regulations. The results of the samples of these control attributes can be projected to the population of transactions at DOD only, not to individual services or locations. Based on the sampled transactions, we also estimated the percentage of premium class travel taken by civilian supervisors, managers, and executives, or senior military officers. 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. 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 estimates as 95 percent confidence intervals (e.g., plus or minus 7 percentage points). These are intervals that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. All percentage estimates from the sample of premium class air travel have sampling errors (confidence interval widths) of plus or minus 9 percentage points or less. Table 5 and table 6 summarize the population of DOD airline travel transactions containing at least one premium class leg charged to DOD’s centrally billed accounts in fiscal years 2001 and 2002 and the subpopulation subjected to testing. In addition to our audit of a DOD-wide statistical sample of transactions, we also selected other transactions identified by our data mining efforts for audit. Our data mining identified individuals who frequently flew using first or business class accommodations, frequent trips to one location, and trips involving family travel. For data mining transactions, we also requested that DOD provide us the travel order, travel voucher, travel itinerary, and any other supporting documentation that could provide evidence that the premium class travel was properly authorized and justified in accordance with DOD policies. If the additional documentation provided indicated that the transactions were proper and valid, we did not pursue further documentation of those transactions. If the additional documentation was not provided or if it indicated further issues related to the transactions, we obtained and reviewed additional documentation or information about these transactions. To assess the overall control environment for premium class travel, we obtained an understanding of the travel process, including authorization of premium class travel, by interviewing officials from the Department of the Army, Department of the Navy, Department of the Air Force, and Defense Finance and Accounting Service. We reviewed applicable policies and procedures and program guidance that they provided. We visited two Army units, three Navy units, three Air Force units, and two Marine Corps units to gain an understanding of the travel process, including the management of premium class travel. We used as our primary criteria applicable laws and regulations, including GSA’s Federal Travel Regulation and DOD’s Joint Travel Regulations and Joint Federal Travel Regulations. We also used as criteria our Standards for Internal Control in the Federal Government and our Guide to Evaluating and Testing Controls Over Sensitive Payments. To assess the management control environment, we applied the fundamental concepts and standards in our internal control standards to the practices followed by management in the areas reviewed. We did not audit the Defense Finance and Accounting Service’s centrally billed travel card payment process. We also did not audit electronic data processing controls used in processing centrally billed account transactions. The sites reviewed received paper monthly bills containing the charges for their purchases and used manual processes for much of the period we audited, which reduced the importance of electronic data processing controls. We briefed DOD managers, including DOD officials in the Office of the Under Secretary of Defense (Comptroller), the Defense Finance and Accounting Service, and the Office of Inspector General; Army officials in the Office of Deputy Chief of Staff for Logistics; Navy officials in the Office of the Assistant Secretary of the Navy for Financial Management and Comptroller; Air Force officials in the Office of the Deputy Chief of Staff for Installation and Logistics; and Marine Corps officials in the Office of Deputy Chief of Staff for Installations and Logistics. On August 8, 2003, we provided DOD officials with a draft of this report. We obtained oral comments from DOD, Air Force, Army, Marine Corps, and Navy officials representing the offices of the under secretaries of defense for Acquisitions Technology and Logistics, Personnel and Readiness, and Comptroller on September 10, 2003. We summarized those comments in the “Agency Comments and our Evaluation” section. We conducted our audit work from November 2002 through August 2003, in accordance with U.S. 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. The process for obtaining premium class travel begins when a DOD civilian employee or member of the military or the employee’s supervisor determines that he or she needs to travel and the traveler is notified to initiate a travel request. If the traveler determines that he or she needs premium class travel, the traveler submits the travel request, along with justification for premium travel, to his or her supervisor for approval. Once the supervisor reviews the travel request, along with the required supporting documentation, such as a doctor’s note supporting a specific physical condition and the necessity for premium travel, it is forwarded to the official who signs the order. For first class travel, the secretary within the military service or a designee reviews the request and justification for first class travel for consistency with DOD regulations. In the case of premium class other than first class transportation, the local transportation officer or other appropriate authority reviews the request and justification. The order-signing official reviews the travel request and documentation and determines if there is adequate support for the premium travel. If the travel is properly supported and justified, then the premium class travel is approved and the official signs the travel request to generate a travel order. If adequate support does not exist for the class of travel requested, then the request for premium travel is denied. The travel order is issued, signed by the official, and delivered to the government travel office (GTO), or the commercial travel office (CTO)acting on behalf of the government. Either the GTO or CTO verifies the existence of documentation and checks for an authorizing signature. The CTO then issues the premium class ticket and charges the centrally billed account. The CTO is not supposed to use the centrally billed account to purchase a premium class ticket until the traveler or the official provides the CTO with a signed travel order authorizing the premium class travel. Figure 3 provides a graphic description of the process to obtain premium class travel. Staff making key contributions to this report were Kris Braaten, Beverly Burke, Francine DelVecchio, Lisa Hansen, Kenneth M. Hill, Aaron Holling, Jeffrey Jacobson, Julie Matta, Karlin Richardson, John Ryan, Sidney H. Schwartz, and Scott Wrightson. 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. | Ineffective oversight and management of the Department of Defense's (DOD) travel card program, which GAO has previously reported on, have led to concerns about DOD's use of first and business class airfares. GAO was asked to (1) identify the magnitude of premium class travel, (2) determine if DOD's key internal control activities operated effectively and provide examples of control breakdowns, and (3) assess DOD's monitoring and key elements of the control environment. Breakdowns in internal controls and a weak control environment resulted in improper first and business class travel and increased costs to taxpayers. Based on extensive analysis of records obtained from Bank of America, GAO found that DOD spent almost $124 million on about 68,000 premium class related tickets--primarily business class--during fiscal years 2001 and 2002. Each premium class ticket costs the government up to thousands of dollars more than a comparable coach class ticket. GAO's work also indicated that civilian supervisors, managers, and executives and senior military officers accounted for almost 50 percent of the premium class transactions, and for 27 of the 28 most frequent premium class travelers. GAO considers travel by high-ranking officials to be a sensitive payment area because of its susceptibility to abuse. Breakdowns in key internal controls resulted in a significant level of improper premium class travel. GAO estimated that 72 percent of DOD's fiscal year 2001 and 2002 premium class travel was not properly authorized, and 73 percent was not properly justified. Further, DOD did not have accurate and complete data on the extent of premium class travel and performed little or no monitoring of this travel. In regard to the control environment, GAO found that DOD (1) issued policies that were inconsistent with General Service Administration governmentwide travel regulations, (2) did not require military services to issue and update premium class policies to implement DOD's travel regulations consistently, and (3) did not issue guidance on how to document the authorization and justification of premium class travel. As a result of GAO's audit, DOD has begun updating its travel regulations to more clearly state when premium class travel can be authorized and to emphasize that it must only be used when exceptional circumstances warrant the additional cost. |
To date, three stamps have been issued in the nation’s semipostal program: the Breast Cancer Research, Heroes of 2001, and Stop Family Violence stamps. Semipostals are stamps sold at a premium above the First-Class postage rate; the net premium amount supports a designated cause. The semipostal proceeds are transferred from the Service to the designated federal agencies. The three semipostals were authorized through separate congressional acts relating to each stamp. The Stamp Out Breast Cancer Act required that the Service issue the Breast Cancer Research stamp. The Heroes of 2001 and Stop Family Violence stamps were mandated by Congress in the 9/11 Heroes Stamp Act of 2001 and the Stamp Out Domestic Violence Act of 2001, respectively. Figure 2 illustrates the three semipostals. The sales period for the three semipostals has varied. Initially, the Breast Cancer Research stamp was authorized for 2 years in 1998. Since then, it has been reauthorized four times and there are currently proposals in Congress to further extend the sales period for either two or four additional years beyond the current expiration date of December 31, 2007. The Breast Cancer Research stamp raises money for breast cancer research programs supported by NIH and DOD, with NIH receiving 70 percent of the funds available and DOD receiving the remaining 30 percent. The Heroes of 2001 stamp was offered for sale from June 7, 2002, to December 31, 2004, and funds raised were transferred to FEMA to assist the families of emergency relief personnel who were killed or permanently disabled in the line of duty in connection with the terrorist attacks against the United States on September 11, 2001. The Stop Family Violence stamp was offered for sale from October 8, 2003, to December 31, 2006. Proceeds from the Stop Family Violence stamp were transferred to ACF for domestic violence prevention programs. Between October 8, 2003, and December 31, 2004—a period of just over 1 year—the three semipostals were on sale simultaneously. Currently, however, the Breast Cancer Research stamp is the only semipostal still being sold. Previously, we reported that the Breast Cancer Research stamp has been an effective fund-raiser and that funds raised through sales of the stamp had contributed to key insights and approaches for the treatment of breast cancer. Most of the key stakeholders we spoke with and, according to a survey we conducted in 2003, members of the public viewed the stamp as an appropriate way to raise funds for a nonpostal purpose. With some concerns, however, about the Service’s identification and recovery of costs associated with carrying out the act, we recommended that the Service reexamine and, as necessary, revise its Breast Cancer Research stamp cost recovery regulations. The Service implemented our recommendation by revising its regulations. We also suggested that Congress consider establishing annual reporting requirements for NIH and DOD. In addition, we recommended that the Secretaries of Defense, Homeland Security, and Health and Human Services annually issue reports to the Congressional committees with jurisdiction over the Service and that these reports, among other things, should include information on the amount of funding received from semipostal sales and accounting for how the funds were allocated or otherwise used. As of June 30, 2007, more than $68 million has been raised through the sale of semipostals. The amounts raised and the number of stamps sold has varied among the three semipostals. Also, based on our discussions with various agencies, organizations, advocacy groups, and fund-raising experts, we identified a number of factors that affected semipostal sales, including public awareness, stamp design, and confusion about how the proceeds will be used. The Breast Cancer Research stamp has raised about $54.6 million, which dwarfs the funds raised by the other semipostals. Of the funds raised, the Service transferred a total of $38.2 million and $16.4 million to NIH and DOD, respectively, for breast cancer research. Similarly, among the semipostals, the Breast Cancer Research stamp had the highest level of sales with 777.8 million stamps sold as of June 30, 2007. One explanation for the higher Breast Cancer Research stamp sales is the length of time that each stamp was sold. The Breast Cancer Research stamp—the only semipostal still on sale today—has sold for the past 9 years while the Heroes of 2001 and the Stop Family Violence stamps sold for 2.5 and just over 3 years, respectively. Although Breast Cancer Research stamp sales have fluctuated since the semipostal’s issuance in 1998, sales have been relatively high over time compared to the other semipostals (see fig. 1). For example, sales of the Breast Cancer Research stamp have averaged nearly 22 million semipostals per quarter since issuance. Several factors affected Breast Cancer Research stamp sales to date. As we reported in 2005, public awareness about the fund-raising causes represented by the semipostals—or an issue often in the public eye— affected sales levels. For example, an official from Susan G. Komen for the Cure told us that, with one in eight women being affected by breast cancer, the subject is always in the public spotlight. Likewise, an official from the American Cancer Society told us that public awareness of breast cancer, coupled with the outreach efforts of several organizations, such as the Avon Foundation’s breast cancer fund-raising events, increased Breast Cancer Research stamp sales. Another factor that could affect Breast Cancer Research stamp sales is the stamp’s recent price increase. In May 2007, the price of the Breast Cancer Research stamp increased from 45 cents to 55 cents. This marks the first time that this stamp’s price has increased by as much as 10 cents (see table 1). The Service’s Governors established the new price in January 2007—with knowledge that the Service had proposed an increase of the First-Class postage rate from 39 cents to 42 cents. By law, the Governors are required to set postage rates for the Breast Cancer Research stamp. The price must be an amount evenly divisible by five and at least 15 percent more than the First-Class postage rate. The Service refers to this difference in price as the differential revenue. The Governors decided on a 10-cent price increase because the differential revenue of 34 percent, according to the Service, was historically in line with past differential revenue amounts. For example, in March 2002, when First-Class postage was 34 cents and the Breast Cancer Research stamp was 45 cents, the differential revenue was 32 percent, and this, according to Service officials, did not negatively impact Breast Cancer Research stamp sales. However, an increase to 50 cents would have yielded a differential revenue of 22 percent—also in line with past amounts (see table 1). In addition, Service officials told us that when the decision was being made as to whether the Breast Cancer Research stamp price should be 50 cents or 55 cents, the Governors agreed with postal management that 55 cents would be more appropriate. The Service believes that an increase to 55 cents would not deter customers who were passionate and supportive of the cause. With the Postal Accountability and Enhancement Act effectively allowing annual postage rate increases not to exceed the annual change in the Consumer Price Index, several years could pass with possible increases in the First-Class postage rate. Under this scenario, setting the Breast Cancer Research stamp price at 55 cents will allow for greater price stability in the event Congress further extends the stamp’s sales period beyond 2007. With only a few months passing since this increase, we were unable to determine what impact, if any, this increase had on sales. However, fund- raising experts that we spoke with generally agreed that consumers with an affinity—or positive response—toward the Breast Cancer Research stamp would most likely continue to purchase the stamp. For example, breast cancer survivors and consumers with close family members who have battled the disease will probably continue to purchase the stamp, despite the 10-cent-price increase, to support breast cancer research. Likewise, one fund-raising expert from the BBB Wise Giving Alliance told us that, even with the 10-cent price increase, the Breast Cancer Research stamp price is still relatively low. According to this official, doubling the price, on the other hand, would probably negatively impact sales, but it is difficult to determine at which point an increase in price will negatively affect sales for any given item. Two of the three advocacy groups that we spoke with and that are affiliated with breast cancer said they could not say what impact, if any, the price increase may have on Breast Cancer Research stamp sales, while the third group believed a decline in sales would result. During its sales period, a total of 132.9 million Heroes of 2001 stamps were sold. From the stamp sales, the Service transferred about $10.6 million to FEMA for distribution to the families of emergency relief personnel who were either killed or permanently disabled while serving in the line of duty in connection with the terrorist attacks of September 11, 2001. Sales of the Heroes of 2001 stamp were initially high after June 2002 when it went on sale, and over 50 percent of the stamp’s sale (see fig. 1) occurred in the two-quarters following issuance. However, shortly thereafter, sales began to decline. In our 2005 report, we attributed this decline to the stamp’s inability to maintain steady sales over time—or lack of staying power. Sales of the Heroes of 2001 stamp reflected the dramatic emotional spike typically associated with episodic events, such as a disaster, with fund- raising efforts building quickly and then declining as events begin to retreat from the public spotlight. In contrast, ongoing causes, such as finding a cure for breast cancer, are more likely to maintain staying power overtime, according to fund-raising experts. While the postage rate for the Heroes of 2001 stamp did not change during its sales period, the postage rate for a First-Class stamp did increase—also causing the differential revenue percentage to decline. Table 2 illustrates these changes. The Service sold 45.4 million Stop Family Violence stamps during its sales period—the lowest sales of the three semipostals. Similar to the sales patterns for the Heroes of 2001 stamp, sales for the Stop Family Violence stamp were highest during the initial two quarters following issuance (see fig. 1) and then declined. Sales fell from 6.6 million sold in the first quarter of fiscal year 2004—when the sales period began—to 2.8 million sold in the first quarter of fiscal year 2007—when the sales period ended. The Stop Family Violence stamp raised about $3.2 million, which the Service transferred to ACF to fund domestic violence prevention programs. This review reconfirmed our previous findings regarding the factors that likely affected Stop Family Violence semipostal sales. In 2005, we reported that factors such as stamp design, confusion about how the proceeds would be used, and limited advertising were factors that likely affected sales. For this review, four of the five advocacy groups we spoke with about the Stop Family Violence stamp told us that the stamp’s design—an image of a crying child—played a key role in low stamp sales (see fig. 2). Several advocacy group officials commented that as a result, postal customers were not likely to use the stamp on wedding invitations or holiday mail. At least two officials told us that the Service should have consulted with the domestic violence community before selecting the stamp’s final design. One official told us that in so doing, the Service would have immediately learned that a different design would have been more appropriate. Another advocacy group official told us that because domestic violence is an emotionally charged issue, a softer image was needed for the stamp to have been more effective. This official suggested, for example, that a purple ribbon—often associated with domestic violence, would have been a more appropriate design. In contrast, the Service felt that the design of the Stop Family Violence stamp was not a key factor in the stamp’s lower sales. The Service noted that there are few subjects that will garner the same level of support as the Breast Cancer Research stamp. The Service also noted that it rarely consults with advocacy groups regarding the stamp design because it is difficult to gain consensus. In 2005, we also reported that support may be further enhanced if the semipostal or available marketing information clearly indicated how the proceeds will be used. During this review, three of the five advocacy groups affiliated with preventing domestic violence told us that confusion about how proceeds would be used also affected stamp sales. One advocacy group specifically described this confusion as concern in the domestic violence community that proceeds from the Stop Family Violence stamp might go to children’s programs in general—and not specifically to enhance services for children exposed to domestic violence. According to officials from this advocacy group and another, had it been known early on how the proceeds would be used, the domestic violence community would have given the stamp its full support and would have been more likely to advertise it. Both of these efforts could have resulted in higher Stop Family Violence stamp sales—as, according to the American Red Cross and the BBB Wise Giving Alliance officials, advocacy groups are the most useful tool for getting the word out about charitable causes and fund-raising efforts. In addition, we reported in 2005 that, comparatively speaking, a limited amount of advertising was performed to promote sales of the Stop Family Violence stamp. The Breast Cancer Research and Heroes of 2001 stamps had extensive Service advertising campaigns, as the Service spent nearly $900,000 to advertise the Breast Cancer Research stamp and over $1.1 million for the Heroes of 2001 stamp. However, due to an overall reduction in the Service’s budget, since 2003 advertising for all stamps, including semipostals, were limited to in-store messaging. Consequently, when the Stop Family Violence stamp was issued, the Service had established a policy that all costs incurred for advertising semipostals would be recovered from the semipostal’s proceeds. As a result, the advertising costs incurred for this stamp were deducted from its proceeds. When the Service met with ACF before the Stop Family Violence stamp was issued, the Service proposed spending $1.5 million or more on an advertising campaign to be funded by future Stop Family Violence stamp proceeds. Because of the uncertainty about how much money would be raised through sales of the stamp, ACF decided not to pursue the proposed advertising campaign. Instead, the Service and ACF looked to the advocacy groups to promote the semipostal. However, as discussed above, uncertainty about how the proceeds would be used was one reason why the domestic violence community did not fully support the semipostal. Through May 1, 2007, the Service spent about $78,000 to advertise the Stop Family Violence stamp, and about $77,000 was recovered from the stamp’s proceeds. The postage rate for the Stop Family Violence stamp did not change during its sales period, but the postage rate for a First-Class stamp did increase—causing the differential revenue percentage to decline. Table 3 illustrates these changes. All of the designated federal agencies have distributed proceeds from the sale of semipostals to their respective causes. Both NIH and DOD have started to use proceeds from the sale of the Breast Cancer Research stamp to fund new programs. ACF has used proceeds from the Stop Family Violence stamp to award nine grants under a program that provides funds to organizations that deliver services to children who have been exposed to domestic violence. Finally, FEMA has recently distributed the remaining proceeds from the Heroes of 2001 stamp to the families of emergency relief personnel who were either killed or permanently disabled while serving in the line of duty in connection with the terrorist attacks of September 11, 2001. Of the four designated agencies, only DOD and ACF have submitted to Congress a GAO-recommended report on the agency’s use of semipostal proceeds. Proceeds from the sale of the Breast Cancer Research stamp fund breast cancer research grants and programs supported by NIH and DOD. NIH, which began receiving proceeds from the Breast Cancer Research stamp in 1998, has distributed its share of the proceeds through four different programs. Initially, NIH used the proceeds to award high-risk research grants through the Insight Awards to Stamp Out Breast Cancer initiative. This program was administered by the National Cancer Institute (NCI). In 2003, NIH created the Exceptional Opportunities in Breast Cancer Research initiative, which grants stamp proceeds to more traditional, well- established research projects that would not have been otherwise funded. In 2006, NIH started using Breast Cancer Research stamp proceeds for the Trial Assigning Individualized Options for Treatment (TAILORx) and the Breast Pre-Malignancy Program. TAILORx is designed to determine which patients with early stage breast cancer are most likely to benefit from chemotherapy and, therefore, to reduce the use of chemotherapy in patients that are unlikely to benefit. The Breast Pre-Malignancy Program is an NCI-wide program in breast cancer research that includes the areas of prevention, etiology, biology, diagnosis and molecular epidemiology. This program was created in the fall of 2005 when NCI leaders recommended that the Breast Cancer Research stamp proceeds be used to fund a program addressing multiple aspects of breast cancer pre-malignancy. They hoped that linking NCI’s research programs with research programs underway at universities, medical schools, hospitals, and research institutions, would create a collaborative and integrated program that would result in new discoveries and interventions. As previously discussed, NIH received approximately $38 million from the Service from the sale of the Breast Cancer Research stamp. Of this amount, NIH has spent nearly $26 million and has set aside an additional $8 million to cover the remainder of the Exceptional Opportunities in Breast Cancer Research initiative and the Breast Pre-Malignancy program. NIH has not yet determined whether it will use the remaining $4 million for an existing or new breast cancer research program. NIH has not used any of the stamp proceeds to manage these programs; and as a result, the proceeds available for breast cancer research were not reduced. DOD also began receiving Breast Cancer Research stamp proceeds in 1998. Initially, DOD’s share of the proceeds from the Breast Cancer Research stamp funded grants under its Idea Awards Program, which funds innovative approaches to breast cancer research. In 2007, DOD began using stamp proceeds to fund Synergistic Idea Awards. This program, which is designed to promote new ideas and collaborations, is similar to the Idea Awards Program in that it funds innovative, high-risk, high-reward breast cancer research but differs in that it requires two researchers to work synergistically on a research project. Both programs are administered by the Office of the Congressionally Directed Medical Research Programs, which is part of the U.S. Army Medical Research and Materiel Command. DOD received approximately $16.4 million from the Service from the sale of the Breast Cancer Research stamp. DOD has spent its share of the stamp’s proceeds for grants, except for approximately $608,000, or about 4 percent, which has been used for overhead costs related to managing the grants. Table 4 contains information about NIH and DOD grants, including the size and number of grants awarded. Grants awarded under the NIH Insight Awards and Exceptional Opportunities programs and DOD Idea Awards program have resulted in significant accomplishments in breast cancer research, according to agency officials. The TAILORx and Breast Pre-Malignancy programs first received funding in 2006 and, according to NIH, it is too soon to identify major accomplishments from these initiatives. Table 5 provides some examples of research findings from NIH’s Insight Awards and Exceptional Opportunities programs and DOD’s Idea Awards that were funded with proceeds from the Breast Cancer Research stamp. ACF is using the proceeds from the Stop Family Violence stamp to fund a discretionary grant program called Demonstration of Enhanced Services to Children and Youth Who Have Been Exposed to Domestic Violence that supports children who have been exposed to domestic violence. This grant program is administered under the Family Violence Prevention and Services Act Program (FVPSA). Stop Family Violence stamp proceeds have temporarily increased FVPSA’s budget for discretionary grants from $2.4 million per year to approximately $3.5 million per year. This grant program was created to increase the availability of child-centered services, develop and test new interventions and identify promising practices, and to expand the capacity of domestic violence shelters and community programs to effectively serve children exposed to violence. Some of the eligible activities covered under the grant program include providing services to children exposed to domestic violence, developing processes to ensure confidentiality of information shared by adult victims of domestic violence and their children, providing training to service providers, and developing educational materials for delivering intervention and prevention services to children who have been exposed to domestic violence. The Service distributed about $3.2 million in stamp proceeds to ACF from May 2004 to May 2007. In June 2005, ACF published the grant opportunity announcement. ACF received 65 applications and selected nine applicants to receive 3-year grants. In fiscal years 2005 and 2006, each grantee received approximately $130,000 per year. In fiscal year 2007, ACF distributed about $96,000 to each of the grantees, to expend the balance of stamp proceeds. ACF is distributing all stamp proceeds under the grants program. ACF has absorbed the costs of managing the grant program by managing the program with existing staff. Also, ACF has funded the peer review of grant applications and supported an annual training and technical assistance meeting for grant recipients. Table 6 provides information about grants awarded by ACF with Stop Family Violence stamp proceeds. The projects funded by this grant program are still underway, and ACF has not yet evaluated its accomplishments. According to ACF, several grantees are evaluating the effectiveness of their efforts and have reported significant progress in achieving their project goals. For example, one goal is to expand the capacity of domestic violence prevention programs to address the needs of children and families in and out of emergency shelters. Another goal is to develop and enhance community-based interventions for children exposed to domestic violence whose parents have not sought the services of a domestic violence prevention program. During the final year of program funding, ACF plans to initiate an effort to identify, describe, and disseminate promising practices that emerge from the projects. FEMA has received over $10.5 million from Heroes of 2001 stamp proceeds for distribution to the families of emergency relief personnel who were either killed or permanently disabled while serving in the line of duty in connection with the terrorist attacks against the United States on September 11, 2001. The Service transferred the proceeds to FEMA in six disbursements from November 2002 to May 2005. Once all of the proceeds were received, FEMA published an Interim Rule in the Federal Register on July 26, 2005, that established the program to be used to distribute the stamp proceeds. This rule established that the funds would be distributed equally among all of those deemed eligible. A notice announcing the application period for the program was published in December 2005, and FEMA accepted applications from December 2, 2005, until April 3, 2006. The first payment of funds was distributed to eligible applicants in November 2006 and FEMA made the final payments in August 2007. Because the total amount available and the number of eligible recipients was unknown, FEMA decided to wait until the end of the Heroes of 2001 stamp sales period before finalizing this program and beginning the process of identifying recipients. Table 7 provides information about FEMA’s distribution of Heroes of 2001 stamp proceeds. FEMA conducted outreach efforts prior to and early into the application process to inform potential applicants about the program and its requirements. These efforts included face to face briefings with relevant New York City area emergency relief agencies and their labor unions, as well as discussions with emergency relief agencies in Shanksville, PA, and areas surrounding the Pentagon in Washington, D.C. Broadcast e-mails were forwarded to all of the urban search and rescue teams that assisted at the locations of the attacks. In addition, agency and union newsletters and other media in the New York City area carried stories regarding the availability of the program and how to apply. Specifically, as it related to assisting families of deceased emergency relief workers, the New York City Police Department, New York City Fire Department, and the Port Authority of New York and New Jersey all cooperated and coordinated with FEMA by providing special assistance and directly notifying the families of the deceased about how to avail themselves of the program. In addition, these agencies assisted applicants by completing the appropriate sections of the applications, as required. However, assisting the large number of applicants in preparing their paperwork placed an unexpected burden on these agencies, according to FEMA and officials from these agencies. When we discussed the process for distributing the stamp proceeds with FEMA and these agencies, all officials agreed that the process was collaborative and successful. According to officials from the emergency relief agencies, the application process required an extensive amount of work, but ultimately grant recipients were grateful to receive the funds and generally were not concerned about the length of time it took FEMA to disburse the stamp proceeds. FEMA received a total of 1,945 applications and determined that 1,377 applicants were eligible to receive funds. To apply for Heroes of 2001 stamp proceeds, victims or their families had to complete the application and submit supporting documentation. This documentation had to demonstrate that the individual was present at an eligible site—World Trade Center, Pentagon, or Shanksville, PA— during the 96 hour period required for eligibility and confirm that the individual was deceased or living with a permanent physical disability as a result of the attacks. Examples of documents used to ascertain eligibility included, among other things, death certificates, worker compensation agency decisions, Social Security Administration disability documents, and affidavits from employers and co-workers. Once FEMA received the application and required documentation, a staff attorney and the project manager reviewed the applicant’s file. If they agreed that all elements necessary to qualify for the grant were clearly present and documented, they recommended the application for approval on a consent agenda for the next meeting of the Heroes Stamp Review Panel, which consisted of staff from FEMA, the National Fire Academy, and the Emergency Management Institute. Any questionable applications were reviewed and evaluated individually by the Heroes Stamp Review Panel. Applicants who were determined to be ineligible through this process were allowed an opportunity to appeal the decision. Even though FEMA conducted outreach efforts in metropolitan Washington, D.C., and Shanksville, PA, no applications were received from these areas. All of the applicants and recipients were emergency relief workers from the attacks in New York. A large majority of applicants and recipients were emergency relief personnel that are permanently disabled as a result of serving in the line of duty in connection with the terrorist attacks. Table 8 provides additional information about the recipients of stamp proceeds. The majority of recipients of Heroes of 2001 stamp proceeds were firefighters involved in rescue efforts related to the terrorist attacks. The firefighters included members of the New York City Fire Department, volunteer firefighters from other fire departments in the area, and members of urban search and rescue teams. Other recipients included law enforcement, Emergency Medical Services (EMS), and other safety personnel who were involved in the rescue efforts. Table 9 below lists the number of applicants and recipients in each of these categories. FEMA distributed the entire amount of the stamp’s proceeds to the 1,377 eligible recipients. FEMA decided to distribute an equal portion of the proceeds to each eligible recipient and each one received $7,672.53. It was initially unclear how many of the applicants would be deemed eligible to receive the stamp proceeds, so FEMA distributed the proceeds using a three-stage approach. This allowed some of the funds to be distributed to the recipients while the remaining eligibility decisions and appeals processes were still in progress. According to FEMA, several factors contributed to the length of time it took to distribute the funds. First, FEMA decided that each recipient would receive an equal amount of the proceeds, which meant that all of the recipients had to be identified and all appeals had to be completed before the final dollar amount of each award could be determined. Second, the majority of the applicants and recipients were permanently disabled as a result of serving in the line of duty in connection with the terrorist attacks. Some of these disabilities did not surface until well after the attacks, and the process to determine which applicants met the criteria was complicated. For example, if a firefighter claimed eligibility based on suffering from respiratory disease, it could be difficult to prove that their injuries resulted from involvement in the rescue efforts following the terrorist attacks and not from his entire firefighting career. Third, verification of these injuries required extensive paperwork, which had to be completed, in part, by the emergency relief agencies with the use of existing personnel. According to officials from some of these agencies, it took considerable effort to complete the paperwork. When these agencies became backlogged, FEMA allowed applicants to submit partial paperwork, as long as all required documentation was received by the deadline. Although the enabling legislation authorized the Service to recover administrative and related costs for selling the stamp, FEMA was not authorized to recover its administrative costs for the actual operation of the program to distribute the proceeds. FEMA estimates that it cost about $383,000 to administer the program. This sum includes the salary and benefits of U.S. Fire Administration staff responsible for the day to day management of the program, postage, travel costs, setting up a toll free hotline, and supplies. In our 2005 report, we recommended that the designated agencies issue reports to Congress on their use of semipostal proceeds. Program reporting is important because it ensures accountability and provides information to Congress and other interested parties regarding the use of proceeds. The designated agencies have varied in their response to our recommendation. DOD issued a report to Congress in July 2007 on its use of proceeds from the Breast Cancer Research stamp and plans to report annually as part of its report on Congressionally Directed Medical Research Programs. In addition, DOD provides information about the use of Breast Cancer Research stamp proceeds through information papers and its website. ACF prepared a report on its use of proceeds from the Stop Family Violence stamp and issued it to Congress in August 2007. The report includes information on the use of the proceeds and the related accomplishments achieved to date. Since 2007 is the final year for funding the grant program that uses Stop Family Violence stamp proceeds, the grantees will be preparing reports on the effectiveness of their efforts and the lessons learned. Using these reports, ACF anticipates preparing a final report for Congress on the grant program for release in 2009. FEMA plans to issue a report on its distribution of Heroes of 2001 stamp proceeds in the fall of 2007. NIH does not have any plans to report to Congress on its use of proceeds from the Breast Cancer Research stamp, but NIH officials noted that information on the breast cancer stamp is available to the public on its website and, occasionally, through the NCI newsletter. We found that NIH’s website and NCI newsletter do provide useful overview information about NIH’s use of Breast Cancer Research stamp proceeds. However, NIH’s website did not provide detailed information on the amount of proceeds received to date, how the proceeds were used and any related accomplishments resulting from the use of these proceeds. While we are not making any new recommendations in this report, we reaffirm our prior recommendation aimed at ensuring greater accountability and greater support for the Breast Cancer Research stamp. Specifically, in our September 2005 report, we recommended that the Secretary of Health and Human Services submit to the congressional committees with jurisdiction over the Service annual reports on the amount of funding received from the Breast Cancer Research stamp, how these funds were used, and accomplishments achieved with these funds. We provided a draft of this report to the Service, ACF, DOD, FEMA, HHS, and NIH for review and comment. These organizations did not offer overall comments on the draft report. They provided technical comments, which we incorporated where appropriate. We are sending copies of this report to Senators Dianne Feinstein and Kay Bailey Hutchison and Representatives Joe Baca and Wm. Lacy Clay because of their interest in the Breast Cancer Research stamp; Senators Hillary Rodham Clinton and Charles E. Schumer because of their interest in the Heroes of 2001 stamp; the Postmaster General; the Chairman of the Postal Regulatory Commission; and other interested parties. We will make copies available to others upon request. This report will also be available on our Web site at no charge 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. Key contributors to this report included Gerald P. Barnes, Assistant Director; Jennifer Clayborne; Colin Fallon; Kathleen Gilhooly; Brandon Haller; Josh Ormond; and Stephanie Purcell. To determine the amount of money raised through the sale of the semipostals, we analyzed semipostal sales data that the U.S. Postal Service (Service) provided to us. These data included the amount of quarterly stamp sales and the amount of proceeds that the Service transferred to the four federal agencies designated for each semipostal. We also interviewed officials from the designated federal agencies to confirm the amount of proceeds each received from the Service. The four designated federal agencies are the National Institutes of Health (NIH) and the Department of Defense (DOD) for the Breast Cancer Research semipostal; the Department of Homeland Security (DHS) for the Heroes of 2001 semipostal; and the Administration for Children and Families (ACF) within the Department of Health and Human Services for the Stop Family Violence semipostal. In addition, we obtained stakeholders’ views on what factors affected semipostal sales. For example, we spoke with Service officials; professional fund-raising organizations; and national advocacy groups affiliated with breast cancer, emergency relief personnel affected by the terrorist attacks of September 11, and domestic violence. Also, we interviewed Dr. Ernie Bodai, who is credited with conceiving the idea for the Breast Cancer Research stamp, and Ms. Betsy Mullen, who lobbied Congress for the stamp along with Dr. Bodai. Table 10 identifies the stakeholders whom we spoke with. To determine the reliability of the data we received, we obtained and reviewed specific information on the Service’s data collection and processing system. We determined that the data were sufficiently reliable for the purpose of this report. To determine how the designated federal agencies have used semipostal proceeds and reported results, we interviewed key officials from each agency that receives these funds. These agencies included the National Cancer Institute within NIH, the U.S. Army Medical Research and Materiel Command within DOD, the Federal Emergency Management Agency within DHS, and ACF. In addition, we obtained and reviewed agency documentation pertaining to grant programs funded with semipostal proceeds, including grant program development, purpose and goals, award and program guidelines, the number and amounts of awards, reporting requirements, and grant outcomes. Finally, to describe the monetary and other resources expended by the Service in operating and administering the semipostal program, we obtained and analyzed the Service’s data on costs of administering semipostals as well as what costs the Service has recovered. We also discussed the design of the semipostals, advertising, and postage rate increases with officials in the Service’s Office of Stamp Services. According to the Postal Service (Service), cost items recoverable from the funds raised by semipostals include, but are not limited to, packaging costs in excess of those for comparable stamps, printing costs for flyers or special receipts, costs of changes to equipment, costs of developing and executing marketing and promotional plans in excess of those for comparable stamps, and other costs that would not normally have been incurred for comparable stamps. Specifically, the Service has identified 13 cost categories that it uses to track semipostal costs. USPS, United States Postal Service: Response to the General Accounting Office Recommendations on the Breast Cancer Research Stamp (June 25, 2004). Costs reported by the Service totaled nearly $18.2 million through June 30, 2007 (see table 11). Costs for the Breast Cancer Research stamp accounted for $12.7 million of this amount. The Service determined that about $1.9 million of the total costs related to the three stamps represented costs that were attributable specifically to the semipostals, would not have been incurred for comparable stamps, and therefore, needed to be recovered. The recovered amounts varied from $1.2 million for the Breast Cancer Research stamp to just over $200,000 for the Stop Family Violence stamp. The Service reported that the majority of costs incurred by the semipostals were covered by the First-Class postage rate, and not recovered from the proceeds. Table 11 describes the semipostal costs incurred and recovered by the Service. The specific costs recovered from surcharge revenue varied by amount and type of expenditure for each semipostal (see tables 12 to 14, which show costs for each semipostal). As we explained in our September 2005 report, one of the differences is advertising. The Breast Cancer Research and Heroes of 2001 stamps incurred advertising costs of about $1 million, but when they were issued, the Service had a budget to advertise stamps. Because advertising costs would be incurred for comparable stamps, the Service did not recover these costs. When the Stop Family Violence stamp was issued, the Service had, among other things, eliminated all stamp advertising except for in-store messaging, as previously discussed. Subsequently, the Service established a policy that all costs incurred for advertising semipostals would be recovered from the semipostal’s surcharge revenue. Therefore, the advertising costs incurred for this stamp were deducted from the surcharge revenue. In November 1998, National Institutes of Health (NIH) began receiving Breast Cancer Research stamp proceeds from the Postal Service. Since then, NIH has distributed the proceeds—totaling nearly $31 million— through four different mechanisms. Initially, proceeds from the stamp were used to award 87 grants under the Insight Awards to Stamp Out Breast Cancer initiative. Since 2003, NIH used the proceeds to award 31 grants under the Exceptional Opportunities in Breast Cancer Research initiative. In recent years, the agency has used its share of the proceeds to fund the Trial Assigning Individualized Options for Treatment (TAILORx) and the Breast Pre-Malignancy Program. Grants awarded under each program are listed below. The Insight Awards were designed to fund high-risk exploration by scientists who are employed outside the federal government and who conduct breast cancer research at their institutions. Since fiscal year 2000, NCI distributed 87 Insight Awards totaling about $9.4 million. Most of the awards were for 2-year periods. Table 15 provides information about each Insight Award funded with Breast Cancer Research stamp proceeds, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. The Exceptional Opportunities in Breast Cancer Research were designed to advance breast cancer research by funding high-quality, peer-reviewed, breast cancer grant applications that are outside the current funding ability of the National Cancer Institute (NCI). In total, NCI awarded 31 Exceptional Opportunities Awards totaling nearly $10.8 million. Each grant is for a maximum of four years. Table 16 provides information about each Exceptional Opportunities award, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and amount of the award. In 2006, NIH began funding the Trial Assigning Individualized Options for Treatment (TAILORx) with proceeds from the Breast Cancer Research stamp. The trial is designed to determine which patients with early stage breast cancer would be more likely to benefit from chemotherapy and, therefore, reduce the use of chemotherapy in those patients who are unlikely to benefit. TAILORx seeks to incorporate a molecular profiling test (a technique that examines many genes simultaneously) into clinical decision making and, thus, spare women unnecessary treatment if chemotherapy is not likely to be of substantial benefit to them. The goal of TAILORx is to determine the most effective current approach to cancer treatment, with the fewest side effects, for women with early-stage breast cancer by using a validated diagnostic test developed by Genomic Health, Inc. in collaboration with the National Surgical Breast and Bowel Project, a network of cancer research professionals. The test is provided free to all patients that meet the eligibility requirements for the study. In fiscal year 2006, NIH awarded $4,500,000 to Genomic Health, Inc. to offset the costs of testing. As of the middle of May 2007, there were 1,459 patients who were preregistered and had their tumors tested. The number of patients to be tested during the trial is unknown, but NIH anticipates that it will range from approximately 6,000 to 10,000, depending on the preliminary results of the trial. The NCI Breast Pre-Malignancy Program represents a comprehensive program in breast cancer pre-malignancy research that includes the areas of prevention, etiology, biology, diagnosis, and molecular epidemiology. In fiscal year 2006, NCI awarded 6 grants under the program for a total of $853,000 and funded research projects at NCI totaling $371,000. The Breast Pre-Malignancy Program began in the fall of 2005 when NCI leadership recommended that stamp funds be used to address multiple aspects of breast cancer around a unifying theme—breast pre-malignancy. In addition, they recommended that the program be supported via NCI-wide programs, which support federal researchers located on the NIH campuses in Bethesda and Frederick, Maryland, and extramural research programs, which support research underway in universities, medical schools, hospitals, and research institutions across the country. This provided an opportunity to create a collaborative and integrated scientific program across NCI divisions and centers and to synergistically reach new discoveries and interventions. The NCI Breast Pre-Malignancy Program consists of six research components supporting research on pre-malignant lesions, cancer prevention techniques, and methods for detecting breast cancer or pre-cancers earlier. The program involves work on breast cancer stem cells, pathways, the microenvironment, molecular target identification (biomarkers), imaging, drug recovery, and prevention and translational research. Table 17 provides information about each Breast Pre-Malignancy award, including the fiscal year of the award, sponsoring institution, principal investigator, and amount of the award. As of September 2007, The Department of Defense (DOD) has awarded 39 breast cancer research grants totaling about $15.8 million using proceeds from the Breast Cancer Research stamp. From 1999 to 2006, DOD applied Breast Cancer Research stamp proceeds to its Idea Awards, which are funded under the Breast Cancer Research Program. These grants focus on innovative approaches to breast cancer research and cover research areas, such as genetics, biology, imaging, epidemiology, immunology, and therapy. In 2007, DOD started using Breast Cancer Research stamp proceeds to fund the Synergistic Idea Awards. These awards support innovative, high-risk, high-rewards breast cancer research collaborations between two independent researchers. Grant proposals must demonstrate the synergistic aspects of the collaboration. According to DOD officials, about $608,000 of the transferred funds had been used for overhead costs related to managing the grants. Table 18 provides information about each Idea Award funded with Breast Cancer Research stamps proceeds, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. Table 19 provides information about the Synergistic Idea Awards funded with proceeds from the stamp, including the fiscal year of the award, sponsoring institution, principal investigator, research area, and the amount of the award. As of June 2007, The Administration for Children and Families (ACF) awarded approximately $2.3 million of the proceeds from the Stop Family Violence stamp under the Demonstration of Enhanced Services to Children and Youth Who Have Been Exposed to Domestic Violence grants program. These grants support efforts to identify, design, and test approaches for providing enhanced and direct service for the children of abused parents being served in prevention programs or to develop an expanded capacity to work within community collaborations and systems responding to children exposed to domestic violence. In fiscal years 2005 and 2006, ACF awarded nine grantees approximately $130,000 each year. In fiscal year 2007, the final year of the program, ACF awarded about $96,000 to each grantee, to expend the balance of the Stop Family Violence stamp proceeds. Table 20 contains information about each grant funded with Stop Family Violence stamp proceeds, including the name of the grantee, the location of the organization, and total amount awarded. | As required by Congress, the U.S. Postal Service (Service) has issued three fundraising stamps--also called semipostals--which are sold at a higher price than First-Class stamps, with the difference distributed to designated federal agencies for specific causes. The proceeds from the three stamps are to fund breast cancer research, assistance to families of emergency relief personnel killed or permanently disabled in the terrorist attacks of September 11, and services to children exposed to domestic violence. Of the three stamps, the Breast Cancer Research stamp is the only semipostal currently being sold. GAO has issued three prior reports on semipostals. To provide Congress updated information, GAO examined (1) the amount of money that has been raised through the sale of semipostals, and (2) how the designated federal agencies have used the proceeds and reported the results. As of June 2007, more than$68 million has been raised through semipostal sales. Of the three semipostals, the Breast Cancer Research stamp had proceeds totaling approximately $54.6 million, the Heroes of 2001 stamp had proceeds totaling about $10.6 million, and the Stop Family Violence stamp had proceeds totaling about $3.2 million. The authorized sale period for each semipostal affected the funds raised. In discussions with relevant agencies, advocacy groups and fund-raising organizations, several factors were identified that affected semipostal sales. These factors include public awareness about the charitable cause that a stamp represents, the stamp's design, and confusion about how the proceeds will be used. All four of the designated federal agencies have distributed proceeds from their respective semipostals. Both the Department of Defense (DOD) and National Institutes of Health (NIH) continue to award grants and fund programs for research with proceeds from the Breast Cancer Research stamp, and have added new programs to distribute the proceeds. The Administration for Children (ACF) within Department of Health and Human Services (HHS) used the proceeds from the Stop Family Violence stamp to award nine grants to programs that support children who have been exposed to domestic violence. Also, the Federal Emergency Management Administration (FEMA) recently distributed the last of the proceeds from the Heroes of 2001 stamp to the families of emergency relief personnel who were either killed or permanently disabled while serving in the line of duty in connection with the terrorist attacks of September 11, 2001. In September 2005, GAO recommended that the designated federal agencies annually report to Congress on their use of semipostal proceeds. DOD and ACF have submitted reports to Congress, and FEMA plans to report in the near future. NIH does not plan to prepare a report for Congress, but offers information on NIH's use of Breast Cancer Research stamp proceeds on its public website. But, NIH's website did not provide detailed information on proceeds received, how proceeds were used and related achievements. |
In creating AmeriCorps, the Congress chartered a federal corporation to work with the states to fund local national and community service projects. The President appoints a chief executive officer and a 15-member bipartisan board of directors that is confirmed by the Senate to govern the Corporation; each member serves a 5-year term. The board has the authority to review and approve the strategic plan and proposed grant decisions. The Corporation provides grants to AmeriCorps projects directly and through states. To receive AmeriCorps funds, states must establish commissions on national service. These state commissions must have between 15 and 25 members and be composed of representatives from a variety of fields, including local government, existing national service programs, local labor organizations, and community-based organizations. Since AmeriCorps began, 48 states, the District of Columbia, and Puerto Rico have created commissions. These state commissions, in turn, subgrant AmeriCorps funds to local community service projects. The act gives critical program responsibilities to both the federal and state governments. Because national service was intended to address community needs, the act sought to balance a centralized federal program role with state responsibility for planning, implementing, and overseeing most eligible AmeriCorps projects because state governments are thought to be closer to and therefore more knowledgeable about community needs. Although it directly selects and oversees some AmeriCorps projects, the Corporation is primarily responsible for establishing national criteria for determining projects’ eligibility for federal funds and for assisting the states in carrying out their program responsibilities. Both the Corporation and the states are jointly responsible for other program areas such as providing training and technical assistance to local AmeriCorps projects. Table 1 lists the Corporation’s and the states’ responsibilities. AmeriCorps*State/National is the Corporation’s flagship AmeriCorps program. AmeriCorps*State/National participants earn an education award of up to $4,725 for full-time service or half that amount for part-time service. A minimum of 1,700 hours of service within a year is required to earn the full $4,725 award. To earn a part-time award, a participant must perform 900 hours of community service within 2 years (or within 3 years in the case of participants who are full-time college students). Individuals can serve more than two terms; however, they can receive only federally funded benefits, including education awards, for two terms. The Corporation allows projects to devote some portion, not more than 20 percent, of participants’ service hours to nondirect service activities, such as training or studying for the equivalent of a high school diploma. With regard to attrition, participants can earn prorated education awards if they are released for compelling personal circumstances, such as illness or critical family matters, and have served at least 15 percent of their service term. Participants released for cause are ineligible to receive an education award and may disqualify themselves from future service in AmeriCorps. Participants may be released for cause for a variety of reasons, including being convicted of a felony, chronic truancy, or consistent failure to follow directions. In addition, participants released for cause may include those who leave a project early to take advantage of significant opportunities for personal development or growth, such as educational or professional advancement. Education awards, which are held in trust by the U.S. Treasury, are paid directly to qualified postsecondary institutions or student loan lenders and must be used within 7 years after service is completed. In addition to the education award, AmeriCorps*State/National participants receive a living allowance stipend that is at least equivalent to, but no more than double, the average annual living allowance received by VISTA volunteers—about $7,500 for full-time participants in fiscal year 1996. Additional benefits include health insurance and child care assistance for participants who qualify for such support. Individuals can join a national service project before, during, or after postsecondary education, but must be a high school graduate, agree to earn the equivalent of a high school diploma before receiving an education award, or be granted a waiver by the project. A participant must be 17 or older and be a citizen, a national, or a lawful permanent resident alien of the United States. Selection of participants is not based on financial need. In its fiscal year 1997 appropriations, the Corporation anticipated fielding about 24,000 full- and part-time AmeriCorps*State/National participants. The act created three types of grant awards as funding streams for AmeriCorps*State/National projects: formula, competitive, and national direct. The act lists criteria that state commissions and the Corporation must use in selecting AmeriCorps projects for grant awards. The principal criteria include project quality, innovation, and sustainability. In addition, service projects must address community education, public safety, human, or environmental needs. States may develop additional criteria, based on identified service needs, to use in selecting projects for state formula grants. Similarly, the Corporation develops additional criteria that reflect particular national needs that states use to nominate projects for competitive grant awards and that the Corporation uses to select projects for national direct grants. State formula grants: One-third of the funds appropriated for AmeriCorps*State/National grants are distributed to state commissions strictly on the basis of population. In fiscal year 1995, state commissions were awarded about $67 million to support 262 projects using formula grants. State competitive grants: At least one-third of funds appropriated for AmeriCorps*State/National grants are awarded to state commissions on a competitive basis. The Corporation ranks the highest quality projects among those submitted by the states for these funds. In fiscal year 1995, the Corporation awarded another $64 million to state commissions to finance 103 projects using competitive grants. National direct grants: The Corporation competitively awards the remaining appropriations to public or private nonprofit organizations, institutions of higher education, or multistate organizations. In fiscal year 1995, the Corporation directly awarded about $58 million to support 57 projects using national direct grants. AmeriCorps grantees use grant funds to pay up to 85 percent of the cost of participants’ living allowances and benefits and up to 67 percent of other project costs, including participant training, education, and service gear; staff salaries, travel, transportation, supplies, and equipment; and project evaluation and administrative costs. To ensure that federal Corporation dollars are used to leverage other resources for project support, grantees must also obtain support from non-Corporation sources to help pay for the project. This support, which can be cash or in-kind contributions, may come from other federal sources as well as state and local governments, and private sources. In-kind contributions include personnel to manage AmeriCorps*State/National projects and to supervise and train participants; office facilities and supplies; and materials and equipment needed in the course of conducting national service projects. The National and Community Service Trust Act provides for extensive state control of AmeriCorps. State commissions must develop strategic plans that identify state educational, public safety, human, and environmental service needs. On the basis of these plans and the act’s criteria, commissions select projects to finance with formula grant funds and nominate other projects to the Corporation as candidates for competitive grants. Commissions have ultimate responsibility for administering both formula and competitive awards. In addition, commissions must monitor and evaluate the performance of the AmeriCorps projects under their purview and assess projects’ compliance with state and federal regulations. These reviews determine whether commissions renew funding for AmeriCorps projects in succeeding years. Commission officials in all seven states told us they used a grassroots effort to develop their strategic plans and identify service needs. They said they sought input from a broad cross-section of individuals and organizations to ensure extensive input in identifying state service needs. Most commission officials said they solicited public comment through local and regional meetings and other public forums. For example, one commission mailed meeting announcements to various government, nonprofit, and community-based organizations. Another commission mailed over 1,000 invitations to various service programs and individuals. Another state commission used interactive computer technology to coordinate input from 60 individuals collectively representing over 250 organizations. After developing state plans and prioritizing service needs, commissions used a variety of measures to identify, develop, and select AmeriCorps projects. For example, while some commissions published request-for-proposals packages, others solicited proposals from existing community service and government agencies, and some held regional meetings around the state where local organizations identified community needs and proposed projects to address them. In general, state commissions convened review panels to assess project proposals and rank them according to how well they met the state’s needs and priorities as established in the state’s strategic plan. One review panel was composed only of the commissioners themselves; others used panels made up of commissioners, commission staff, and local service project officials; while another included citizens with academic and public service backgrounds. State commissioners, using the results of these panels, then selected projects to fund with the state’s allotted formula funds or to submit to the Corporation for competition with other state commissions’ selections. Commission officials in all seven states told us they based their project monitoring and evaluation protocols on Corporation guidelines. Some state commissions developed additional evaluation and monitoring measures to ensure projects remain in compliance. Commission staff in six of the states conducted project site visits, while in Texas, commissioners themselves conducted on-site reviews. Typically, the commissions used their site visit results and periodic reports submitted by project administrators to determine whether projects effectively achieved project objectives. States chose to organize their commissions in a variety of ways. The seven commissions we reviewed fell into one of three organizational models: (1) part of a preexisting state agency; (2) an independent state agency; or (3) a nonprofit agency. Five commissions operated within existing state agencies. For example, the Virginia commission operated within the state’s Department of Social Services. California created its commission as an independent agency, while the Rhode Island legislature decided to charter its state service commission as a nonprofit agency, thereby obtaining tax-exempt status from the Internal Revenue Service. State commissions’ administrative budgets and their staffing levels varied significantly among the seven states. For example, in terms of administrative budgets, the Rhode Island commission managed about $183,000, while the California commission managed over $1.3 million in fiscal year 1996. Also, in regard to staffing levels, the Virginia commission employed 1.5 FTE staff, while the California commission employed 18 FTE staff. Both federal and state government contributions defined state commission budgets and their staff resources. Under the act, the Corporation awards administrative grants of between $125,000 and $750,000 to states to help pay for commission operations. Federal administrative grants are limited to 85 percent of a commission’s costs in the first year and decrease to 50 percent of costs in the fifth and subsequent operating years. States must contribute either cash or in-kind resources to obtain administrative grants. Among the seven states, the type (cash or in-kind) and amount of support provided by the state varied. Table 2 lists the commissions’ total budgets and staffing levels for fiscal year 1996. During the 1995-96 program year, the number of AmeriCorps projects in the seven states varied depending on (1) the number of projects commissions financed with their allotted formula funds, (2) the number of projects that won competitive funding, and (3) the number of projects funded directly by the Corporation rather than by the state commissions. The number of formula-funded projects ranged from a low of 1 in Rhode Island to a high of 19 in California. The number of projects awarded competitive grants ranged from none in Virginia to eight in Texas. The number of national direct projects administered by the Corporation in the seven states also varied. While only 1 national direct project operated in Virginia, 18 such projects operated in California. Table 3 lists the number of state commission formula and competitive projects and the number of national directs projects in each state. For the 24 projects we reviewed, outputs and characteristics varied extensively. We reviewed information on enrollment, attrition, and participants’ use of education awards for each project. In addition, we obtained data on projects’ expenditures and the source of projects’ financial support. To calculate enrollment, we added the number of full- and part-time participants that began a term of service for each project. We calculated attrition rates on two bases: (1) the number of participants who ended service early for cause and (2) the combined total of participants who ended service early for cause and for compelling personal circumstances. We determined education award usage based on the number of participants who earned either a full or prorated education award and the number of participants who had used either part of or the full value of their awards at the time of our review. The following points illustrate the extent of variability among the projects: Participant enrollment: AmeriCorps enrollment ranged from 21 to 350 participants. The median enrollment was about 46 participants. Attrition rates: The attrition rate for participants who ended service early for cause ranged from 3 to 58 percent. The median attrition rate was 22 percent. The overall attrition rate—participants who ended service early for either cause or compelling personal circumstances—ranged from 9 to 95 percent, and the median was 39 percent. Education award usage: The proportion of participants who accessed their education award ranged from 17 to 78 percent. The median was 54 percent. Appendix II lists projects’ enrollment, attrition rates, and participant education award usage. Project-level expenditures also varied widely. Our expenditure data excluded funding for education awards and for state commission and Corporation administrative expenses. Projects obtained cash support and in-kind resources to cover their expenditures from the Corporation, other federal agencies, state and local governments, and the private sector. The projects’ expenditures ranged from $206,000 to $3.9 million. The median expenditure was $627,000. The share of these expenditures that were supported by the following sources was corporation grants—0 to 78 percent (the median was 66 percent), public sector resources—49 to 100 percent (the median was 83 percent), private sector sources—0 to 51 percent (the median was 17 percent). Figure 1 illustrates private sector support for all 24 projects. Appendix III lists detailed expenditure data for all 24 projects. One of the National and Community Service Trust Act’s objectives is to help the nation address its unmet human, education, environmental, and public safety needs. The projects included in our sample all reported diverse service activities that address one or more of these needs. While some projects’ service activities were focused on meeting a particular need within the community, such as housing, other projects’ activities addressed multiple areas of need, such as environmental and education needs. In the project reports we reviewed in detail, participants organized food programs that served 2,500 children; assisted with totally rehabilitating 16 vacant public housing units; operated a 7-week summer reading camp for 36 children; planted trees, removed debris, and created gardens improving 32 urban neighborhoods; and provided parenting classes to low-income families. State commissioners and executive directors in all seven states agreed with senior Corporation officials that a federal role in the AmeriCorps program is needed. None of these officials believed that eliminating the federal Corporation and simply allocating funds directly to state commissions would serve the program well. While some state officials told us that the grant allocation process warrants significant change, other state officials noted the indispensability of federal oversight. Corporation officials believed that a federal role is needed for conducting nationwide data gathering on the AmeriCorps program, evaluating the performance of AmeriCorps projects and state commissions, and providing a central repository of information on the “best practices” of individual AmeriCorps projects and state commission operations. All seven state commission executive directors agreed that a federal role is necessary to provide the AmeriCorps program with a national identity. According to these officials, a national identity helps AmeriCorps projects obtain widespread public support. They told us that national identity provides AmeriCorps participants with a sense that the benefits of their service extend not only to themselves and their communities, but to the whole nation. Furthermore, they said AmeriCorps’ name recognition and positive reputation help local projects recruit participants. To promote national identity, the Corporation provides AmeriCorps projects national advertisement, service gear, and the means to network with other projects across the country to share experience and knowledge. In addition, the Corporation encourages projects to adhere to certain standardized elements such as the ethic reflected by the Corporation’s slogan “getting things done,” a standard orientation and pledge, and participation in national events. Most commission officials also welcomed the federal oversight of AmeriCorps. Some officials told us that while reducing the federal role could save money, a lack of oversight would spawn fraud, waste, and abuse. Several commission officials, for example, expressed concern that, without federal oversight, other state officials might bypass commission offices and fund projects, regardless of whether they meet national service priorities, to serve partisan agendas. Another official said that without a federal role, the AmeriCorps program would become wholly dependent on the support of the states’ executive leadership, noting a fear for the future of their states’ AmeriCorps programs if elected governors do not support national service. Corporation officials agreed that a national identity for the AmeriCorps program is important and that a federal role provides it. They also noted that the federal government has a vital role in evaluating the AmeriCorps program, sharing evaluation results with others, and developing and increasing the evaluation capacity of state commissions. They believe that such a role helps to address the disparity between state commissions’ competence and performance by, in part, serving as a central repository of information on successful AmeriCorps projects and state commission management strategies. Furthermore, evaluating projects and state commissions ensures that federal taxpayer dollars are efficiently and effectively used to finance legitimate national service projects. Commission officials in the seven states disagreed on whether states should have more control over federal grant funds, particularly in terms of allocating federal funds. Some commission officials supported allocating all three types of grants (formula, competitive, and national direct) to the states based on population. The California contingent advocated allocating all AmeriCorps grant funds to states using a population-based formula. California officials argued that the Corporation’s competitive grant-making process is redundant because it occurs after states review and select projects for funding on their own. In addition, these officials told us that federal selection of AmeriCorps projects usurps the state commissions’ right to exercise their best judgment, expertise, and creativity in administering national service projects in their states. Other officials told us that the competitive grant-making process promotes equity and ensures that the relatively higher quality projects receive funding. Officials in Rhode Island argued that the competitive grant-making process provides a more equitable distribution of national resources than strict population-based allocations. They said that such simplistic methods arbitrarily penalize states with small populations and reward states with large populations, while ignoring the variability in quality among national service projects. Officials in other states told us that commissions themselves, rather than individual projects, should compete for federal grants. Officials in Maryland and Texas told us that the Corporation should allocate federal AmeriCorps grants to states on the basis of commissions’ demonstrated ability to effectively manage quality national service projects in their states. They argued that the Corporation should treat different states differently, taking into account states’ unique service needs. Neither Maryland nor Texas officials, however, had developed a set of suggested criteria for the Corporation to use to make such determinations. Senior Corporation officials told us that they are not certain the competitive process used, in part, to allocate funds to state commissions achieves the quality control over project selection that was originally anticipated. They oppose, however, allocating all available funding to state commissions based simply on population demographics. Corporation officials stated that such a method does not take into account the differing abilities of state commissions to administer and oversee AmeriCorps projects, noting that two states have yet to even appoint state commissions. In addition, these officials believe that national direct projects play an important role in the AmeriCorps program and should receive grants directly from the Corporation. While these officials told us that in the future the Corporation may recommend that the Congress change the act’s grant allocation process, they had no specific proposals for the Congress to consider at the time of our review. Some state commission officials we visited told us that giving states more control over the AmeriCorps program would eliminate or alleviate current problems they have coordinating with AmeriCorps projects operating in their state. Historically, national direct projects were not required to coordinate with state commission officials, which some commission officials cited as a point of frustration. These officials told us that the public holds them culpable for the actions of national direct AmeriCorps projects because the public does not distinguish between national direct projects and state-administered projects. In addition, some state commission officials said they doubt that out-of-state nonprofits fully understand the needs of local communities in their states. Corporation officials acknowledged the difficulties that some states have experienced coordinating with national direct projects. To ameliorate this problem, an official said that as of January 1997, the Corporation requires national direct grantees to coordinate with the relevant state commission officials. In addition, in the future, state commissions can provide comments on the Corporation’s national direct grant selections, which these Corporation officials believe will also help eliminate this coordination problem. Corporation officials told us, however, that national direct grants play an essential program role. They argued that community service is central to the mission of many national nonprofit organizations and that these organizations are, by and large, the recipients of such grants. Specifically, these officials believe that national direct grants help (1) attract national nonprofit organizations to the AmeriCorps program, (2) achieve a more efficient and less bureaucratic method of administering projects that operate in several states, and (3) recruit nonprofit organizations with the economies of scale that could allow the Corporation to dramatically decrease its per-participant costs by funding only the portion of projects’ expenses associated with providing participants their education awards. In commenting on our report, the Corporation stated that in calculating attrition rates, we should not have included participants who leave projects early to take advantage of opportunities for educational or professional advancement because such departures do not reflect on program quality. We did not, however, use attrition rates or any other output as a project quality index and, therefore, did not modify our calculations. Although the Corporation believes that the term “outputs” should characterize only project accomplishments, we use the term to characterize participant enrollment, project attrition, education award usage, and project expenditures—a use of the term that is consistent with long-standing conventions of social science research. The Corporation also stated that a complete analysis of education award usage may not be available for several years because participants have up to 7 years to use their awards. Our education award calculation represents a snapshot in time, and our report describes the 7-year interval. The Corporation suggested other changes that were primarily technical and editorial in nature. We revised the report as appropriate, defining our use of the terms “project” and “program,” for instance, and clarifying that we used the most current and appropriate data available for our analysis. We are sending copies of this report to the appropriate House and Senate committees and other interested parties. We will also make copies available to others on request. If you have any questions about this report, please call me at (202) 512-7014 or Jeff Appel, senior evaluator, at (617) 565-7513. This report was prepared under the direction of Wayne B. Upshaw, Assistant Director. Ben Jordan, evaluator, also contributed to this report. Participants work to meet the needs of at-risk youth through peer counseling, health education/outreach, gang intervention, conflict resolution, alcohol/drug counseling and education, outreach to homeless youth, after-school recreation, tutoring, and child care. Participants serve in a citywide partnership to develop neighborhood-based service projects. Members mentor/tutor community youth, provide training in conflict management skills, and engage individuals in physical improvement projects. Participants serve in teams to plan and perform activities, including rural and urban environmental projects, trail construction and maintenance, tree planting, city infrastructure maintenance, and organizing city youth activities. Participants tutor and counsel at-risk youth, develop and operate after-school programs, deliver basic health care services, and implement physical improvement projects through a 19- organization partnership. Participants provide independent living assistance and health care to homebound elderly individuals, enlarge area food pantries, create youth literacy programs, and develop educational programs for Head Start students in Appalachian Maryland. Participants tutor low-income students, in a tri-county area, using a cascading leadership model. Participants supervise high school students who, in turn, act as mentors and tutors for middle and elementary school students. Participants work in rural, urban, and suburban areas of the state through a collaboration among the Maryland Conservation Corps, Civic Works, and Community Year. Participants work to stabilize soil erosion, build community gardens, and rehabilitate homes for low-income families. Participants conduct home visits to the chronically ill and provide health service referrals. Participants also tutor first-grade students, develop structured after-school intergenerational activities, and teach school readiness skills to preschool children. Grace Hill AmeriCorps RiverFront Trail Project Participants help conserve the Mississippi Riverfront by restoring and beautifying trails. Participants work to increase the educational success of urban youth by organizing outdoor recreational and educational activities and by planning weekly summer educational events. Participants serve the St. Joseph area by developing academic laboratories in schools, organizing and conducting neighborhood cleanup projects and recycling programs, and working with children to establish community gardens that provide food to local food pantries. Participants work to reduce violence against children by recruiting tutors and mentors to work with high-risk youth, developing a literacy program for parents, developing after-school and summer programs, and working with juvenile authorities to develop service projects for youthful offenders. Participants work to increase the capacity of schools to improve the achievement of fourth- through eighth-graders in low-income communities and identify and train volunteers to develop service projects in literacy, the environment, first aid and personal safety, and substance abuse prevention. (continued) Participants provide a range of services for at-risk students of all ages, including preschool assistance, tutoring for school-aged youth and adults, and referral services. Participants serve in teams to strengthen communities by tapping the resources of local residents, business, and nonprofit organizations. Participants provide services such as mentoring/tutoring students from kindergarten through seventh grade and participating in community gardening, low-income housing, and after-school programming. Participants work to improve low-income areas by building energy-efficient homes using least toxic materials and alternative building methods. Participants also renovate and weatherize existing homes to save on energy costs. Participants serve children living in poverty by offering nutritious food and enrichment activities at summer food sites, tutoring and mentoring at schools, providing violence prevention/conflict resolution activities, and facilitating access to health care. Participants provide parenting education services at schools and community nonprofit organizations. Participants conduct home visits, community outreach and recruitment, teen parent mentoring, and developmental screening, and provide child care for teen parent students. Participants operate after-school service-learning programs in elementary schools. Participants work in teams with other youth from varied backgrounds to strengthen the community in areas including the environment, hunger and homelessness reduction, and public safety. Participants work to rehabilitate, revitalize, and maintain public housing units in their own communities. Participants serve as outreach workers for community-based organizations that provide tutoring/mentoring, parenting skill workshops, physical exams and immunizations, conflict resolution training, and prenatal health education. Participants teach conflict resolution skills, provide tutoring and frontline gang intervention, and implement after-school, late night, and summer recreation programs for rural and Native American youth. Participants also provide independent living support to mentally ill adults. Participants rehabilitate low-income housing units and construct new housing for emergency and transitional living. Participants also work to restore habitats for native plants, vegetation, and wildlife. They are also involved in developing recreational areas in state parks and improving hiking and biking trails. Participants work to improve water quality and restore a reduced salmon population by rehabilitating damaged watersheds and building fences to prevent erosion. Participants serve in various agencies across the state on a wide range of projects, including developing a statewide literacy initiative for recent immigrants, providing at-risk youth with service alternatives to gang activity, and concentrating services to a needy, isolated Native American reservation. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed state commissions' capacity to absorb additional AmeriCorps program management responsibility, focusing on: (1) the statutory role of state commissions; (2) state commission operations, including project-level outputs from national service projects within their purview, such as participant enrollment and expenditure data; and (3) extending state commissions' administrative and oversight role over AmeriCorps and correspondingly decreasing the federal government's role. GAO found that: (1) by assigning state commissions significant responsibilities, the National and Community Service Trust Act of 1993, in effect, emphasizes state control of the AmeriCorps program; (2) these responsibilities include developing a statewide service infrastructure, selecting and funding AmeriCorps projects, and monitoring and evaluating projects; (3) state commissions directly control two-thirds of the federal funds available for AmeriCorps projects; (4) for fiscal year 1995, state commissions received $131 million of $192 million available in federal funding; (5) GAO's review of seven state commissions indicated that all are performing program management activities envisioned by the act, but vary in terms of their infrastructures and project outputs; (6) operational resources of the state commissions in GAO's sample varied widely; (7) for selected projects, outputs also varied both within and among the state commissions; (8) officials from the seven state commissions agreed on the need for a federal role in AmeriCorps, but disagreed on how much federal control is desirable; (9) on one hand, all officials agreed that only a federal entity can provide AmeriCorps with a national identity, which they considered essential; (10) on the other hand, they disagreed on the role the Corporation for National and Community Service should play in allocating AmeriCorps funding grants; (11) senior Corporation officials agreed with state officials that a federal role is necessary to provide the AmeriCorps program with a national identity; (12) they also stated that a federal role is necessary to conduct performance evaluations of national service projects and state commissions; (13) these officials acknowledged that changes to the funding allocation process might better achieve the Corporation's quality control objectives and said they may recommend changes to Congress when it considers reauthorization of the act; and (14) Corporation officials noted that, notwithstanding their view that the act gave the states a substantial degree of control over the program, they have initiated actions to increase state commissions' autonomy. |
The Secure Rural Schools Act was enacted to help address fiscal difficulties confronting rural counties having substantial federal lands and a history of federal timber harvesting. The act, as reauthorized, comprises three principal titles. Under Title I, counties are to use the majority of payments they receive for the same purposes for which they used federal receipts, in most cases for the benefit of roads and schools. Under Title II, counties may reserve a portion of the payments to fund certain land management projects that benefit federal lands. Title III authorizes the use of a portion of the payments for certain purposes related to wildland fire and emergency services on federal lands. These authorized uses include carrying out certain activities to increase the protection of people and property from wildland fires under the Firewise Communities program, reimbursing the county for search and rescue and other emergency services performed on federal land, and developing community wildfire protection plans to help protect homes and neighborhoods. Title III requires counties to follow certain administrative requirements, including publishing public notices of proposed uses for the payments and submitting annual certifications of Title III expenditures to either the Forest Service or BLM, as appropriate, stating that any Title III funds spent in the previous year went toward authorized uses. For fiscal years 2008 through 2011, 358 counties received a total of $108 million for Title III projects, and individual counties received from about $3,600 to over $2 million in a single fiscal year for such projects. The Forest Service and BLM are responsible for carrying out certain parts of the Secure Rural Schools Act. Both agencies calculate the amounts that counties are to receive each year, and both agencies are required by the act to review the counties’ certification of Title III expenditures as the agencies determine to be appropriate. The act also requires the agencies to issue regulations to implement the act, although it does not describe what the regulations are to address or establish a deadline for issuing them. In our July 2012 report, we found that the Forest Service and BLM had taken few actions to oversee county spending under Title III of the Secure Rural Schools Act and that the guidance they provided was limited and, in some cases, did not appear consistent with the act. We also found that some expenditures by selected counties we contacted may have been inconsistent with the act—which may have resulted in part from the limited guidance available from the agencies—and that counties we reviewed did not consistently follow Title III’s administrative requirements. In July 2012, we reported that neither the Forest Service nor BLM had issued regulations under the act and that the guidance the agencies had issued was limited and sometimes unclear. We expressed particular concern that the agencies had not developed regulations or clear guidance because the act itself does not define key terms. For example, the act authorizes counties to use Title III funds for “search and rescue and other emergency services, including firefighting, that are performed on federal land” but does not specify the types of activities covered by this phrase.certain provisions open to varying interpretations, and available guidance from the agencies had done little to clarify this language, counties had generally been left to make their own interpretations about which types of expenditures are allowable under Title III and which are not. We concluded that because the language of the law leaves To provide guidance, the Forest Service had developed a brief overview of Title III, which generally echoed wording in the act, and a “frequently asked questions” document responding to questions on authorized uses of Title III funds. At the time of our report, agency officials told us they believed the frequently asked questions document provided sufficient clarity for counties to use when considering how to spend Title III funds. Officials from several counties we contacted, however, told us they found these documents to be of little help, and our review of these documents found that they did not clearly define terms from the act or specify which types of expenditures were allowed under the act and which were not. For example, the act authorizes counties to use Title III funds for “search and rescue and other emergency services, including firefighting, that are performed on federal land” but does not define the types of activities covered by this phrase. Neither of the Forest Service documents defined such activities. In addition, in the frequently asked questions document, the Forest Service listed eight specific uses of Title III funds—including purchase of capital equipment, capital improvements, purchase of land, and training for emergency response—and asked, “Are Title III funds authorized for the following uses?” Instead of answering the question directly, the documents stated that for certain uses—such as construction of facilities, purchase of real property, and purchase of vehicles and other capital equipment—the act does not explicitly authorize these uses. It then further stated that reimbursement for certain uses—such as the purchase of replacement equipment damaged or destroyed during an emergency response or maintenance of vehicles and equipment in proportion to their actual use for emergency services performed on federal land—may be allowable. We concluded that such statements were confusing and unclear. Further, our review showed that, in addition to being unclear, the Forest Service’s frequently asked questions document appeared to be inconsistent with certain provisions of the act. For example, the act authorizes counties to use Title III funds to carry out activities under the Firewise Communities program to educate homeowners about, and assist them with, techniques in home siting, construction, and landscaping. Forest Service guidance documents, however, defined Firewise Communities as an approach that, among other things, “emphasizes community responsibility for planning in the design of a safe community as well as effective emergency response.” The documents did not emphasize the act’s requirement that counties’ Firewise activities with Title III funds must be limited to providing fire-related education or assistance to homeowners. Moreover, the frequently asked questions document stated that developing emergency 9-1-1 systems under Firewise—which is not an activity clearly authorized under the act—may also be an authorized use of Title III funds. We raised concerns that including emergency response in a definition of Firewise and suggesting that developing 9-1-1 systems may be an authorized activity under the act could lead some counties to interpret the act as allowing expenditures that improve the county’s emergency response—a use not clearly authorized under the act. Our report also raised issues related to counties’ certification that any Title III funds spent in the previous year went toward uses authorized under the act. For example, we found that the Forest Service and BLM had jointly developed a process to assist counties in certifying their Title III expenditures but that the information the agencies directed the counties to submit—typically the amount spent in each of the three allowable Title III spending categories but without further details regarding actual activities—did not allow either agency to determine whether counties spent their Title III funds appropriately. In addition, the act requires counties to submit certifications only for the years they have spent funds, and we found that neither the Forest Service nor BLM had a process to contact counties that did not submit a certification to determine if these counties spent no Title III funds that year or had simply not submitted the required certification. Some county officials we interviewed said they had not submitted certifications even when their counties had Title III expenditures the previous year. Overall, we found that of the $108 million in Title III payments provided to 358 counties for fiscal years 2008 through 2011, the counties had certified having spent about $46 million—or less than half the total amount—by the end of calendar year 2011. However, because the agencies did not have a process to ensure an accurate accounting of the amounts of Title III funds spent and unspent, we concluded that it was unclear whether the amounts were accurate and that it would be difficult to ensure that counties return to the U.S. Treasury any funds that remain unobligated upon the act’s expiration, as the act requires. We also found that expenditures by counties we contacted for our 2012 report did not in all cases appear consistent with the act. These counties reported using Title III funds for projects that were generally aligned with the three broad purposes of Title III—wildland fire preparedness, emergency services on federal land, and community wildfire protection planning— and some counties reported expenditures that were clearly authorized by the act. Nevertheless, we identified various expenditures by some counties that may not have been consistent with specific requirements of the act, such as the following examples: Wildland fire preparedness. Title III authorizes counties to spend funds for activities carried out under the Firewise Communities program but specifies that these activities are to involve educating or assisting homeowners with home siting, home construction, or home landscaping to help protect people and property from wildfires. Some counties we reviewed used Title III funds on broad emergency preparedness activities that may not be consistent with the 2008 act. For example, two counties we reviewed told us they spent part of their Title III funds to clear vegetation along roads, some of which are potential emergency evacuation routes, and others said they removed vegetation from county lands, parks, schools, or cemeteries or from larger swaths of land to create fuel breaks—locations not directly associated with home siting, home construction, or home landscaping. In addition, four counties used Title III funds to update their 9-1-1 telephone systems, according to county officials—an activity not clearly authorized by Title III (although, as noted, agency guidance stated that such an activity may be allowable). Emergency services on federal land. Title III authorizes counties to use funds as reimbursement for search and rescue and other emergency services, including firefighting, that they perform on federal lands. Some counties we reviewed spent Title III funds on activities that may not have been consistent with this requirement. For example, instead of reimbursements for specific incidents, a number of counties used Title III funds to pay a portion of their fire or emergency services departments’ salary and administrative costs, including office supplies, utility costs, or insurance. As justification for this approach, these counties cited the high percentage of federal land in their counties or the difficulty in breaking out the costs of emergency services on federal versus nonfederal land. Some counties we reviewed also used the funds to carry out routine law enforcement patrols on federal land; officials from one of these counties told us that these patrols help reduce and deter criminal activity and enhance visitor safety on federal lands. In addition, some counties reported that, to maintain access to federal lands, they used Title III funds to help rebuild flood-damaged roads, and some reported using funds to purchase equipment, such as radios and GPS equipment, sonar equipment, watercraft, all-terrain vehicles, snowmobiles, and trucks for patrols. Community wildfire protection planning. The act authorizes counties to use Title III funds “to develop community wildfire protection plans in coordination with the appropriate Secretary concerned.” Some counties we reviewed reported Title III expenditures for wildfire protection planning activities that may not be consistent with this provision. For example, one county used Title III funds to purchase vehicles having firefighting capabilities, as well as other equipment associated with emergency response. Another county used Title III funds to contract for firefighter dispatch and suppression services. Officials from this county explained that county emergency service units cannot reach certain remote areas quickly, so they contract with a state agency to provide dispatch and suppression services during the heavy wildland fire season, and because the area served is largely federal land, the county pays for a portion of the contract costs with Title III funds. We also found that counties we reviewed did not consistently follow Title III’s administrative requirements. Title III requires counties to certify expenditures to the Forest Service or BLM annually and provide 45-day notification to the public and any applicable resource advisory committee before spending funds. The 2008 act also required projects to be initiated by September 30, 2011. Our review identified instances where counties did not follow the requirements, including: Certification. Some counties did not submit certifications at all or submitted their certifications late, some certified expenditures for multiple years simultaneously, and some acknowledged putting incorrect information on the certification form. We found various reasons for counties’ not complying with the certification requirements in the act. Three counties, according to county officials we interviewed, did not submit their certifications to the Forest Service for the years they spent funds because they were unaware of the requirement to do so. Two other counties submitted certification forms for some but not all years in which they spent funds, and many counties submitted their certification forms after the deadline specified in the act, in some cases because they were initially unaware of or overlooked the requirement to do so. Public notification. The act directs each county, before moving forward with Title III projects, to publish a proposal describing its planned use of Title III funds in local newspapers or other publications, after which the county must allow a 45-day comment period before using the funds. Some counties in our review followed only part of the public notification requirement. For example, some counties published notices in their local newspapers but did not allow for a 45-day comment period before moving ahead with projects or activities, according to county officials and documents, while other counties issued public notices in some years but not in others. We also found four counties that did not issue any public notices on their Title III project proposals; officials from these counties told us that they were unaware of the requirement to do so. Notice to resource advisory committees. Some counties in our review did not notify the relevant resource advisory committees of their Title III projects, as required under the act. County officials cited a number of reasons for the lack of notification, including (1) they were unaware of the requirement to do so; (2) the committee meets only once a year in the summer, which does not coincide with the county’s timeline for the Title III budgeting process; and (3) the county planned to notify the resource advisory committee but did not because a local Forest Service official stated that resource advisory committees were involved only in Title II, not Title III projects—even with a specific reference to such committees in Title III of the act. Project initiation. Some counties did not initiate projects by September 30, 2011, as required by the 2008 act.interviewed provided a number of reasons why they missed this deadline. For example, counties did not receive their Title III funds for fiscal year 2011 until 2012, and officials in one county told us that their county’s guidelines prohibit starting projects before funding is actually received. Another county had not initiated all of its Title III projects because some of its previous projects had cost less than estimated, unexpectedly leaving the county more Title III funds to spend; county officials told us that they were selecting additional Title III projects on which to use the extra funding. The 2008 act also required Title III funds to be obligated by September 30, 2012, and officials from nearly all counties in our review that had spent funds told us they anticipated doing so. However, as noted, the agencies did not have a process to ensure an accurate accounting of the amount of Title III funds spent and unspent, making it difficult to ensure that unobligated funds are returned to the U.S. Treasury when the act expires. In response to our recommendation that the agencies strengthen their oversight by issuing regulations or clear guidance specifying the types of allowable county uses of Title III funds, the Forest Service and BLM provided additional guidance to counties, which clarifies the types of allowable uses of county funds. In addition, the agencies reported that they plan to update their expenditure reporting requirements for Title III funds, so that counties report not only funds expended the previous year but also amounts remaining unobligated. Regarding guidance, soon after our report was issued in July 2012,agencies updated their websites to provide substantial additional information on allowable expenditures under the act. Given that this information includes specific discussion about, and numerous examples of, expenditures that are and are not authorized by the act, we believe the that this additional guidance addresses our recommendation. The guidance addressed each of the three main areas of allowable spending under Title III, as follows: Wildland fire preparedness. As we noted, several counties reported expending funds for broad emergency preparedness activities under the Firewise Communities program that did not appear consistent with the act because they did not involve providing fire-related education or assistance to homeowners. This issue is specifically addressed in the guidance, which now states that Title III authorizes funds to be “spent on Firewise Communities program activities that (1) educate homeowners in fire-sensitive ecosystems about techniques in siting (positioning or locating) a home, constructing a home, landscaping and maintenance around a home. . .or (2) assist homeowners in implementing these techniques” (emphasis in original). The guidance goes on to list examples of activities that are authorized—such as disseminating Firewise information or assisting with “clean-up days”— and those that are not—such as updating 9-1-1 systems or clearing vegetation along emergency evacuation routes or from county lands, parks, schools, cemeteries, or other larger swaths of land not directly associated with home siting. Emergency services on federal land. Likewise, the guidance addresses concerns we raised about whether certain projects related to emergency services on federal land were clearly consistent with the act. The guidance, among other things, clarifies the definition of emergency services and provides lists of expenses that are authorized (e.g., salary or wages of emergency response personnel deployed during an emergency response) and those that are not (e.g., routine sheriff’s patrols of national forest roads and campgrounds, cleanup after a flood event, and purchase of capital equipment or real property). Community wildfire protection planning. The guidance also addresses concerns we raised about development of community wildfire protection plans by clarifying authorized uses and illustrating those that are not authorized, including the implementation of activities described in such plans. Regarding annual reporting requirements on the part of counties, both agencies updated the certification form for counties to use in certifying Title III expenditures, so that counties must report not only on the funds expended the previous year but also on the amount of their Title III funds that remain unobligated. Such an update is consistent with guidance provided by Agriculture’s Office of General Counsel in response to a Forest Service request for legal advice on its role in counties’ return of unobligated Title III funds. The update is likely to allow the agencies a more accurate accounting of the overall amounts of Title III funds spent and unspent—a need we noted in our report. In our July 2012 report, we also suggested that if Congress chooses to extend Title III beyond the 1-year reauthorization enacted in 2012, it should consider revising and clarifying the language of Title III to make explicit which types of expenditures are and are not allowable under the act. Given that the agencies have issued guidance that we believe clarifies the allowable uses of Title III funds, there may be less need for changes to the language of the act itself. Nevertheless, it will be important to monitor counties’ Title III expenditures to observe whether the incidence of expenditures that appear inconsistent with the act diminishes in the wake of the additional guidance the agencies have issued. Chairman Wyden, Ranking Member Murkowski, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-3841or [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), Ellen W. Chu, Jonathan Dent, Richard P. Johnson, Lesley Rinner, and Leigh McCaskill White. 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. | Under the Secure Rural Schools Act, counties with federal lands may elect to receive payments to help stabilize revenues lost because of declining federal timber sales. Under Title III of the act, counties are authorized to use these funds for certain projects related to wildland fire and emergency services on federal lands. The act provides oversight roles for the Forest Service and BLM, requiring them to review counties certification of their Title III expenditures as the agencies determine to be appropriate and to issue regulations to carry out the acts purposes. GAO reported to this committee in July 2012 that the agencies had provided limited oversight of county spending under Title III and that, although the projects for which counties reported using Title III funds were generally aligned with the broad purposes of Title III, county spending did not in all cases appear consistent with specific provisions of the act. This testimony describes (1) key findings of GAOs July 2012 report on oversight and implementation of the act (GAO-12-775) and (2) actions the agencies have taken to strengthen oversight of county spending since the July 2012 report was issued. The testimony is based primarily on GAOs 2012 report and includes selected updates conducted in March 2013 on actions the agency has taken in response to that report. GAO is making no recommendations in this testimony. In July 2012 GAO recommended that the agencies strengthen their oversight by issuing regulations or clear guidance. The agencies concurred, and took action to implement this recommendation. In July 2012 GAO reported that the Forest Service and Bureau of Land Management (BLM) had taken few actions to oversee county spending under Title III of the Secure Rural Schools and Community Self-Determination Act, and that the guidance they provided was limited and in some cases did not appear consistent with the act. GAO also reported that some expenditures by selected counties may have been inconsistent with the act--which may have resulted in part from the limited guidance available from the agencies--and that reviewed counties did not consistently follow Title III's administrative requirements. Specifically, GAO found the following: Neither the Forest Service nor BLM had issued regulations under the act, and the guidance the agencies had issued was limited and sometimes unclear. Forest Service guidance, for example, did little to clarify language in the act, neither defining terms from the act nor specifying which types of expenditures were allowed under the act and which were not. The absence of clear guidance or regulations was of particular concern to GAO because the act itself does not define key terms. For example, the act authorizes counties to use Title III funds for "emergency services" but does not specify the types of activities covered by this term. Moreover, the agencies did not have assurance that they had an accurate accounting of the amounts of Title III funding spent and unspent by the counties, which is important because the act requires unobligated funds to be returned to the U.S. Treasury upon the act's expiration. The counties GAO reviewed reported using Title III funds for projects that were generally aligned with the three broad purposes of Title III--wildland fire preparedness, emergency services on federal land, and community wildfire protection planning--but GAO identified certain expenditures by some counties that may not be consistent with specific requirements of the act. Such expenditures included funding for activities such as clearing vegetation along evacuation routes, updating 9-1-1 systems, and conducting routine law enforcement patrols on federal land. Some counties GAO reviewed reported using funds to purchase equipment, such as radios and GPS equipment, sonar equipment, watercraft, all-terrain vehicles, snowmobiles, and trucks for patrols. Counties also did not consistently follow Title III's administrative requirements, which include annual certification of expenditures, 45-day notification periods to the public and others before spending funds, and deadlines for project initiation. For example, some counties did not submit a certification for certain years when they spent funds, some counties submitted their certifications late, and some counties did not consistently follow notification and project initiation requirements. Since GAO's report was issued, the Forest Service and BLM have provided additional guidance to counties, which clarifies allowable uses of Title III funds. In addition, the agencies reported that they plan to change their requirements for annual reporting of expenditures to obtain additional information regarding the extent to which counties have obligated their Title III funds. The additional guidance addresses the recommendation in GAO's July 2012 report. |
In 1996, an estimated 64 billion checks were written in the United States. Approximately 30 to 35 percent of these checks were “on-us” checks—that is, checks for which the collecting bank (any bank except the paying bank handling the item for collection) and the paying bank (the bank on which the check is drawn) are the same entity. On-us checks never enter the interbank check-collection process. The remaining 65 to 70 percent (about 45 billion checks in 1996) of the checks written were interbank checks. Interbank checks are cleared and settled through an elaborate check-collection process. The check-collection process includes, among other steps, check presentment and the final settlement of checks. Check presentment occurs when the checks are delivered to the paying banks for payment and the paying banks must decide whether to honor or return the checks. Final settlement of checks occurs when the collecting banks are credited and the paying banks are debited, usually through accounts held at either Federal Reserve Banks or correspondent banks. In the check-collection process, depositary banks generally sort deposited checks by destination and dispatch them for collection. Depositary banks can physically present paper checks to paying banks through several methods: direct presentment of the paper checks to the paying banks; exchange of paper checks at clearing houses in which the depositary banks and the paying banks are members; presentment of the paper checks through intermediaries, such as correspondent banks or Federal Reserve check offices; or some combination of the above methods, such as depositary banks using correspondent banks to collect checks and the correspondents collecting those checks through local clearing houses or Federal Reserve check offices. When paying banks decide not to pay certain checks, they must return the dishonored checks to the depositary banks. Under the Uniform Commercial Code (UCC), the paying bank generally has until midnight of the day following presentment (“midnight deadline”) to return dishonored checks or send notices of dishonor. (The UCC and other laws and regulations governing the check-collection processes are described below.) Banks use this period to decide whether or not to pay checks. Dishonored checks are returned for several reasons, such as insufficient funds in the check writer’s account, issuance of a stop-payment order on the check, or because the check was written on a closed account. Banks vary considerably in their policies for making pay/no pay decisions and may view these decisions as a matter of customer service. Thus, even if banks have earlier information indicating that some checks may have to be returned, using the entire period permitted by the UCC may enable the bank to honor the check. The paying banks may return dishonored checks, commonly referred to as return items, directly to the depositary banks, through clearing house associations, or to any returning bank (a bank handling a returned check), including the Federal Reserve Banks. Although most paper checks are physically presented to the paying banks, checks can be presented electronically by agreement with paying banks. When checks are electronically presented, the MICR data are electronically transmitted by the presenting bank to the paying banks and the receipt of these data constitutes presentment, rather than the paying banks’ receipt of the paper checks. The paper checks may be sent to the paying banks at a later time or may be “truncated” or held, at some point in the collection process, depending upon the terms of the applicable electronic presentment agreement. When checks are truncated, the check writers do not receive the cancelled checks. Checks can be truncated at depositary banks or at intermediary banks, such as Federal Reserve Banks or correspondent banks. The check-collection process is regulated by a complex system of laws and regulations. The primary laws affecting checks are Articles 3 and 4 of the UCC, as adopted in each state; EFAA; and the Federal Reserve Board’s Regulations CC and J. The UCC is a set of model laws that govern commercial and financial activities. Efforts have been made to encourage each of the 50 states to enact UCC articles in a uniform manner. The UCC’s Articles 3 and 4 govern negotiable instruments, including checks and bank deposits, and collections, respectively. Article 4 was revised in 1990, in part, to promote the efficiency of the check-collection process by making the provisions of Article 4 more compatible with the needs of an automated system and to facilitate the adoption of programs allowing for the presentment of checks by electronic transmission of information. Although the UCC allows for the use of electronic check presentment, paying banks still have the legal right to insist on paper presentment. EFAA, which is implemented through Regulation CC, limits the time that banks can hold funds deposited into customer accounts before these funds must be made available for withdrawal. Regulation CC, which preempts the UCC or other state law to the extent that either is inconsistent with Regulation CC, also governs the collection and return of checks. Regulation J governs checks collected through the Federal Reserve System. EFAA and Regulation CC establish the specific funds availability schedules for checks. Generally, funds are to be made available for withdrawal within 2 business days after the day of deposit for local checks and within 5 business days for nonlocal checks. Local checks, in general, are those for which the depositary bank and the paying bank are located in the same Federal Reserve check-processing region. Nonlocal checks, in general, are those for which the depositary bank and the paying bank are located in different Federal Reserve check-processing regions. EFAA and Regulation CC also require that the first $100 of a depositor’s aggregated checks and certain other types of checks, such as Treasury, state and local government, or cashier’s checks, are to be made available for withdrawal by the next business day after the day of deposit. Under EFAA and Regulation CC, banks are permitted to hold checks longer for, among other things, checks over $5,000 or suspicious checks. In certain circumstances, such as when banks have reasonable cause to believe that certain checks are uncollectible or when an account is new, the banks may delay the availability of funds. In such a case, the banks must notify the customers, explain the delay, and indicate when the funds will be available. To identify and describe the ECP services offered to U.S. banks, we interviewed officials from the Federal Reserve Board and FRBM and reviewed Federal Reserve Board documents that described the Federal Reserve’s ECP services. We also interviewed officials at the New York Clearing House Association (NYCHA), the Electronic Check Clearing House Organization (ECCHO), and the American Bankers Association (ABA). To determine the volume of checks that were electronically presented in the United States from 1995 to 1997, we collected data from the Federal Reserve Banks on their ECP services. To calculate the percentage of the ECP volume in the U.S. interbank check-collection market, we used the number of interbank checks cited in the January 1998 report by the Committee on the Federal Reserve in the Payments Mechanism. The number of interbank checks is an estimate because the actual number of checks that are cleared through clearing houses and correspondent banks, and by direct presentment, as well as the number of on-us checks, is unknown. To determine how ECP affects the length of time it takes for a dishonored check to be returned to a depositary bank, we used data from a survey coordinated by the Federal Reserve Board and conducted by four Federal Reserve offices. At our request, the Federal Reserve collected information on the return cycle time for a small sample of items that were initially presented by either paper check or electronic transmission and that were returned as dishonored through four Federal Reserve check offices. This information was collected for a sample of 2,258 return items, primarily during the week of January 12 through 16, 1998. The four check offices were selected because they had higher-than-average ECP volumes. Also, the Federal Reserve Board applied the same ECP return item survey to FRBM’s additional ECP service, ECCS, which is offered only to banks located in the Upper Peninsula of Michigan. For comparison purposes, we also collected comparable check-return data from 10 judgmentally selected banks in the Upper Peninsula of Michigan that do not participate in ECCS. Because the sizes of the samples were small and not selected on a random basis, we could not make any statistical generalizations regarding the entire banking industry or the Federal Reserve’s ECP services on the basis of these surveys. Since the samples were selected during an 1-week period at 4 Federal Reserve check offices, we could not ascertain whether our results would differ if the samples were taken over a longer period of time or collected at more of the Federal Reserve’s 45 check offices. Furthermore, our results may not fully reflect differences among paper presentment and ECP services because the checks are not assigned to these processes on a random basis, but rather on the basis of each paying bank’s decisions. It is reasonable to expect that paying banks make decisions to accept electronic presentment based on a number of criteria, such as price and availability of services. Thus, the returned checks collected from the different presentment methods may well have different characteristics; these could, in turn, affect the time required for their return if they are dishonored by the paying bank. This nonrandom selection process limited our ability to determine whether ECP services available nationwide had any effect on check return cycles. To determine potential legal and operational impediments to ECP, we interviewed officials at several large banks, the Federal Reserve Board, the Federal Reserve Banks of Minneapolis and Boston, and NYCHA. We asked these officials how certain provisions of the UCC’s Articles 3 and 4, EFAA, and the Federal Reserve Board’s Regulation CC and other issues may impede increased ECP use. To determine how ECP may affect a bank’s risk of check fraud, we interviewed officials at the Federal Reserve Bank of Boston (FRBB), NYCHA, and three large commercial banks in New York City. In addition, we sent a survey of written questions regarding ECP and check fraud risk to six large commercial banks that are members of ECCHO. Five of the six banks responded to our survey questions. We obtained written comments on a draft of this report from the Federal Reserve Board. Their comments are discussed near the end of this report and are reprinted in appendix II. We did our work from July 1997 to April 1998 in Washington, D.C.; Minneapolis, MN; and New York City in accordance with generally accepted government auditing standards. The Federal Reserve Banks offer banks three ECP services: basic MICR presentment (Basic), MICR presentment plus (MICR Plus), and check truncation (Truncation). In addition, FRBM offers ECCS to banks located in the Upper Peninsula of Michigan. For all four ECP services, Federal Reserve check offices transmit the electronic data to the paying banks and receipt of these data constitutes presentment. Under the three nationally available ECP services, the collecting banks deposit checks with the Federal Reserve check offices, but the three ECP services differ in how the Federal Reserve check offices handle the paper checks after they have been electronically presented to paying banks. The return process for Basic items is the same process used to return checks that were physically presented. The other two nationally available ECP services, MICR Plus and Truncation, use different processes to return checks than those used to return physically presented checks. The fundamental characteristic of ECCS, which distinguishes it from other Federal Reserve ECP services, is that banks using the service do not deliver paper checks to FRBM; instead, they electronically transmit the checks’ MICR data to FRBM. Since depositary banks keep the deposited checks until the checks are finally paid, they can pull any paper checks that are dishonored by the paying banks. Under ECCS, depositary banks receive notices of dishonored checks from paying banks through FRBM. Table 1 lists the four Federal Reserve ECP services and explains (1) how collecting banks deposit checks with the Federal Reserve check offices and (2) how paper checks and return items are handled after electronic presentment. Private clearing houses offer electronic check information services to banks. These services transmit the MICR data to the paying banks, but they do not constitute electronic presentment of checks. Industry officials we interviewed noted that, while agreements between or among banks that would enable them to present checks directly and electronically are possible under the UCC, few such agreements exist. NYCHA offers electronic check informational services to banks in which the MICR data are transmitted to paying banks with the paper presentment to follow. Banks perceive some advantages to receiving MICR data before the paper checks are physically presented. One banking official told us that electronic transmission of MICR data, used as an informational service, may assist a paying bank with its cash management services or allow the bank to debit a customer’s account earlier than it otherwise could. Such information may also provide for earlier identification of checks that cannot be paid. For instance, checks written on closed accounts cannot be paid and thus are returned to the depositary bank. NYCHA estimated that in 1997 its members electronically transmitted data on 53 million checks, or approximately 19 percent of the total volume of checks exchanged at NYCHA. Additionally, several commercial banks formed ECCHO in 1989 to coordinate the use of electronic check information among banks and to design standards for the use of electronic check information. In 1997, ECCHO reported that its members transmitted data on 567 million checks. In 1997, 2.2 billion checks were electronically presented in the United States—almost 5 percent of the estimated U.S. interbank check volume (about 45 billion checks). According to a recent Federal Reserve report, the Federal Reserve Banks accounted for about 35 percent (about 16 billion checks) of the total interbank check-collection market in 1996. The remaining 65 percent of the market (about 29 billion checks) were presented directly or through private, local clearing houses. The 2.2 billion checks electronically presented by the Federal Reserve in 1997 represented 14 percent of the total number of checks the Federal Reserve collected that year. Electronically presented checks as a percentage of the Federal Reserve’s overall check collection volume grew from 1995 to 1997. During this period, the Federal Reserve’s ECP volume increased 114 percent, from slightly more than 1 billion checks to 2.2 billion checks. From 1996 to 1997, the Federal Reserve’s ECP volume increased 56 percent, from 1.4 billion to 2.2 billion checks. Although all 12 Federal Reserve Banks offered ECP services, ECP volume was concentrated primarily in the southern and midwestern Federal Reserve Districts. As shown in table 2, the check offices comprising the Federal Reserve Bank of Atlanta electronically presented the highest volume of checks (420 million). The Federal Reserve Bank of Boston electronically presented the lowest number of checks among the Federal Reserve Districts in 1997 (46 million). The most commonly used Federal Reserve ECP service was Basic presentment. In 1997, about 1.5 billion checks were presented using the Basic presentment service. Truncation was used to present about 558 million checks, and MICR Plus was used to present about 204 million checks. Our analysis of a limited sample of returned checks collected in four Federal Reserve check offices during the week of January 12 through 16, 1998, indicated that the use of ECP services that are available nationwide did not have a substantial effect on the percentage of dishonored local checks returned to depositary banks within the 2-day hold period. On the basis of our analysis of the 1-week sample, the percentage of dishonored checks initially presented through Basic, MICR Plus, and Truncation services and then returned to depositary banks within the 2-day hold period was only marginally higher than the percentage of returned checks under paper presentment. However, our analysis did show that the percentage of local checks returned within the 2-day hold period using ECCS was substantially higher than the comparable percentage of physically presented paper checks. Our comparison of ECCS and paper-check presentment methods indicated that substantial improvements in check-return performance occurred when the paper check was held at the depositary bank until the expiration of the “midnight deadline” specified in the UCC. Given the small sample size of this comparison and the particular conditions of the Upper Peninsula of Michigan (severe winter weather conditions and the low volume of checks electronically presented through ECCS), however, it is not possible to know whether these improvements could be achieved in other settings or nationwide. Our analysis of a 1-week sample of returned checks indicated that the percentages of dishonored local checks returned within the holding period were only marginally higher for checks electronically presented through Basic, MICR Plus, and Truncation services compared with checks presented in paper form. Almost 15 percent of the electronically presented local checks in our sample were returned within 2 business days after they were deposited compared with only 6 percent of the physically presented local paper checks. The majority of the electronically presented checks were not received by the depositary bank until the third business day. (See table 3.) Truncation produced the best 2-day cumulative percentage of the electronically presented checks: 22 percent. However, at 3 business days, paper-check presentment’s cumulative percentage was 69 percent, which was less than the cumulative percentages of Basic, MICR Plus, and Truncation services at 82 percent, 85 percent, and 87 percent, respectively. According to the Federal Reserve Board, the time required to return checks handled by the Federal Reserve likely represents the upper bound of overall check-return cycle times. In a Federal Reserve Board survey, Federal Reserve Banks indicated that, in 1995, they delivered about 15 percent of local returned checks that they processed to the depositary bank by the second business day. This check-return performance is low compared with the bank average reported by the Board in the same survey. Depositary banks received about 48 percent of all local returned checks within 2 business days, according to the survey. The differences in these check-return performances appear to be an indicator of the significance of depositary banks’ direct presentment of paper checks to paying banks and exchanges of paper checks at clearing houses. The Federal Reserve Board said that checks returned through one or more intermediary banks, such as Federal Reserve Banks, were not received by depositary banks as quickly as checks returned directly to depositary banks by paying banks. Federal Reserve Board officials said that the Federal Reserve’s lower percentage of returned checks delivered within the 2-day hold period reflects, in part, the Federal Reserve’s obligation to provide services to handle checks that cannot be easily processed by direct presentment or through a clearing house. We found that ECCS, the ECP service available only to banks in Michigan’s Upper Peninsula, provided a better check-return performance than the paper-check presentment method used by banks in the same area. The basis for this finding was a comparison of the percentage of returned checks for which ECCS banks received a return notification within 2 business days after the checks were deposited and the percentage of returned checks received by paper presenting banks within the same 2-day period. (As previously noted, depositary banks using ECCS keep deposited checks until the expiration of the “midnight deadline” specified in the UCC and pull returned checks when they receive a return notice through FRBM from a paying bank.) This comparison of the ECCS and paper-check presentment methods indicated that substantial reductions in return cycle times are possible when the paper check is held at the depositary bank. For the week of January 12 through 16, 1998, the 8 banks that used ECCS received a return notification on 131 local dishonored checks, while the 10 judgmentally selected Upper Peninsula banks, which constituted our paper presentment comparison group, received 276 dishonored local checks. We found that the return notifications for the 131 ECCS dishonored checks were provided to depositary banks within 2 business days after the checks were deposited. (See table 4.) Moreover, 82 percent of the 131 return notices were received by depositary banks within 1 business day after the checks were deposited. In contrast, only about 8 percent of the 276 dishonored checks that were physically presented were returned to depositary banks within 2 business days after the checks were deposited. Conditions in the Upper Peninsula region, such as relatively low check volume and banks that are remotely located, and other factors may well have played a role in showing ECCS to its best advantage in comparison with paper presentment. As a result, it is not likely that the savings in the time between ECCS and paper presentment may be achieved in the banking industry as a whole. First, several regional conditions complicated the return of dishonored checks within the 2-day hold period for local checks using the paper presentment process. These conditions included severe winter weather conditions, the distances between the banks and the most commonly used private check clearing house and the Federal Reserve check office in Minneapolis, and the two time zones dividing the banks in the Upper Peninsula area. In addition, the composition of ECCS participating banks and the low volume of checks electronically presented through ECCS may have contributed to its better performance. Banks participating in ECCS had to store a fairly limited number of checks and retrieve a small number of return items. All of the ECCS participating banks were small, with assets ranging from $52 million to $350 million. In 1997, ECCS volume was nearly 1.9 million checks. This volume constituted about 0.2 percent of the 973 million checks that the FRBM check office collected in 1997. In our analysis, we also compared return times for electronic and paper presentment of nonlocal checks. Our data showed that the check-return performance against the funds availability schedules of electronically presented nonlocal checks was not very different from that of paper-presentment checks. Again, we evaluated the return cycle times of nonlocal checks using the applicable availability schedule specified in EFAA for nonlocal checks—that is, the 5-business-day funds availability. We found that a very high percentage of dishonored checks were returned to depositary banks within 5 business days after the day the checks were deposited, regardless of whether the checks were electronically or physically presented. Approximately 90 percent of the electronically presented nonlocal checks were returned within 5 business days to depositary banks, while 89 percent of the physically presented checks were returned within 5 business days. Our data showed that a considerable number of electronically presented nonlocal checks were returned to depositary banks within 3 business days after the checks were deposited. As shown in table 5, 43 percent of the checks presented through the Basic service and 35 percent of the checks presented through the Truncation service were returned to depositary banks within 3 business days. This compares with 14 percent of the nonlocal checks returned under paper presentment. While some observers believe that ECP may potentially contribute to a more efficient check-collection process, several factors were mentioned as currently limiting ECP use. As previously noted, although the UCC permits the use of electronic presentment agreements between the presenting bank (the last bank in the check-collection process demanding payment from the paying bank) and paying banks, few such agreements have been negotiated, and private clearing houses do not currently offer ECP services. In interviews with regulatory officials and bankers, we identified several factors that may play a role in discouraging banks from agreeing to accept an electronically presented check, including the lack of a clear economic incentive to use electronic presentment; laws and regulations that require maintaining cancelled checks in certain situations; a perceived consumer preference for receiving cancelled checks with monthly bank statements and state laws requiring that cancelled checks be offered; UCC and Regulation CC’s requirement that paying banks generally must physically return a dishonored check to depositary banks; operating and business factors that limit banks’ adoption of ECP; and a concern that ECP may increase banks’ vulnerability to forged signatures and counterfeit checks. While there are current impediments to expanded ECP use, the Federal Reserve Banks and some check-collection service providers are working to create a more favorable environment for ECP growth, including possible ways to promote ECP use and establishing standards for using ECP. For a bank, deciding on the relative advantages and disadvantages of ECP use requires weighing the potential gains in its role as a depositary bank against the potential losses in its role as a paying bank. In its January 1998 report, the Committee on the Federal Reserve in the Payments Mechanism concluded that paying banks have little incentive to speed up the presentment process because they receive benefits from “float.” Float occurs in the check-collection process because of the time it takes to process a check—that is, the time between when the check is accepted for payment and when the paying bank deducts the amount of the check from the check writer’s account. Since the paying bank has use of the funds during that time, it has little incentive to speed up the process. When a bank is the depositary bank, however, it has a clear incentive to collect the check—and receive payment—as quickly as possible and at the lowest cost. Many states have laws or regulations that require certain individuals, businesses, and organizations to maintain cancelled checks. Cancelled checks also serve as documentation for federal and state tax authorities and as proof of payment for certain categories of commercial transactions. The Federal Reserve Bank of Boston (FRBB) compiled a survey (dated 1997) of federal and state laws and regulations that relate to the retention of an original cancelled check. On the basis of our analysis of the survey, 41 states, plus the District of Columbia, had at least 1 law or regulation that required individuals or organizations to retain their cancelled checks for various purposes, including documentation for state and local governments and by certain businesses. The remaining nine states—Alaska, Georgia, Iowa, Maryland, Michigan, Nebraska, Oregon, West Virginia, and Utah—were not listed as having any laws or regulations that required the retention of cancelled checks. An example, cited in the survey, of a state law requiring the retention of cancelled checks was a Florida law that provides, in general, that county officials are required to retain cancelled checks as a part of the permanent record of the applicable office. Another example was a California regulation requiring investment advisors to retain cancelled checks for at least 6 years—during the first 2 years of which, the cancelled checks are to be held in a location that is easily accessible. The perceived consumer preference for receiving cancelled checks is another operational deterrent to ECP use. If consumers are to receive their cancelled checks in their monthly statements, banks cannot use check truncation anywhere in the collection process. Federal Reserve Board officials and banking officials with whom we spoke expressed a belief that many consumers want their cancelled checks returned. Additionally, two states have laws that guarantee bank consumers the right to receive cancelled checks. According to the FRBB’s survey, New York and Massachusetts have such laws. A New York law requires, in general, that banking institutions offering consumer accounts offer a consumer account through which cancelled checks are returned to the customer with a periodic statement of the account. In Massachusetts, a state law requires that, if depositors request their cancelled checks, the bank must return the cancelled checks without charging a fee. Regulation CC, which governs funds availability and the collection and return of checks, requires that paying banks must physically return the original dishonored check to the depositary bank if it is available. This requirement applies to all checks, regardless of whether they were electronically or physically presented. The Federal Reserve ECP services were structured so that paper checks can be returned to depositary banks. Federal Reserve Board officials told us that Regulation CC could be amended to permit banks to return dishonored checks using images in lieu of the paper check but that before Regulation CC could be modified, certain operational and legal issues would need to be resolved. On the basis of our interviews with banking officials, we also identified business factors that could play a role in discouraging banks from choosing electronic check presentment and truncation, including the current concentration of resources on ensuring that banks’ computers are able to handle dates after the year 2000 and the potential for depositary banks to secure access to information on the paying banks’ customers. Banks must ensure their computer systems are able to handle dates in 2000 and beyond. However, many banks may not have sufficient resources to both ensure that their computers are able to handle this date change and make necessary investments to use ECP. Officials of large banks told us that they have allocated significant resources toward ensuring that their computers are able to handle these dates. As a result, any significant changes in check clearing technology are not likely to be considered until after 2000 in many banks. From our interviews and from written responses from banking officials at five large banks, we learned that these banks do not consider MICR data adequate information for detecting certain types of fraud, particularly forged signatures and counterfeit checks. (The potential effects of ECP use on check fraud are discussed in the next major section of this report.) Despite the current limitations previously mentioned, the Federal Reserve Banks, some private organizations, and several large banks in the United States are working to create a more favorable environment for ECP growth. Two of these efforts include (1) the establishment of a working group comprising officials from banks, the Federal Reserve Banks, and check collection service providers and (2) the expected creation of the first multilateral ECP organization, that is, an ECP organization established by an agreement involving more than two banks. In its January 1998 report, the Committee on the Federal Reserve in the Payments Mechanism concluded that “it is not yet clear” whether the whole check system would benefit from moving toward ECP and truncation. The report recommended that a working group comprising banks, the Federal Reserve, and other check-collection process participants should be convened to determine the cost and feasibility of further ECP use and truncation. The report outlined possible steps that the Federal Reserve might take if this working group concludes that such a coordinated move is both feasible and advisable. For example, the report stated that the Federal Reserve could amend Regulation CC to permit banks to return dishonored checks, or return items, using images or electronic transmissions in place of the original checks. In addition, several commercial banks, with the assistance of NYCHA, are forming the first national multilateral ECP organization, The Small Value Payments Company, L.L.C., which was expected to begin operations in mid-1998. Thirteen of the largest U.S. banks are to become owners in The Small Value Payments Company. Under current plans, the organization would be established in stages. In the initial stage, banks are to transmit electronic check information among themselves, but the receipt of the paper check would still constitute presentment. According to an NYCHA official, the initial phase would provide The Small Value Payments Company with time to ensure that ECP standards are established and that banks are complying with the standards. As currently proposed, the final phase would be realized when the transmission and receipt of the MICR data constitute presentment and when the checks are truncated at depositary banks. The same NYCHA official acknowledged that The Small Value Payments Company faces obstacles in completing the final phase of its operation. One of these obstacles is state laws that guarantee consumers the right to elect to receive cancelled checks. But the NYCHA official predicted that the final phase may be completed within 4 to 5 years from the initial operating date of The Small Value Payments Company. In interviews and written responses to our questions, officials at five commercial banks indicated that forged signatures and endorsements, as well as counterfeit checks, have created their highest check fraud losses in the period since 1995. Under the UCC, banks may be responsible for recrediting the account of a customer if the bank charges the account for a check that is not properly payable, such as a check with a forged signature. According to these banking officials, perpetrators of fraud are becoming more sophisticated in committing check fraud. A banking official told us that large banks in New York City and San Francisco face a greater potential for check fraud than small banks located in rural areas. Of the five commercial banks that responded to our written survey questions, four listed forgeries of either signatures or endorsements as the type of check fraud that has caused them their highest dollar losses since 1995. The fifth bank reported that counterfeit checks constituted its highest fraud losses for the same period. Banking officials, in interviews and written responses to our questions, informed us that they do not consider the receipt of the MICR data as providing adequate information for detecting certain types of fraud, particularly forgeries and counterfeit checks. According to one banking official, banks need access to the paper checks to detect potential forged signatures or counterfeit checks. Because the receipt of the MICR data does not provide paying banks with information viewed as adequate for identifying forged signatures, these banking officials said they have continued to insist on paper presentment. As previously noted, although the UCC permits the use of electronic presentment agreements between the presenting bank and the paying bank, very few agreements have been negotiated. A potential alternative to paper checks is a digitized image of checks. According to banking officials, transmitting a digitized image of the paper check along with the MICR data would allow banks to verify signatures. Specifically, a digitized check image would allow paying banks to inspect the image as they would inspect a check for possible fraudulent signatures. However, we were told that both business and technological considerations currently limit widespread use of digitized check images. First, according to one banking official, banks are unlikely to invest their financial resources in check imaging technology because customers expect to have their cancelled paper checks returned. Second, check images cannot currently be economically transmitted. One check image consists of a massive amount of digital information—that is, about 50,000 bytes of information, compared with 94 bytes of information for a MICR data transmission. The Committee on the Federal Reserve in the Payment Mechanism, in its January 1998 report, stated that imaging technology would require both additional investment and ongoing costs for banks. The committee also noted in the report that “there is some risk that changes in technology and the evolution of the retail payments system will overtake the cost and benefit issues” associated with check imaging. For example, while “there is little evidence to suggest that the volume of checks is likely to drop substantially over the next several years,” check imaging could become obsolete if other electronic payment methods emerge and lead to a decreased use of checks. ECP use may enhance a bank’s ability to identify checks that cannot be paid, such as checks written on closed accounts, and potentially deter some types of check fraud. Fraudulent practices like “paperhanging” and “check kiting” can be created from closed accounts and insufficient funds, respectively. If the MICR data were presented faster to the paying banks than paper checks are, this action might facilitate the identification of a check written on a closed account or a check written on an account with insufficient funds. However, a Federal Reserve official and a banking official noted that both ECP and paper presentment methods have some limits in detecting some types of check fraud, particularly forged endorsements, and that it would be difficult to judge which method is superior. A banking official noted that forged endorsements often are not detected until the proper payee of a check notifies the check writer that a payment is missing. We requested comments on a draft of this report from the Federal Reserve Board. The Board’s comments are reprinted in appendix II. The Board agreed with the facts as stated in our report. In addition, the Board provided technical comments, which we have incorporated where appropriate. We are sending copies of this report to the Chairman and the Ranking Minority Member of the House Committee on Banking and Financial Services; the Chairman and the Ranking Minority Member of the Senate Committee on Banking, Housing, and Urban Affairs; the Chairman of the Board of Governors of the Federal Reserve System; the Presidents of the Federal Reserve Banks of Boston and Minneapolis; and others upon request. This report was prepared under the direction of James M. McDermott, Assistant Director, Financial Institutions and Markets Issues. Other major contributors are listed in appendix III. Please contact me on (202) 512-8678 if you have any questions about this report. To determine how ECP use affects the length of time that it takes for a dishonored check to be returned to a depositary bank, that is, the return cycle time, we used data from surveys conducted by us and the Federal Reserve Board. The survey instruments we and the Federal Reserve Board used captured the return cycle times and other characteristics of a small sample of returned checks that were initially presented by paper check and by electronic transmission. The Federal Reserve, at our request, sampled dishonored checks as they were being returned by the paying bank to four Federal Reserve check offices (Kansas City, Jacksonville, Minneapolis, and Richmond), primarily during the week of January 12 through 16, 1998. These four check offices were selected on the basis of the amount of their ECP volume and the number of banks that acquire ECP services from the four Federal Reserve check offices. Since ECP is a paying bank service, the samples were drawn at the Federal Reserve office that served the paying bank. Also, the Federal Reserve Board applied the same ECP return item survey to FRBM’s additional ECP service, ECCS, which is offered only to banks located in the Upper Peninsula of Michigan. To collect a sample of paper checks comparable to those ECCS items obtained from the Minneapolis check office, we judgmentally selected 10 banks located on the Upper Peninsula of Michigan, all of which are in the Minneapolis check processing region, where ECCS is offered. Then, we asked the 10 banks, which did not participate in ECCS, to record return-time data, using the same survey forms and instructions used by the Federal Reserve Board, for all checks returned to them during the study week of January 12 through 16, 1998. For the Basic, MICR Plus, and Truncation ECP services, the 4 Federal Reserve check offices were instructed to select 25 return items daily for each presentment service from a list of return items received from paying banks and to record the return time data. In addition, they were instructed to collect 25 paper items each day during the 5-day study period. Therefore, the weekly sample size of each service (Basic, MICR Plus, Truncation, and Paper) was expected to be 125 items at each of the 4 check offices, and the total sample size for each presentment service was to be 500 items. For determining the return cycle time of ECCS, the Minneapolis check office was instructed to select 75 return items daily, or all items if there were fewer than 75 returns for any day. The Federal Reserve check offices were instructed to decrease the likelihood of bias in the sample of return items by allocating the sample across all the cash letters (i.e., a listing of return items) received from banks of various sizes on a particular day, to the extent possible. The 10 Michigan banks that we selected were instructed to select all of the return items (i.e., dishonored checks) returned to them, as depositary banks, on each day of the study week. Because the check offices, Michigan banks, and check samples were not selected on a random basis, we cannot make any statistical generalizations regarding the entire banking industry, or the Federal Reserve’s ECP services, on the basis of this analysis. Return items from 515 paying banks were selected by the 4 Federal Reserve check offices. Data from 2,258 return items were recorded by the Federal Reserve Board, after those items that had been sent through the collection process more than once had been discarded. A depositary bank may potentially send a dishonored check back through the collection process multiple times before a check is paid. The inclusion of those items might have skewed our results because it is very difficult to determine the endorsement and return dates for checks that have been presented more than once. Table I.1 shows the actual sample size for each presentment service. ECCS (ECP service offered only in the Upper Peninsula of Michigan) The number of paper items in the overall sample was lower than the 500 items originally planned. We were advised by Federal Reserve Board staff that, because Federal Reserve Bank staff collected the sample of paper items during the busy processing cycle, they were generally unable to collect as many paper items as instructed. Moreover, the MICR Plus sample was also smaller than originally planned. Return items that were initially presented by MICR Plus were sampled at three of the four Federal Reserve check offices. Federal Reserve Board officials advised us that one check office did not have any MICR Plus customers from which they could take a sample of items. However, the other three offices did achieve a total sample size of 421 MICR Plus return items. The actual number of ECCS items received by the FRBM fell below the sample quota of 75 per day, and all items were selected, resulting in a total of 131 items for the study week. Items that were presented through ECCS were all local paper checks that were not presented more than once. Therefore, to compare the return cycle times of checks that were presented through ECCS with those that were physically presented, we included only the 276 physically presented local paper checks that had not been represented by the 10 Michigan banks in our analysis. (See table II.2.) We did not verify that this data-collection process was followed at the Federal Reserve check offices or at the 10 Michigan banks. However, we examined check endorsement and presentment and return dates for out-of-range values and logical consistency. We also resolved, to the extent possible, data coding and entry problems with respondents at the banks and officials at the Federal Reserve Board. We and the four Federal Reserve check offices used the same data collection instrument to record return cycle times and other check characteristics. This instrument was similar to one developed and administered by the Federal Reserve Board in previous check return time surveys. The ECP return item survey instructed the Federal Reserve Bank staff and officials at the 10 Michigan banks to collect certain data elements located on paper checks. These data elements included (1) the endorsement date or the date the check was deposited, (2) the date the check was presented to the paying bank, and (3) the date the check was returned to the depositary bank. In addition, the survey instrument collected the ABA numbers of both the depositary banks and paying banks so that checks could be categorized as local or nonlocal. Also recorded were the reasons the checks were returned, whether the checks had been represented, and whether intermediaries were involved in the return process. To ascertain the return cycle times for both local and nonlocal checks, we calculated the number of days from the endorsement date (the date the check was deposited at the depositary bank) to the return date (the date the dishonored check was received by the depositary bank). For the checks sampled at the Federal Reserve check offices, we added 1 day to the return cycle for nonlocal checks because the samples were drawn and the final date was recorded at the Federal Reserve offices that served the paying banks. Since the samples were not drawn at the depositary banks, we needed to adjust the recorded return dates to include the time required for transporting the return items from the Federal Reserve check offices to the depositary banks. According to the Federal Reserve Board official who supervised the ECP Return Item Survey data collection, because the samples were drawn at the Federal Reserve check office serving the paying bank, any nonlocal return items would have been delivered overnight to the Federal Reserve check office serving the depositary bank. The official acknowledged that there may have been instances in which the return item took more than 1 day to actually reach the depositary bank, but these instances would have been rare and nearly impossible to identify. We agreed that the Federal Reserve Board’s approach of adding 1 day to the return cycle time for nonlocal checks seemed to be reasonable, given that the sample could not be drawn at the Federal Reserve check office serving the depositary bank and that the understatement of return cycle times would be small. For local checks, no adjustments were made to the calculated return cycles because the same Federal Reserve check office served both the depositary bank and the paying bank. Again, we felt that any understatement of return cycle times would be small. Because the dates on which the 10 Michigan banks recorded their check data also represented the actual return dates for checks so recorded, no return cycle time adjustment was necessary. Return dates for checks were recorded, and cycle times were calculated, in whole days. Weekends and holidays were excluded from the elapsed times. Some of the return dates fell outside of the study week. The 213 such cases in the Federal Reserve data were included in the analysis, while cases that were outside of the study period were excluded from the Michigan bank data. For those return items with return dates falling on a weekend date, the dates were adjusted to have been returned on the next business day because checks cannot be collected or returned on a nonbusiness day, weekend date, or holiday. A voluntary association formed by banks that establishes a meeting place for the exchanging of checks drawn on those banks. Any bank except the paying bank handling a check for collection. A bank that holds deposits owned by other banks and performs banking services, such as check collection. The first bank at which a check is deposited. The time between when the check is accepted for payment and when the paying bank deducts the amount of the check from the check writer’s account. Checks for which the depositary bank and the paying bank are not the same entity. A bank other than the depositary or the paying bank to which a check is transferred in the course of collection. The line at the bottom of a check that identifies the routing number of the paying bank, the amount of the check, the number of the check, and the account number of the customer. Midnight on the next banking day following the banking day on which the paying bank received the check. Checks for which the collecting bank and the paying bank are the same entity. The bank on which the check is drawn. The last bank in the check-collection process demanding payment from the paying bank. A bank handling a returned check. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the current role of electronic check presentment (ECP) in the collection process for interbank checks, focusing on: (1) identifying and describing the ECP services offered to U.S. banks; (2) determining the ECP volume in the United States for 1995 through 1997; (3) determining whether ECP affects the length of time that it takes for a dishonored check to be returned to the depositary bank; (4) identifying any factors that may limit ECP use; and (5) determining how ECP may affect banks' risk of check fraud. GAO noted that: (1) the Federal Reserve System is the leading ECP provider in the United States; it offers three ECP services nationwide; (2) for these services, the collecting banks send the paper checks to the appropriate Federal Reserve check office, which then presents the checks electronically to paying banks; (3) these ECP services differ in how the paper checks are handled after they have been electronically presented to paying banks; (4) delivery of the magnetic ink character recognition (MICR) line data serves as presentment, and the checks are truncated at the Federal Reserve check office serving the paying bank; (5) ECP volume accounts for a small, but growing, percentage of the overall U.S. interbank check volume; (6) from 1995 to 1997, ECP volume increased 114 percent; (7) GAO's analysis of return items that were initially electronically presented suggests that use of the Federal Reserve ECP services may not have a substantial effect on the percentage of dishonored local checks that are returned to depositary banks within the 2-day hold period; (8) for these ECP services, the percentage of local checks returned within 2 days during this period was only marginally higher than the paper-check presentment method; (9) interviews with regulatory and banking officials identified several factors that deter banks from accepting the electronic presentment of checks, including: (a) the concern that ECP may increase a paying bank's vulnerability to check fraud; (b) the lack of a clear economic incentive to use electronic presentment; and (c) a perceived consumer preference for receiving cancelled checks; (10) in addition, certain types of state laws have been identified as having the effect of impeding ECP because of the laws' reliance on paper checks; (11) while ECP may allow paying banks to identify checks that might not be honored sooner and deter certain types of check fraud, banking officials expressed concerns that ECP could make paying banks more vulnerable to other types of check fraud; (12) officials at five large banks told GAO that forged signatures and endorsements, along with counterfeit checks, have created the highest check fraud losses in the period since 1995; and (13) because the receipt of the MICR line data does not provide a paying bank with adequate information for identifying forged signatures, banking officials said they continue to insist on paper checks. |
OPM manages the federal government’s human capital and is responsible for helping agencies shape their human capital management systems and holding them accountable for effective human capital management practices. Title 5 of the U.S. Code, which provides for the effective management of the civil service, describes OPM’s mission and responsibilities. OPM is also responsible for administering retirement, health benefits, and other insurance services to government employees, annuitants, and beneficiaries. During the past several years, OPM has undergone significant changes. The entire agency was restructured in fiscal year 2003, which included steps such as eliminating redundant operations and organizational layers. As mentioned previously, in early 2005, OPM’s workforce expanded by approximately 40 percent when more than 1,500 security clearance employees transferred from DSS. Several months later, OPM experienced a change in top leadership, with the appointment of a new agency director in May 2005. In addition to making organizational changes, OPM has recast a number of its mission objectives. As we previously reported, OPM is continuing to transform itself from less of a rulemaker, enforcer, and independent agent to more of a consultant, toolmaker, and strategic partner in leading and supporting executive branch agencies’ human capital management systems. OPM has also played a role in the design and implementation of new human capital systems at the Departments of Homeland Security and Defense and has exerted greater human capital leadership through its Human Capital Scorecard of the President’s Management Agenda (PMA). OPM is responsible for helping other federal departments and agencies with strategic human capital management, while serving as a model for managing its own workforce. SHRP and HCLMSA are the two OPM divisions with the most responsibility for working with federal departments and agencies to assist them with making their human capital efforts more effective. SHRP designs, develops, and implements human capital policies and programs. SHRP’s objective is to make sure federal agencies understand human capital policy and correctly apply it. For example, SHRP counsels agencies on how to apply policy to their performance appraisal, employee development, labor-management relations, information technology, and workforce planning programs. HCLMSA serves as the strategic leader of the governmentwide effort to transform human capital management so that agencies are held accountable for managing their workforces effectively, efficiently, and in accordance with merit principles. This division provides advice and assistance in all areas of staffing and human capital management, such as workforce restructuring and assistance in recruiting. While SHRP focuses on developing human capital policy, HCLMSA’s responsibilities deal primarily with the implementation of that policy. The Management Services Division (MSD), headed by the senior executive who also serves as the agency’s Chief Human Capital Officer (CHCO), is responsible for providing human capital management services to the agency. MSD houses the Center for Human Capital Management Services (CHCMS), which is responsible for coordinating much of OPM’s internal strategic human capital planning, including workforce and leadership succession management efforts. This group is also responsible for supporting the agency in recruitment, hiring, and other day-to-day human capital management activities. Figure 2 shows OPM’s organizational structure. One of OPM’s efforts has been to conduct the FHCS biennially to measure employees’ perceptions on whether conditions characterizing successful organizations are present in their agencies. OPM uses the FHCS in the Human Capital Assessment and Accountability Framework (HCAAF) as one source of information for evaluating agency success in creating a better working environment for their employees. OPM analyzes the FHCS results for itself and each agency with the four indices of the HCAAF: Leadership and Knowledge Management, Results-Oriented Performance Culture, Talent Management, and Job Satisfaction. A performance agreement at OPM showed the agency had a goal of being in the top half of agencies surveyed for 2006 and being in the top 5 of government rankings for 2008. The FHCS data are also used to rank agencies and subcomponents on a “Best Places to Work” index score, which measures employee satisfaction. The Partnership for Public Service and the Institute for Study of Public Policy Implementation produce the best places to work rankings. More than 220,000 federal employees responded to the most recent survey in 2006, with a governmentwide response rate of 57 percent. The survey participation rate within OPM was 80 percent. In 2006 testimony, we reported that OPM’s 2004 survey results could be summarized as reflecting employees’ concerns about perceptions of leadership; talent management; customer focus, communication, and collaboration; and performance culture and accountability. We identified these four key areas as critical for human capital development in order for OPM to continue to transform itself into a more effective leader of governmentwide human capital reform. The areas differ slightly from the four HCAAF indices and represent a somewhat different grouping of survey items than the indices. For example, we included three questions that were asked relating to talent management: (1) the skill level in my work unit has improved over the past year; (2) I have sufficient resources to get my job done; and (3) supervisors/team leaders provide employees with constructive suggestions to improve their job performance. For this report, we did not include customer focus, communication, and collaboration because the number of survey items we included in that area decreased to one question from 2004 to 2006, making the data no longer significant. Compared to its 2004 results, OPM’s 2006 FHCS results indicate strong improvement in employee perceptions on key questions relating to leadership, mixed results in performance culture and accountability, and continuing challenges in talent management. Additionally, OPM’s 2006 survey results show that the investigative service transfers from DOD, who joined the agency in 2005, were less positive than the rest of OPM’s 2006 responses and negatively affected OPM’s overall results. As a response to a decrease in positive 2004 FHCS responses within OPM, the agency used survey results and focus groups to develop action plans to address areas of employee concerns. In response to the 2006 survey results, OPM reviewed and updated the first set of action plans by incorporating changes as needed to address areas of concern to OPM employees. Top leadership in agencies across the federal government must provide the committed attention needed to address human capital and related organizational transformation issues. In 2006, OPM experienced a positive increase in employee perceptions of questions relating to leadership compared to 2004 FHCS responses. Four questions out of the top 10 questions having the largest increase in positive responses from 2004 to 2006 were related to leadership. For example, there was an 8 percentage point increase for both “satisfaction with information received from management” and “my organization’s leaders maintain high standards of honesty and integrity,” as displayed in figure 3. The positive response increase for leadership questions from 2004 to 2006 represents a major improvement for the agency and a decreasing gap between OPM and the rest of government. OPM was significantly higher than the rest of government on three of eight leadership questions. For example, on the question “Managers communicate the goals and priorities of the organization,” OPM was 11 percentage points higher than the rest of government and 15 percentage points higher than OPM’s 2004 results, as shown in figure 4. Additionally, on the HCAAF index for Leadership and Knowledge Management, OPM’s ranking improved from 28th in 2004 to 19th in 2006, out of 36 ranked agencies. For questions relating to leadership, however, OPM’s 2006 results continue to show a larger gap between SES and General Schedule (GS)-level employees than the difference found in the rest of government results. We reported previously that OPM’s 2004 FHCS results and the follow-up focus group discussions implied that information did not cascade effectively from the top leadership throughout the organization, and we identified a gap in perception between OPM’s SES and GS-level employees, particularly relating to questions on leadership. In 2006, this gap persists between SES and GS-level employees. For example, in both 2004 and 2006 OPM’s SES responses were substantially more positive than non-SES responses for the statement “I have a high level of respect for my organization’s senior leaders.” While OPM has taken steps to address the lack of overall and cross-divisional communication and issues related to employee views of senior management, this gap between SES and GS-level response remains a challenge. Finally, the significant leadership changes that occurred at OPM since the 2004 FHCS survey may have affected the perspectives of employees regarding leadership questions. A new director began a term at the agency in May 2005 and, according to OPM, about half of the senior leadership started after OPM administered the 2004 survey. Additionally, actions taken beginning in May 2006 in response to the 2004 survey results, such as Web casts and e-mail communications from the Director regarding internal changes, were intended to lead to positive 2006 FHCS responses to leadership questions. Effective performance management systems can drive organizational transformation by encouraging individuals to focus on their roles and responsibilities to help achieve organizational outcomes. We reported in 2006 that OPM’s executive performance management system aligns the performance expectations of OPM’s top leaders with the goals of the organization. In addition, we reported that OPM could build upon its positive results for some of its performance-related questions to address performance culture concerns, one of the three areas examined in the focus groups. Similar to the 2004 results, OPM’s 2006 results relating to performance culture and accountability showed some mixed areas of strength that could be maximized and areas of weakness to be addressed. Of the 12 questions we identified as relating to performance culture and accountability, OPM’s results for three questions in 2006 demonstrated substantial improvement compared to 2004 results and two questions dropped significantly from 2004 to 2006. Figure 5 shows the questions that substantially improved. OPM’s highest positive increase from 2004 to 2006 was a 17 percentage point increase in response to “managers review and evaluate the organization’s progress toward meeting its goals and objectives.” OPM also saw a more positive response to “I am held accountable for achieving results.” Questions that dropped significantly involved employees feeling encouraged to come up with new and better ways of doing things and performance appraisals being a fair reflection of performance. On the performance accountability questions that saw a large positive increase at OPM from 2004 to 2006, OPM was significantly higher than the rest of government. In addition, OPM’s ranking on the HCAAF index for Performance Culture increased from 29th in 2004 to 25th in 2006. OPM, however, remains among the bottom half of the 36th ranked agencies in this area. Of the performance culture and accountability questions, OPM responded significantly lower than the rest of government on five questions. Two of these questions dealt with creativity and innovation in the workplace, as displayed in figure 6. These mixed results indicate that while OPM has seen and can build upon the positive increases on some performance culture and accountability questions, room for improvement still exists in this area at the agency. OPM’s 2006 FHCS responses indicate that talent management concerns continue among employees at the agency. Of the nine questions we identified as relating to talent management, OPM showed a decline on seven questions from 2004 to 2006. The largest decline from 2004 to 2006 was a 5 percentage point drop from 48 to 43 percent of OPM employees reporting satisfaction with the training received for their present job. Figure 7 shows the decline in two talent-management related questions. Training was a specific area of concern for OPM’s SES, who reported an 8 percentage point decrease in satisfaction with their training and a 13 percentage point decrease in support for “the skills in my work unit have improved in the past year.” We have previously highlighted talent management as an area of concern and noted that OPM’s ability to lead and oversee human capital management could be affected by its internal capacity and ability to maintain an effective leadership team, as well as an effective workforce. In addition, in the 2006 survey, OPM was significantly lower than the rest of government on five of the nine questions we identified as relating to talent management. For example, OPM was 11 percentage points lower than the rest of government for “the workforce has the job-relevant knowledge and skills necessary to accomplish organizational goals.” Additionally, only 39 percent of OPM employees said that their training needs were assessed, compared to 51 percent of the rest of government, as displayed in figure 8. Further, OPM’s ranking decreased from 28th to 31st out of 36 agencies on the HCAAF index for Talent Management in 2006. Without DOD transfers, results for just under half of the 2006 survey questions relating to leadership, performance culture and accountability, and talent management would have been higher by 5 percentage points or more. In fact, all but 1of the 29 questions relating to leadership, performance culture and accountability, and talent management that we identified would have been more positive without DOD transfers. Moreover, OPM reported those employees who participated in both the 2004 and 2006 surveys rated the agency higher on almost every item on the survey in 2006. OPM’s FHCS agency ranking would have increased dramatically from 26th to 11th place without the DOD transfers. OPM would have seen the greatest increase in those questions relating to leadership, with six of the eight questions we identified as relating to leadership having a 14 to 16 percentage point increase from 2004 to 2006. For example, without DOD transfers, OPM 2006 response to “I have a high level of respect for my organization’s senior leaders” would have been 14 percentage points higher than 2004 results. The question that would not have been more positive addressed talent management, suggesting that talent management is a salient issue for OPM, regardless of the transfers. In addition, DOD transfers gave more neutral responses on several questions, particularly those relating to performance culture and accountability and equal employment issues, indicating a lack of perspective rather than a negative response. Given that the DOD transfers had more neutral responses to these questions, this suggests that OPM may have an opportunity to help shape the perspectives of its new transfers on these issues. Selected survey questions and data from the 2004 and 2006 surveys appear in appendix II. Figure 9 shows a sequence of selected actions OPM took regarding the 2004 and 2006 FHCS and the accompanying internal OPM action plans. To address a decrease in positive responses to the 2004 FHCS, OPM hired a contractor to conduct a series of OPM employee focus groups. The purpose of the groups was to understand the factors contributing to the 2004 responses and report employee ideas for addressing top priority improvement areas. Employees were randomly selected to participate in 33 focus groups with participants from all major divisions, headquarters and the field, employees and supervisors, and major installations. The results of the 2004 FHCS and the responses of the focus groups showed that OPM employees were most concerned with leadership and leadership’s ability to deal with staff about policies and performance. Employees preferred OPM to have more open communication to address inadequate planning and excessive supervision. Employees identified additional problem areas for OPM including lack of management support, inadequate training for supervisors and managers on performance culture and accountability, and lack of senior executive interest in and respect for employees. OPM required each division to develop specific action plans to address the critical issues raised by employees in both the survey results and the focus groups. In December 2005 and January 2006, the CHCMS met with each associate director and their management team to present their individual results and discuss the next steps in the process. OPM also held a half-day planning meeting with a cross-section of OPM divisions and office representatives to develop an OPM-wide action plan. As an example of activities based on the 2004 survey action plans, OPM has attempted to improve communication throughout the agency by initiating visits to its field locations, creating an e-mail mail box where employees can make suggestions on more efficient and effective ways of doing business, and holding employee meetings. Additionally, to address employee concerns about communication with senior leaders, OPM established brown bag lunches with the Director and a process in all divisions to solicit employee input on various initiatives and set aside “open door” time for employees to speak with their managers. After release of the results of the 2006 FHCS, OPM reviewed and updated the first set of action plans responding to the 2004 survey by incorporating changes as needed to address new and continuing areas of concern to OPM employees. OPM’s analysis of the data included (1) comparisons between responses in 2004 and 2006 agencywide and governmentwide, (2) comparisons of results by organizational components, (3) a review of responses between headquarters and field locations, and (4) a review of the responses comparing supervisory and nonsupervisory employees. OPM believed responses to eight questions on the 2006 FHCS improved based on their previous actions for issue areas dealing with leadership. OPM identified that the areas reflecting the lowest positive response rates centered in large part around performance culture areas; for example, promotions based on merit, employee empowerment, and awards. OPM also found that the responses from the field employees were lower than the responses from headquarters employees, where some questions had significant differences ranging from 10 to 20 percentage points lower. In response to the survey results, OPM updated five actions from the action plans responding to the 2004 survey and developed five new actions for the action plans responding to the 2006 survey. In terms of leadership, OPM carried over two actions from the first set of action plans because of the positive response from employees: using OPM’s Intranet for up-to-date information sharing throughout the organization and using the Director’s formal and informal communication methods, such as brown bag meetings, field site visits, and Web casts. One area of concern for employees of OPM was employee empowerment. To address this issue, OPM indicated that it would continue to work on delegating authorities to the lowest appropriate level and involving employees in decisions to increase internal approval and coordination to streamline organizational processes. In addition, in OPM’s recently developed action plans, 5 out of 10 actions will address talent management. For example, OPM will be implementing the core curriculum for supervisory training that was developed because of the first set of action plans. OPM officials said the supervisory training program was funded in May 2007 and implementation started in July 2007. Additionally, OPM developed four new actions to deal with training and development: (1) administering performance management training for all employees, (2) developing individual development plans (IDP), (3) creating electronic access to training opportunities, and (4) implementing an internal rotation professional development program. Each division and office analyzed their organization-specific results to reflect the 2006 responses of their employees in order to update their previous action plans. SHRP, for example, had each of its center leaders meet with employees to discuss the survey results and held a divisional town hall meeting to talk about the results and answer any questions the employees had. HCLMSA used a new interactive communication tool to involve employees and management in resolving issues and capitalizing on strengths identified by the 2006 FHCS results. HCLMSA focused on 38 questions where the positive results were less than 65 percent; from these questions, 3 to 5 questions were consensually determined as key discussion areas and included in the division’s current action plans. OPM also plans to develop communications plans to ensure field locations receive the same information as headquarters on a timely basis. The investigative services division, which includes the DOD transfer employees, also developed action plans in response to the 2006 FHCS. For example, in response to employees’ concerns with their personal work experience, through early September 2007, 428 Federal Investigative Service Division (FISD) employees had participated in detail assignments within FISD, assignments outside of FISD but within OPM, and assignments to other agencies to gain additional program knowledge. OPM will conduct an agencywide employee survey in October 2007, and OPM officials said they believe these survey results will show significant improvement for FISD. After OPM assessed the survey results and the Director approved the action plans, the agency notified its employees about how it will address the responses and will post information on OPM’s Intranet with continual progress updates. Additionally, CHCMS officials said they will monitor the action plans quarterly and report findings to the Director in an effort to build a positive and productive work climate where all employees and managers feel valued and appreciated. OPM’s workforce and succession plans are consistent with selected strategic workforce planning practices and principles relevant to OPM’s capacity to fulfill its strategic goals. OPM’s top leadership is engaged in workforce and succession planning efforts, and OPM has assessed competency gaps and created gap closure plans for its mission critical and leadership workforce. The agency, however, operates some of these division-level efforts without a well-documented process for evaluation agencywide. For example, it was not evident how OPM is able to identify the appropriate level of investment in training and development and to prioritize funding so that it addresses the most important training needs first. We have previously reported that efforts to address important organizational issues, such as strategic workforce planning, are most likely to succeed if agencies’ top program and human capital leaders set the overall direction, pace, tone, and goals from the beginning of the effort. We have also noted that effective succession planning and management programs have the support and commitment of their organizations’ top leadership, and that the demonstrated commitment of top leaders is perhaps the single most important element of successful management. In particular, reinforcing leadership support by assigning responsibility for succession efforts, and holding executives accountable for succession planning in performance plans, are effective strategies for ensuring the active participation of leadership. One of OPM’s vehicles for involving top leadership in its workforce and succession planning efforts is its ERB. Chaired by OPM’s Chief of Staff, the ERB serves as the advisory and review body for all major leadership management policies and programs related to the SES specifically, and management and leadership in general. Among other responsibilities, the ERB is charged with executive/leadership succession planning and workforce planning; executive/leadership staffing management; and executive, managerial, and leadership development management. ERB membership consists of all of OPM’s associate directors, including the associate director who also serves as the agency’s CHCO, along with the chief financial officer, the general counsel, and the deputy associate director for CHCMS. The ERB meets weekly and provides CHCMS, OPM’s internal human resources management group, with direction on key workforce and succession planning decisions, among other things. According to a CHCMS official, the ERB helps to set the direction for the agency’s succession planning and workforce planning efforts. At least annually, the ERB meets with CHCMS staff and division management to review all of the succession planning position profile sheets, templates that the agency uses to try to capture the leadership skills needed for it to meet its strategic and operational goals and objectives both currently and in the future. The ERB looks at the description of potential successors identified and, according to the CHCMS official, will sometimes override the supervisor’s position profile assessments based on their “big-picture” knowledge of agencywide human capital resources. The ERB also works with CHCMS to identify opportunities for economies of scale in addressing training and development needs that cut across divisions. For example, CHCMS and the ERB jointly proposed the establishment of a new supervisory training curriculum for all OPM managers and supervisors. This curriculum intends to address several agencywide training and development needs, such as strengthening performance management skills, closing leadership competency gaps, and addressing issues that emerged in the 2004 FHCS results. As a result, the Director of OPM approved funding for this agencywide initiative, which OPM is now implementing as part of the action plans to address the 2006 FHCS results. In addition to leveraging the ERB to engage its leadership with workforce and succession planning, OPM also made explicit its CHCO’s accountability for succession planning. In the CHCO’s 2006 Performance Agreement, OPM charged the CHCO with the responsibility of having agencywide, written succession plans in place by October 2006. OPM also held other members of OPM’s executive management team accountable via their 2006 performance agreements for general workforce and succession planning efforts. In his 2007 executive performance agreement, the CHCO is accountable for implementing leadership and succession- related training and development initiatives. For example, the CHCO is responsible for implementing the supervisory training for all managers described above. This training curriculum includes courses intended to address leadership competencies, which include performance management and interpersonal skills training. According to OPM’s HCAAF standards, an agency should align its human capital management strategies, including workforce planning, with its mission, goals, and organizational objectives and integrate them into its strategic plans, performance plans, and budgets. We have similarly reported that it is critically important to align an organization’s human capital program with its current and emerging mission and programmatic goals. In its most recently published A Plan for the Strategic Management of OPM’s Human Capital (HC Plan), OPM links its human capital planning to its current 5-year, agencywide Strategic and Operational Plan. The HC Plan explicitly notes the relationship between OPM’s agencywide mission and its workforce, recognizing that OPM’s overall success in achieving its mission objectives is dependent on a strategic focus on its own talent and human capital needs. OPM charges each of its divisions with linking their workforce analysis and competency needs to their business initiatives. For example, the SHRP division has designated the design of a modern compensation system as a key business initiative. Accordingly, SHRP identifies (1) activities related to the initiative (working with internal and external stakeholders, drafting and implementing legislation, etc.); (2) the occupations that constitute its mission critical workforce (HR policy specialist, actuary, etc); (3) the number of mission critical staff needed; and (4) the general and technical competencies that are important for its mission critical workforce (oral communication, creative thinking, problem solving, etc.). Each of OPM’s divisions contribute a similar written section to the agencywide HC Plan to represent how OPM links the identification of its mission critical occupations and key competencies to its business initiatives. The diagram in figure 10 depicts the steps in OPM’s workforce planning process. OPM’s Corporate Leadership Succession Management Plan describes that the key goal of its succession plan is to ensure the availability of diverse individuals with the necessary competencies to fill key leadership positions so the agency can meet its short- and long-term goals, regardless of turnover. The succession plan also notes that the agency needs leaders with a mix of specific skills in order to meet the goals and objectives laid out in its 5-year Strategic and Operational Plan. Similar in its approach to workforce planning, OPM charges its divisions with the responsibility for carrying out the individual-level, position-based elements of its succession planning process. The diagram in figure 11 depicts the steps in OPM’s succession management planning process that focus on analyzing the succession risk and developing an internal leadership pipeline for each individual leadership position. OPM requires the direct supervisor of each executive, manager, and supervisor to complete a succession planning position profile template for these employees. (See appendix III for a copy of the succession planning position profile template.) The succession planning position profile sheets include the supervisor’s judgment of risk factors such as the likelihood that the incumbent will leave; an identification of key general and technical competencies needed for the position; a determination of the “readiness” of internal candidates, those that are ready immediately, within 1 to 2 years, or within 3 to 5 years; and other items. OPM uses these quantitative and qualitative assessments to develop succession management objectives, performance goals, and action plans to help ensure that OPM has a robust candidate pool to replace leadership incumbents as needed. Our review of 93 of approximately 330 succession planning position profile documents showed that nearly all of the sampled documents had been updated within the past year. Our review also confirmed that all of these included an estimation of the prospective successor pool for at least 5 years out, with two citing the need to begin developing the candidate pipeline at least 10 years in advance. An official in CHCMS explained OPM intends that the profile sheets will serve as a built-in mechanism requiring management to think about leadership positions and how they may need to change. For example, some of the SHRP profile sheets illustrate sensitivity to the changing environment in relation to future recruitment efforts: “internally and short term, outlook is quite positive; however, as agency human resource program responsibilities continue to restructure, streamline and consolidate into more generalist and consultative roles, the potential candidate pool of detail oriented technically proficient staffing experts will decline.” While some aspects of the succession planning position profile sheets demonstrate a forward-looking approach to development and recruitment efforts, the extent to which OPM is identifying key competencies for leadership positions based on anticipated long-term changes in mission and objectives is not evident. In reviewing OPM’s instructions for completing the position profile sheets, we found no guidance stating that supervisors are to identify key competencies for these leadership positions according to current and anticipated future requirements. We have previously reported that an agency needs to define the critical skills and competencies that it will require in the future to meet its strategic program goals and then develop strategies to address gaps and human capital conditions in critical skills and competencies. With regard to leadership positions, it is important to emphasize developmental or “stretch” assignments for high-potential employees in addition to formal training, in order to strengthen skills and competencies and broaden experience. Consistent with these workforce and succession planning principles, OPM has undertaken a number of workforce assessments and has developed gap closure plans, which include a mix of training and developmental assignments, to address current and projected deficiencies in mission critical and leadership positions. According to its current HC Plan, as of June 2006, 62 percent of OPM’s 5,194 employees were in mission critical occupations. OPM has several division-level and centralized strategies to assess the competencies of its mission critical occupations. OPM conducted agencywide skills assessments in 2001 and 2003 and more recent assessments in targeted mission critical occupations such as information technology and human resources management (HRM). In 2006, HCLMSA focused competency assessment and gap closure efforts on the mission critical occupation of accountability auditor. During the same year, CHCMS conducted a competency assessment of its HRM specialists, using a competency model developed by the CHCO Council in cooperation with OPM. In the fourth quarter of fiscal year 2006, SHRP, HCLMSA, and the Human Resources Products and Services (HRPS) divisions assessed their human resources specialists. OPM reassessed these specialists using the CHCO Council HRM competency model in May 2007. All of these assessments looked for gaps in both competency levels and numbers of mission critical incumbents. To determine the competency levels for both its current and prospective leadership, OPM looks at both individual leadership positions and general leadership skills. As described in figure 11, in looking ahead to its future leadership, OPM uses qualitative data to assess potential gaps in its leadership pipeline, using the succession planning position profiles. As part of this individual, position-based planning process, the direct supervisor of every subordinate executive, manager, and supervisor describes the key competencies needed for a particular position and the number of potential internal successors for the leadership position, and produces an estimate of when these candidates will be ready to assume the leadership responsibilities in question. The supervisor describes the training and development opportunities needed to address any gaps and to prepare the pool of prospective candidates to assume the leadership position. From these individual analyses, OPM derives a measure it refers to as a “bench-strength index,” which counts the number of internal candidates that are ready to replace a single incumbent, when it becomes necessary. In addition to assessing its in-house leadership pipeline and external prospects for each individual leadership position, OPM looks at the competency levels of its current leadership corps. Figure 12 depicts the steps in OPM’s workforce planning process that focus on assessing the competencies of the agency’s current leadership incumbents and developing and implementing plans to close gaps as needed. The agency most recently conducted a formal competency assessment of its 376 incumbent leaders in fiscal year 2006, using an online survey completed by the supervisors of all subordinate executives, managers, and supervisors. OPM uses these data to make a determination of the extent to which its current leadership cadre meets the desired proficiency levels for competencies required in their positions. In early 2007, OPM launched the Management Competency Assessment Tool (MCAT), a governmentwide, Web-based instrument for assessing the skill levels of managers, supervisors, team leaders, and others in key leadership and performance management competencies. OPM has been using the MCAT internally for its agencywide leadership competency assessments. The agency used this tool to conduct a reassessment of skills gaps among these 376 leadership positions in July 2007. Based on the results of agencywide skills assessments conducted in 2001 and 2003, OPM reports that it has made at least some improvement to employee proficiency levels in 96 percent of its mission critical competencies, and has eliminated gaps in 64 percent of these competencies. OPM’s current HC Plan includes an initiative to conduct an agencywide skills reassessment to continue to monitor its gap closure progress. Regarding its organizational leadership cadre, OPM recently reported positive results. The only priority competency gap common across supervisory, managerial, and executive leadership positions was in the area of interpersonal skills, which are critical to the agency’s increased focus on performance management, consultancy, and other strategic initiatives. OPM has also calculated turnover risk and overall succession risk for leadership positions based on information captured in the succession planning position profile sheets. These indicate that while 30 percent of the current leadership is at high risk for turnover, only 3 percent are high risk for overall succession purposes, since the expectation is that OPM can identify suitable candidates from within or outside the agency. In terms of its leadership candidate pipeline, the succession planning position profile sheets indicated that as of August 2006, all but 11 of the 376 leadership positions met OPM’s bench-strength goal of having a minimum 2:1 ratio of ready-now candidates for each incumbent. More recently, an OPM official confirmed that the agency had reduced this number even further, with only 8 positions considered by the agency to be at high-risk for succession management purposes due to weak bench strength. On the division level, OPM’s most recent competency assessment and gap analysis completed in 2006 for employees in the GS-201 HR specialist mission critical occupation in SHRP and HRPS identified few gaps among employees in this occupational group. Only the competency area of knowledge of agency business emerged as a high-priority gap, based on factors such as the gap’s impact on OPM’s ability to accomplish mission objectives, size of the gap, and level of difficulty in closing the gap through development of internal employees or recruitment from external sources. Specifically, OPM set a target to increase by more than double the number of HR specialist staff at the advanced proficiency level, from 39 to 87. OPM’s strategy to accomplish this goal was to provide training and developmental opportunities to increase the expertise of current staff, while building a pipeline of HR specialists at the awareness and basic levels of proficiency from a pool of external hires. In May 2007, OPM readministered the competency assessment of the SHRP and HRPS GS-201 employees, using the CHCO Council HRM Competency Model, to determine the extent to which gap closure efforts over the past year resulted in higher competency proficiency levels. The results of OPM’s assessment indicated that it had surpassed its goals by moving the HR specialists to, or beyond, the targeted proficiency levels. In addition to its emphasis on the HRM Competency Model as it relates to GS-201 series employees, SHRP has reported on all of the elements of its mission critical workforce, which include actuaries, statisticians, and psychologists, along with HR specialists. In the HC Plan, SHRP notes that its mission critical employees exhibit strengths in the areas of technical competence, oral communication, and problem solving. It describes areas of particular challenge in the fields of creative thinking and reasoning. Further, SHRP is looking ahead to identify a potential future competency gap in written communication, particularly related to writing policy. SHRP plans to address competency gaps in the areas of written communication, creative thinking, and reasoning by incorporating these competencies into the selection processes for new staff and by providing appropriate developmental opportunities to current staff. In an interview with SHRP’s Associate Director about the division’s mission critical workforce, she noted that recruitment and retention for the division would continue to present underlying challenges. She said that SHRP would be trying to recruit employees with the same types of skills other federal government agencies would increasingly need, requiring those with excellent written, analytical, and technical abilities as well as capable leaders. Some positions in SHRP are particularly difficult to fill with the caliber of talent the division needs. For example, the Associate Director explained that it was hard to recruit mid-level actuaries and statisticians from outside OPM because often these individuals, while possessing adequate technical skills, do not know and understand the mission and workings of OPM. In addition, recruiting an employee with actuarial skills and management experience is very difficult given the salary that individuals with those skills can command in the private sector. She did note that SHRP does a lot of recruiting based on its mission; individuals want to come to OPM to be part of some of the largest human capital programs in the world. In terms of retention, the Associate Director said that the SHRP division loses a number of employees to other federal agencies because these agencies view the division’s employees as potential assets to their human capital offices. For example, she said the division’s classification employees along with those in employee and labor relations are highly sought after. She noted that she makes limited use of recruitment and retention bonuses because of funding issues, but she finds the intern hiring flexibilities useful. OPM has also been focusing on competency assessments and gap closure strategies for its HCLMSA division GS-201 HR specialists, who serve as human capital officers and other HR specialists, directly supporting the PMA human capital initiative. Based on external stakeholder input, as well as through internal assessments, HCLMSA chose to set a higher proficiency level target for its HR specialists in the areas of technical competence and client engagement. For example, we have noted that, based on interviews with the federal workforce community, OPM needed a greater emphasis on providing consultative and technical expertise to its agency customers. HCLMSA’s leadership took this type of external feedback into consideration when setting the goal to significantly increase the percentage of human capital officers and HR specialists who are at least at the advanced proficiency level in both the technical competence and client engagement competency areas. OPM has recently reported that, based on its readministration of the competency assessment of HCLMSA’s GS-201 employees in June 2007, the division surpassed its competency goals in the advanced/expert proficiency levels. The division fell short of its goal for the number of HR specialists at the intermediate level of proficiency, which OPM attributes to an overall attrition in the number of HR specialists. Although OPM was able to replace the three human capital officers that left during the reporting year, it could only recruit one HR specialist to replace the four that left. As of June 2007, this represented a net loss of three employees with an overall HCLMSA staff reduction of 6 percent. In the HC Plan, HCLMSA also describes additional initiatives and actions related to its mission critical workforce planning. It noted that recruitment, training, and development efforts have reduced competency gaps that existed in 2004 and described the establishment of a training advisory group (TAG) in fiscal year 2005 made up of members who represent each mission critical role in HCLMSA. In 2007 and beyond, HCLMSA, with TAG’s assistance, plans to continue to provide staff development opportunities to ensure employees in mission critical roles possess all the strategic competencies needed to achieve goals and accomplish the mission. In an interview on HCLMSA’s mission critical workforce, the division’s Associate Director said the biggest recruitment challenge for HCLMSA is finding the right people with the right skills, and the most important aspect of retention is maintaining a positive organizational culture. He said the HCLMSA division is organized into two almost completely separate functions—human capital management and merit systems accountability—which require somewhat different skills. He explained that the human capital side of HCLMSA faces a conundrum because the division loses employees to other agencies, which is good for the larger federal human capital community, but difficult for the division. On the other hand, he said that because HCLMSA’s human capital focus is not as technical as the compliance side, when he needs to recruit employees, he is able to successfully hire individuals from the private sector. The Associate Director said that he sees recruitment as an ongoing process, and he believes that an important part of his job is to always be recruiting for current or future positions. In terms of retention, he noted that a critical component of retention is having a good organizational culture, which often depends on better communication. OPM has a number of gap closure plans in place. For example, to specifically address the leadership competency gap in the area of interpersonal skills, OPM has instituted a requirement that each supervisor, manager, and executive work with their supervisor to develop a supervisory training plan. Each individual plan identifies mandatory and elective training reflecting the specific needs of the individual and addressing any gaps in the target area of interpersonal skills. To support the goal of closing the interpersonal skills gap, OPM has developed an agencywide supervisory training curriculum that includes a mix of classroom and Web-based course such as “Interpersonal Skills,” “Front Line Leadership,” and “Dealing with Poor Performers.” In addition to agencywide and division-level gap closure plans, the position-based succession planning position profiles for each executive, manager, and supervisor include an action plan to prepare the pool of potential internal successors. Plans may include training, professional conferences, developmental assignments, and other opportunities. OPM officials said that any profile that indicates that a corporate leadership position is at high risk for succession management requires an aggressive plan of action to address how the agency will reduce the risk rating. In addition, OPM recently implemented a pilot program for closing potential succession gaps. In early spring of 2007, it launched a knowledge transfer pilot in its Office of the Chief Financial Officer (OCFO) to formalize the process for capturing institutional knowledge. According to OPM, knowledge transfer is a way to capture critical information necessary to perform program responsibilities and ensure that knowledge is not lost due to personnel changes, such as retirements, new work assignments, or temporary absences. The pilot process begins with an advance set of questions sent to an interviewee, followed by a structured interview on topics such as duties performed by the incumbent, the incumbent’s internal and external contacts, statutory requirements of the work, and required training and skills needed. The goal of the interview is to be able to provide the incumbent’s current supervisor and successor with information necessary to continue to carry out work activities. The OCFO is also working on incorporating into the pilot a database to track where incumbents’ important electronic and paper files and records are located. According to an OCFO official, while OPM is still evaluating the pilot, it has been well received and it is likely that it will be expanded in the future. We have reported on the importance of evaluating the contribution that workforce plans make to strategic results in order to measure the effectiveness of an agency’s workforce plan and to help ensure that the strategies work as intended. This involves two activities: determining (1) how well the agency implemented its workforce plan and (2) the contribution that the implementation made toward achieving programmatic goals. For example, a workforce plan can include measures that indicate whether the agency executed its hiring, training, or retention strategies as intended and achieved the goals for these strategies, and how these initiatives changed the workforce’s skills and competencies. With regard to training and development, which are key to each of the OPM gap closure plans we reviewed, we have reported that front-end analysis can help ensure that agencies are not initiating these efforts in an uncoordinated manner, but rather that they are strategically focusing their training efforts on improving performance to achieve the agency’s goals. A CHCMS official representing OPM on its workforce and succession planning process reported that the agency’s plans are largely developed at the division level and are periodically evaluated by the ERB and the agency director. The official noted that these reviews are informal and are not documented or summarized in agency-level status reports. He further explained that OPM provides agency-level workforce analysis data, such as trends in hiring and turnover, to division heads and other top executives at least annually as part of the PMA reporting process. In addition, the official noted that, while there is no formal process for periodically distributing division-level workforce analysis reports, OPM can generate these data on demand and agency leaders and division heads can request this information at any time as the need arises. However, OPM had difficulty providing us with some of its key workforce analysis indicators, which OPM officials explained was partially due to technical difficulties with the reporting system. Regarding OPM’s training and development efforts, in its January 2004 comments on our report on designing training and development, OPM noted that it had increased the role of its CHCO to serve as an advisor to the Director on overall employee training and development initiatives and programs, as well as the establishment of the agency’s training budget. OPM viewed this move as a strategic approach to better position the agency to prioritize its training needs and forecast funds to support those needs. OPM has also recognized the importance of bringing a perspective to training and development activities, particularly with regard to prioritizing among training needs and forecasting funds to support those needs. More recently, OPM acknowledged the importance of tracking training and development investments when it announced a requirement that agencies must begin regularly submitting data on the cost and amount of training they provide their employees. Specifically, OPM now requires agencies to report, among other items, the names of employees receiving training; the title of the classes; the start and end dates; the facility where courses were offered, such as a government agency or university; the number of hours; cost; travel costs; and category, such as leadership development. An OPM official said that the HCLMSA division would monitor data and work with agencies to ensure they are using training dollars for succession planning and to fill critical skills gaps, as well as to improve performance management. In September 2006, OPM also issued a guide for collection and management of training information that emphasizes that agencies must manage and collect training information in support of mission objectives and strategic goals and must properly evaluate training to ensure it provides meaningful contributions to agency results. When we asked for management reports or a similar means for OPM’s top management to track information on training activity, however, CHCMS was unable to provide us with this information. OPM’s budget office provided aggregated annual training expenditures through its accounting system, but had no accompanying information on, for example, how many employees had received training or the type of training or professional development completed. When we requested status reports on training and development activity, program completion rates, or other examples of indicators of how implementation is progressing, an OPM official explained that this was not tracked at the agency level. An OPM official explained that while the agency has improved its training and development tracking, he anticipates being able to do better in the coming year. OPM had expected that its management would be able to use the Enterprise Human Resources Initiative (EHRI) data warehouse to generate information on training activity and expenditures as early as a year ago. While CHCMS had begun tracking training instances for OPM employees in its human resources data system by December 2006, OPM was dependent on the General Services Administration to build the interface to allow transmission of those data to the EHRI data warehouse. The interface to allow transmission of the data to EHRI was completed in July 2007. In addition to gathering data on measures such as participant number and program costs, we have reported that agencies also need credible information to evaluate how training and development programs affect organizational capacity. Agencies should work toward demonstrating their training and development programs’ value in providing future talent by identifying outcome-oriented measures and evaluating the extent to which these programs enhance their organizations’ capacity. In terms of OPM’s allocation of training resources, an OPM budget official explained that as a rule of thumb, the agency budgets no more than 2 percent of its salary and benefit levels, and that more recently, it has held training expenditures to less than 1 percent. He further explained that a reallocation of internal funds to OPM’s retirement systems modernization project resulted in a 5 percent decline of agencywide spending on discretionary activities, leaving a 25 percent cut to the less than 1 percent allocation for fiscal year 2007 training activities. In addition to other reductions within the agency, OPM may make similar cuts to the fiscal year 2008 training budget. Although a CHCMS official told us that OPM is increasing its use of in-house training and development opportunities such as job shadowing and mentoring programs, which he believes can be more effective than outside training, we were unable to ascertain OPM’s full investment in internal training and development programs since the budget tracking information does not include indirect costs. As we mentioned previously, however, survey results show that OPM employees are not satisfied with their training and addressing this concern is a focus of OPM’s 2006 FHCS action plans. An OPM budget official noted that the agency is moving to a strategic budget process. Beginning with the fiscal year 2009 budget, OPM is requiring that internal budget requests, such as those for training and development and other succession management activities, be linked explicitly to OPM’s agencywide strategic objectives. It is also not evident how OPM is able to identify the appropriate level of investment in training and development and to optimize funding so that it addresses the most important needs first with its individual, position- based succession planning. The direct supervisor of the incumbent executive, manager, or supervisor completes the individual action plans for the training and development of the successor candidate pool. Although the ERB provides oversight for this process, an OPM official explained that division-level management is responsible for making decisions concerning if and how to invest resources across most of the training and development needs identified in the position profile sheets. OPM is making progress in addressing issues indicated by the employee responses to both the 2004 and 2006 FHCS, with initiatives underway to attempt to build a positive and productive work climate in the agency. During the past year, OPM has taken positive actions to address specific concerns raised by employees and managers in the surveys, such as placing more emphasis on information sharing with employees at all levels on the strategic goals and objectives of the agency. This should help employees and managers enhance individual and organizational performance. It is also important to acknowledge that OPM’s 2006 FHCS results, without the DOD investigative service transfers, would have been, in many cases, significantly more positive than in 2004. The responses from the investigative services division, however, are an area of concern that OPM will need to continue to focus attention on. OPM also has strategic workforce and succession management plans in place that adhere to selected leading practices, and the agency has undertaken several initiatives to address human capital problems identified and to build on recognized strengths. As previously noted, OPM has implemented an innovative knowledge transfer pilot and is launching an agencywide individual development plan program, a professional development program, and supervisory training plans that include a curriculum intended to improve interpersonal skills, performance management, and other key competencies needed for a successful management environment. With its new approach to strategic budgeting for fiscal year 2009, OPM is also making strides in linking budget and program implementation information to its strategic goals, to aid its management in making decisions on workforce and succession management investments. OPM’s CHCMS division also expects to monitor training implementation and expenditures more closely as it expands its use of the EHRI system in the coming year. Even though OPM has acknowledged the importance of an agencywide perspective on workforce and succession planning and implementation with the establishment of the ERB and by pointing to an increased role for its CHCO, the agency has not documented well the coordination of some of these division-level activities. In a relatively short time there will be a Presidential transition, and well-documented processes can help to ensure a seamless transition that builds on the current momentum. Without a well-documented process in place for OPM’s top leadership to review and monitor progress made at the division level, there is also a risk that the agencywide approach to strategic human capital management could be diminished. For example, OPM lacks information on direct and indirect costs of its training and development programs. Because these actions are essential to OPM’s gap closure strategy for its mission critical workforce and succession management efforts, it is vital to the success of these efforts that the agency invests in training and development wisely. Without an agencywide view of how training investments relate to the agency’s overall mission and strategic objectives, OPM may have difficulty understanding reasons for shortfalls in meeting its talent management goals and cannot effectively make a business case for prioritizing one set of training activities over another, which is increasingly important given tightening budget constraints. To help OPM continue down its path of improvement with regard to internal capacity for strategic human capital management, we recommend that the Director of OPM institute a documented process for OPM’s top leadership to monitor workforce and succession efforts carried out at the division level, to help ensure an agencywide perspective on workforce and succession funding, implementation, and evaluation. For example, OPM could document and report on how training and development budget requests are reviewed by agency’s corporate leaders—such as the Chief Human Capital Officer or other decision makers in a position to identify the appropriate level of investment in training and development efforts across divisions—so that funding is prioritized according to the greatest needs relative to the agency’s overall mission and objectives. In written comments on a draft of this report, reprinted in appendix IV, the Director of OPM agreed with our recommendation and acknowledged that its work must sustain and build upon its current momentum in addressing strategic and operational human capital challenges. The Director also noted that the insights and recommendation provided in the report will be useful in shaping both ongoing and planned human capital management initiatives within the agency. We are sending copies of this report to the Director of OPM and appropriate congressional committees. We will also provide copies to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of our review were to determine the extent to which the Office of Personnel Management (OPM) has addressed key internal human capital management issues identified by examining employee responses to the 2004 and 2006 Federal Human Capital Surveys (FHCS) and determine the extent to which OPM has strategies in place to ensure it has the mission critical talent it needs to meet current and future strategic goals. To address these objectives, we analyzed OPM’s 2004 and 2006 FHCS results and summaries of its 2005 focus groups related to the key areas of leadership, performance culture and accountability, and talent management to determine whether OPM has made progress in addressing areas of concern from the 2004 survey. We identified these key areas as critical for human capital development in order for OPM to continue to transform itself to being a more effective leader of governmentwide human capital reform. The areas differ slightly from the four Human Capital Assessment and Accountability Framework (HCAAF) indices and represent a somewhat different grouping of survey items than the indices. We also analyzed OPM’s 2006 survey results to identify any new challenges to OPM’s strategic human capital management. In analyzing the data, we performed significance tests with corrections for multiple, simultaneous comparisons. Not all comparisons of 2004 and 2006 results were made because some questions were dropped from the 2004 survey and not included in the 2006 survey. We combined responses (for example, strongly agree and agree) to calculate the overall positive response of OPM employees, and we combined responses (for example, strongly disagree and disagree) to calculate the overall negative response of OPM employees. After an examination of documents detailing the survey methodology, we found the survey data to be sufficiently reliable for the purposes of this report. To address our second objective, we obtained key strategic and human capital planning documents and analyzed the extent to which OPM adheres to selected strategic workforce planning practices and principles relevant to OPM’s capacity to fulfill its strategic goals. We focused primarily on examining Senior Executive Service (SES) positions and positions from the two OPM divisions with the most responsibility for working with federal departments and agencies to assist them effectively with their human capital efforts: the Strategic Human Resources Policy (SHRP) and the Human Capital Leadership and Merit System Accountability (HCLMSA) divisions. We obtained and analyzed strategic, human capital, workforce, succession, and training and development plans along with executive performance contracts. We reviewed individual succession planning position profile sheets for all supervisors, managers, and executives in SHRP and HCLMSA, along with all career SES incumbents throughout the agency except those from the Office of the Inspector General. We also had discussions with and obtained other pertinent documentation from OPM officials at their headquarters in Washington, D.C. We conducted interviews with key officials at OPM to discuss workforce planning and succession planning, and we met with the associate directors of SHRP and HCLMSA. In addition, we reviewed OPM’s own guidance to executive branch agencies such as the HCAAF, along with prior GAO work on leading practices in succession and workforce planning. The scope of our work did not include independent evaluation or verification of the effectiveness of the workforce and succession management planning used at OPM, including any performance results that OPM attributed to specific practices or aspects of its action plans. We conducted our review in Washington, D.C., from December 2006 through August 2007 in accordance with generally accepted government auditing standards. Q. 9: Overall, how good a job do you feel is being done by your immediate supervisor/team leader? Q. 36: I have a high level of respect for my organization’s senior leaders. Q. 37: In my organization, leaders generate high levels of motivation and commitment in the workforce. Q. 38: My organization’s leaders maintain high standards of honesty and integrity. Q. 39: Managers communicate the goals and priorities of the organization. Q. 51: Managers promote communication among different work units (for example, about projects, goals, needed resources). Q. 55: How satisfied are you with the information you receive from management on what’s going on in your organization? Q. 57: How satisfied are you with the policies and practices of your senior leaders? Q. 4: I feel encouraged to come with new and better ways of doing things. Q. 22: Promotions in my work unit are based on merit. Q. 23: In my work unit, steps are taken to deal with a poor performer who cannot or will not improve. Q. 24: Employees have a feeling of personal empowerment with respect to work processes. Q. 26: Creativity and innovation are rewarded. Q. 28: Awards in my work unit depend on how well employees perform their jobs. Q. 29: In my work unit, differences in performance are recognized in a meaningful way. Q. 30: My performance appraisal is a fair reflection of my performance. Q. 31: Discussions with my supervisor/team leader about my performance are worthwhile. Q. 32: I am held accountable for achieving results. Q. 40: Managers review and evaluate the organization’s progress toward meeting its goals and objectives. Q. 56: How satisfied are you with the recognition you receive for doing a good job? Q. 2: I am given a real opportunity to improve my skills in my organization. Q. 11: The workforce has the job-relevant knowledge and skills necessary to accomplish organizational goals. Q. 14: My work unit is able to recruit people with the right skills. Q. 15: The skill level in my work unit has improved in the past year. Q. 16: I have sufficient resources (for example, people, materials, budget) to get my job done. Q. 47: Supervisors/team leaders provide employees with constructive suggestions to improve their job performance. Q. 48: Supervisors/team leaders in my work unit support employee development. Q. 59: How satisfied are you with the training you receive for your present job? In addition to the contact named above, key contributors to this report were William Doherty, Assistant Director; Ami Ballenger; Laura Miller Craig; Judith Kordahl; and Katherine Hudson Walker. In addition, Barbara Hills; Donna Miller; Beverly Ross; and John Smale provided key assistance. | Given the importance of the Office of Personnel Management's (OPM) role in managing the nation's federal workforce, GAO assessed OPM's internal capacity for human capital management. This report--the third in the series--extends prior work and (1) looks at the extent to which OPM has addressed key internal human capital management issues identified by examining employee responses to the 2004 and 2006 Federal Human Capital Survey (FHCS) and (2) has strategies in place to ensure it has the mission critical talent it needs to meet current and future strategic goals. To address our objectives, GAO analyzed 2004 and 2006 FHCS results, summaries of OPM employee focus groups, and analyzed OPM strategic and human capital planning documents. OPM has taken positive actions to address specific concerns raised by employees and managers in the 2004 and 2006 FHCS responses. OPM conducted employee focus groups to understand factors contributing to the low 2004 survey scores and took actions, such as trying to improve communication throughout the agency. The 2006 survey results showed improvement in the area of leadership, with mixed results in the performance culture and accountability area, and continued concern in the talent management area. Without the responses from the investigative service employees who transferred from the Department of Defense in early 2005, OPM's 2006 FHCS results would have been, in many cases, significantly more positive than in 2004. The perceptions of the investigative service employees, however, will need continued attention. OPM has strategies in place, such as workforce and succession management plans, that are aligned with selected leading practices relevant to the agency's capacity to fulfill its strategic goals. For example, OPM's top leadership is involved in these efforts, and the agency has assessed gaps in numbers and competencies and created gap closure plans for its mission critical and leadership workforce. OPM lacks, however, a well-documented agencywide evaluation process of some of its workforce planning efforts. In particular, OPM's implementation of division-level training plans could make it difficult for the agency to identify and address reasons for shortfalls in meeting its talent management goals. In a relatively short time, there will also be a Presidential transition, and well-documented processes can help to ensure a seamless transition that builds on the current momentum. |
After more than 40 years under U.S. administration as part of the United Nations Trust Territory of the Pacific Islands, the FSM and the RMI became sovereign nations in 1978 and 1979, respectively. For the last 20 years, the United States’ relationship with the two countries has been defined by the original Compact of Free Association and the subsequent amended Compacts of Free Association. In 1986, the United States, the FSM, and the RMI entered into the original Compact of Free Association. Representing a new phase of the unique relationship between the United States and these island areas, the compact provided a framework for the United States to work toward achieving its three main goals: (1) to secure self-government for the FSM and the RMI, (2) to ensure certain national security rights for all of the parties, and (3) to assist the FSM and the RMI in their efforts to advance economic development and self-sufficiency. The first goal was met; the FSM and the RMI are independent nations. The second goal has also been achieved with the compact’s establishment of several key defense rights for all three countries. The defense relationship continues with, among other things, U.S. access to military facilities on Kwajalein Atoll in the RMI through 2016. The compact’s third goal was to be accomplished primarily through U.S. direct financial assistance to the FSM and the RMI. For the 15-year period covering 1987 to 2001, funding was provided at levels that decreased every 5 years. For 2002 and 2003, during negotiations to renew expiring compact provisions, funding levels increased (see fig. 1) to equal an average of the funding provided during the previous 15 years plus inflation. For 1987 through 2003, compact financial assistance to the FSM and the RMI was estimated, on the basis of Interior data, to be about $2.1 billion. Economic development and self-sufficiency were not achieved under the original compact. Both nations remained dependent on U.S. funds; total U.S. assistance accounted for more than 50 percent of government revenues throughout the compact period. In addition, FSM and RMI GDP estimates reveal that per capita GDP at the close of the compact had not exceeded, in real terms, early 1990s levels in either country (see fig. 2). Although U.S. direct assistance maintained standards of living that were higher than could be achieved without support, we found previously that compact funds spent on economic development were largely ineffective in promoting economic growth. For example, compact funds were used to support general government operations that, among other things, maintained high levels of public sector employment and wages, creating disincentives to private sector growth. Compact funds were also used to support business ventures, most of which have failed. In our examination of a wide range of projects funded under the compact, we found that many projects experienced problems due to poor planning and management, inadequate construction and maintenance, or misuse of funds. In 2000, we recommended, among other things, that the Secretary of State direct the Special Negotiator for the Compact of Free Association to negotiate amended compact provisions that include assistance provided through grants targeted to priority areas, expanded reporting and consultation requirements, and the ability to withhold funds for noncompliance with compact terms and conditions. The compact also gave citizens of both nations the rights to live and work in the United States as “nonimmigrants” and to stay for long periods of time. Further, the compact exempted FSM and RMI citizens from meeting U.S. passport, visa, and labor certification requirements when entering the United States. In 2001, we reported that during the compact, a significant number of FSM and RMI citizens had migrated to the United States and U.S. island areas. The United States negotiated separate amended compacts with the RMI and the FSM that went into effect on May 1, 2004, and June 25, 2004, respectively. The amended compacts continue the defense relationship, including a new agreement providing U.S. military access to Kwajalein Atoll in the RMI through 2086; strengthen immigration provisions; and provide direct financial assistance, in the form of grants, to the FSM and the RMI for fiscal years 2004 to 2023 (see table 1). To promote FSM and RMI budgetary self-reliance and economic advancement, the amended compacts and their subsidiary agreements, along with the countries’ development plans, target grant assistance to six sectors—education, health, public infrastructure, the environment, public sector capacity building, and private sector development—prioritizing two sectors, education and health. In addition to providing grant assistance, the amended compacts provide for the establishment of trust funds for both countries that can provide income after annual compact grants cease. The amended compacts, their subsidiary agreements, and the U.S. implementing legislation also establish numerous reporting and accountability requirements—including the legislation’s direction to the JEMCO and JEMFAC to specifically address economic policy reforms to encourage investment and improve tax income. Including estimated inflation adjustments, total combined compact grant assistance to the two countries is projected at an estimated $3.6 billion over the 20-year assistance period. However, to provide increasing U.S. contributions to the FSM’s and the RMI’s trust funds, grant funding will decrease annually. Assuming current population growth estimates from the U.S. Census Bureau, this decrease in grant funding will result in falling per capita grant assistance over the funding period and relative to the original compact (see fig. 3). While the level of annual grant assistance to both countries decreases each year, contributions to trust funds—meant to provide an ongoing source of revenue after fiscal year 2023—increase annually by a comparable amount. In comparing projected trust fund revenue with the fiscal year 2023 grant level, we reported earlier that, under certain conditions, the trust fund revenue available in 2024 may be less than even the lower level of grant funding in 2024. For example, at an assumed annual 6 percent rate of return, earnings from the FSM’s trust fund would be lower than expiring grant assistance in 2024, while earnings from the RMI’s trust fund would encounter the same problem by 2040. If the trust funds consistently earn a higher rate of return, or if additional contributions to the funds are provided, the probability rises that the trust funds could provide a sustainable income source at the level of fiscal year 2024 grants. However, if the trust funds experience market volatility with years that have negative returns, the probability that these funds would yield income sufficient to replace expiring grant assistance declines. Although the FSM and the RMI are stable democracies, both countries face political and social challenges with regard to improving grant implementation and health and education conditions. U.S. and country officials told us that political conditions, including a weak federation in the FSM; disputes over public institutions’ and government use of land on Kwajalein Atoll in the RMI; and both governments’ lack of communication with their constituencies have hindered compact implementation and service delivery. At the same time, despite relatively high health and education expenditures, both countries face development challenges in these sectors. For example, although the Millennium Challenge Corporation (MCC)—which evaluates indicators with a relationship to growth and poverty reduction—ranks the FSM and the RMI in the top 20 percent for health expenditures relative to other lower-middle-income countries, it ranks both countries in the bottom third for a key health indicator, immunizations. The FSM and the RMI are established democracies with free and peaceful elections. According to State and Interior, each democracy is stable despite the challenges of having hierarchical traditional structures; islands with scattered populations; and a citizenry of distinct cultures, languages, and histories. Each country also has a vocal civil society evidenced by religious organizations and nongovernmental organizations (NGO) that have been active on some political issues. Internationally, both countries also participate in various regional organizations, many of which address trade, energy, and environmental challenges faced by island nations. For example, the FSM and the RMI are members of the Forum Fisheries Agency—which promotes sustainable management of fisheries in the Pacific—and the South Pacific Applied Geoscience Commission, which promotes sustainable development of offshore resources for member countries. Despite the two countries’ stable democratic systems, interviews with U.S., FSM, and RMI officials and civil society representatives indicated that key aspects of the FSM’s and the RMI’s political environments hinder effective compact grant implementation. Lack of government consensus. State and Interior officials reported that the FSM’s weak federal structure inhibits compact grant implementation. Because each state has its own constitution and authority over budgetary policies, the central government that is represented on JEMCO does not control the majority of compact funds and have been unable to secure agreement from the state governments regarding compact needs. As a result, FSM access to the compact infrastructure grant, for example, has been delayed for more than 2 years owing to national and state disagreements over infrastructure priorities. Similarly, the RMI government and landowners on Kwajalein Atoll have been disputing government use of leased land and management of public entities on the atoll. Such tensions have negatively affected the construction of schools funded by compact grants and the management of the Kwajalein utility company and the Kwajalein development authority, two entities that also receive compact funds. Lack of government communication. Interviews with U.S., FSM and RMI departmental officials, private sector representatives, NGOs, and external economic experts revealed a lack of communication and dissemination of information by each government on wide-ranging issues, including JEMCO and JEMFAC decisions, departmental budgets, economic reforms, legislative decisions, fiscal positions of public enterprises, and economic statistics. Additionally, private sector representatives in several FSM states reported that the public radio station serves as the government’s primary means of disseminating information but is often nonoperational or censored—a complaint confirmed by the U.S. State Department’s 2004 Report on Human Rights Practices in the FSM. In the RMI, a State official and an official from the RMI Council of NGO’s reported that the government had been criticized—most strongly by environmental NGO’s and a leading women’s NGO (Women United Together Marshall Islands)—for not holding public hearings or disseminating sufficient information regarding a proposed dry dock. According to the World Bank, Transparency International, and other development experts, lack of information about government activities creates uncertainty for public, private, and community leaders, which can inhibit grant performance and improvement of social and economic conditions. Although FSM and RMI health and education expenditures are relatively high, certain conditions in both countries’ health and education sectors are poor. According to the World Bank, among 171 countries for which it reports aid per capita, the RMI and the FSM ranked 5th and 6th highest, respectively, with per capita aid greater than $900 in 2003. Much of this aid is directed toward health and education. MCC provides economic assistance to developing countries, with eligibility determined partially by evaluating a country’s performance—relative to other countries within its income group—on select indicators associated with economic growth and poverty reduction. MCC ranks the FSM in the top 35 percent (in the 81st and 67th percentile, respectively) for expenditures on health and primary education, and it ranks the RMI in the top 1 percent for both indicators, relative to other lower-middle income countries that qualify for MCC assistance. However, for another health-related indicator— immunizations—MCC ranks both countries in the bottom third: the FSM in the 33rd percentile and the RMI in the 13th percentile. According to the World Bank’s World Development Indicators (WDI), the FSM also performs relatively poorly in provision of safe water or sanitation—a service necessary for improved health outcomes. According to WDI, only 28 percent of FSM citizens have access to improved sanitation, compared with an average of 57 percent in all lower-middle income countries. In the RMI, the 1999 census suggests that 85 percent of the population has access to safe water, although the RMI 2003 statistical yearbook reports that recent tests in urban and rural areas indicate that a significant number of potable water sources, such as groundwater wells and water catchments— 30 percent or more in some cases—are contaminated and deemed unsafe for human consumption. (For further information on socioeconomic conditions in the FSM and the RMI, particularly in relation to regional averages, refer to app. II.) Country studies and health and education officials in the FSM and the RMI also highlight other challenges—for example, the increasing prevalence of lifestyle diseases such as diabetes or hypertension; youth health issues; and poor teaching skills. According to the FSM Department of Health, 80 percent of 35 to 64 year-olds are overweight, and the number of cases involving diabetes, hypertension, heart disease, and cancer increased in the late nineties. Likewise, the RMI Ministry of Health reports that diabetes figured as the leading cause of adult morbidity in 2000 and 2001. Although the RMI has made progress in reducing overseas referrals since 2001, the rising prevalence of lifestyle diseases poses challenges for delivery of health services in both nations. The care and treatment of such diseases often involves expensive referrals abroad, lowered funding for public health programs that serve impoverished populations, and burdens on household and national budgets. Future health outlays will also be affected by health challenges facing FSM and RMI youths. FSM and RMI health officials indicated concern about growing youth problems such as suicides, sexually transmitted diseases, and teen pregnancy. With regard to teacher qualifications, the FSM Department of Education reports that 90 percent of teachers need to upgrade skills to meet new certification standards (a bachelor’s degree with courses in child development). In the RMI, a 2004 Ministry of Education assessment reported that more than 50 percent of teachers had failed basic English literacy tests. In the past 2 years, the FSM and the RMI economies have performed modestly and have been characterized by continued dependence on external assistance, suggesting limited prospects for achieving development goals of budgetary self-reliance and long-term economic advancement. Private sector employment has largely stagnated in both countries, whereas public sector expenditures continue to account for almost two-thirds of GDP. Despite the amended compacts’ structure of declining grant assistance, the FSM and the RMI public sectors have grown while tax revenues remain relatively small. Unless each nation can secure other donor assistance, maintenance of living standards over the long term will likely require private sector expansion or increased remittances. The FSM and the RMI private sectors face significant constraints to growth, however, and FSM and RMI emigrants’ current lack of marketable skills is a hurdle to increased remittance revenue. Although the amended compacts’ fiscal procedures agreements require JEMCO and JEMFAC to monitor FSM and RMI progress toward budgetary self-reliance and long- term economic advancement, neither organization has discussed these issues at its annual meeting or defined what actions they will undertake to meet this requirement. As in the original compact period, FSM and RMI economic conditions in 2004 and 2005 were characterized by dependence on foreign assistance. In the FSM, 2004 and 2005 GDP fell owing to compact delays and a lower level of assistance relative to 2003. For the RMI, the IMF estimates that GDP expanded moderately owing to increased public sector expenditure (see fig. 4). While the RMI also experienced compact delays in 2004, RMI public expenditure increased in both 2004 and 2005, reflecting expected compact funding at levels roughly equivalent to fiscal years 2002 and 2003, when compact funds were temporarily increased. Both countries’ 2005 public sector expenditure—about two-thirds of which is funded by external grants—remained at about 60 percent of GDP. In both the FSM and the RMI, however, private sector activity has remained relatively stagnant and exists largely to provide services to the public sector. Since 2000, the estimated private sector share of GDP has fallen in both countries and only Pohnpei state in the FSM has had modest growth in private sector employment, principally in wholesale and retail operations. Institutions such as the IMF and the ADB characterize the private sector in both the FSM and the RMI as isolated from international opportunities, given each economy’s high dependence on imports and negligible foreign investment. Given the recent performance and structure of FSM and RMI government budgets, both nations are likely to face significant budgetary pressure as compact grants decline through 2023. Apart from 2002 and 2003, when compact assistance was temporarily increased, FSM national and state budgets have varied widely from year to year; however, each has had recent budget deficits. RMI government finance statistics reported by the IMF suggest that the RMI fiscal balance deteriorated after 2003 as well, with an estimated deficit equivalent to 2 percent of GDP in 2005. Economic experts emphasize that, structurally, both country’s budgets are characterized by a small local revenue base and recent increases in government payroll. As a result, unless other donors provide additional assistance, expenditure reductions will be required as compact grants decline. FSM budget structure. Although tax revenue in the FSM increased slightly in 2005, the FSM tax base is small and the growing wage bill is high relative to regional standards. In 2005, FSM taxes provided an estimated $29 million in revenue, or 23 percent of total revenue (compared with an average of 17 percent from 2000 to 2004). In addition, the FSM government receives fishing access fees from foreign vessels that fish in its exclusive economic zone. However, the largest income source is external grants, which, at $76 million, accounted for 60 percent of revenues in 2005 (see fig. 5). In terms of expenditure, the largest FSM expenditure component is public sector wages and salaries at an estimated $60 million. This component grew from 36 percent of total expenditures in 2000 to 2004 to 42 percent of total expenditures in 2005. RMI budget structure. As a percentage of total revenue, the RMI’s tax base is slightly larger than the FSM’s. As a percentage of total expenditure, the RMI’s public sector wage bill is also relatively smaller, although its wage bill increases have exceeded the FSM’s. Taxes in the RMI provide about $22 million in revenue to the government, or roughly 26 percent of total revenues (see fig. 6). The RMI also receives fishing access fees. At 64 percent of total revenues, external grants are the largest income component, providing $54 million in 2005. The structure of RMI revenues remained roughly the same over the past 5 years. However, RMI payroll expenditures increased. In 2005, the RMI’s wage bill comprised 34 percent of total expenditures, compared with the 2000 to 2004 wage bill of 31 percent. In actual value, the RMI’s wage bill increased from around $17 million in 2000 to around $30 million in 2005. In addition to receiving compact grant assistance, the FSM and the RMI receive substantial U.S. program assistance from agencies such as the U.S. Departments of Agriculture, Education, and Health and Human Services. The RMI also receives large grants from Japan and Taiwan and the FSM receives large grants from Japan (see table 2) and reports having received grants from China. As compact grants decline through 2023, government fiscal balances and GDP could be supported, at least partially, by increased noncompact assistance. However, such increases in assistance are not guaranteed, may vary from year to year, and may not be flexible enough to meet FSM and RMI budget needs. Tax reform may provide opportunities for increasing annual government revenue in the FSM and the RMI. For example, business tax schemes in both nations are considered to be inefficient by the IMF, the ADB, and other economic experts owing to a poor incentive structure and weak tax collection. Various expert and country studies have concluded that substantial tax reform could bring revenue growth by broadening the tax base, altering the structure to be more equitable and business friendly, and improving administration. However, although the FSM and the RMI governments have made some improvement in tax administration, tax revenues have largely stagnated. Revenue potential from further tax reform will also vary by government (national and state) and will require factors such as a sound design; adequate resources and capacity for tax enforcement; government commitment for reform; and, ultimately, private sector growth. FSM and RMI development plans identify fishing and tourism as key potential growth industries. However, in both nations, fishing enterprises have shown poor performance, and the number of tourists has been small relative to other Pacific islands. In the FSM, the fisheries and tourism sectors together provide about 6 percent of employment; commercial fishing has been plagued by poor government investments in vessels and infrastructure that have resulted in high debt levels, according to ADB experts; and visitor arrivals have remained flat over the past 10 years despite growth in Pacific island tourism. In the RMI, the fisheries and tourism sectors together provide less than 5 percent of employment; commercial fishing within the RMI’s exclusive economic zone has been declining, and although visitor arrivals have increased modestly, they remain small in number relative to other Pacific island nations. Economic experts suggest that the FSM and the RMI fishing and tourism industries could grow within specialized niche markets such as high-end tourism or dock services. Such opportunities remain limited in scale, however, and the IMF, the ADB and other economic experts suggest that growth in these industries in both countries may be limited by current structural barriers such as the following: geographic isolation and small fragmented markets; high airfares and poor flight connections; lack of adequate hotel and airport infrastructure; low freight capacities and poor interisland shipping; inadequate transshipment facilities in some areas; a growing threat of overfishing; limited pool of skilled labor; and high production costs in terms of labor, fuel, and other supplies. In addition to facing structural barriers to growth, private industry in general faces a costly business environment in both the FSM and the RMI according to economic experts and U.S. and country officials. In interviews, private sector representatives also expressed concern with poor government provision of power, water, and infrastructure services and government failures to pay bills owed to the private sector for services rendered—a complaint confirmed by several government officials including those from the Chuuk State legislature, the RMI Ministry of Resources and Development, and the FSM Department of Economic Affairs (see app. III for further information). FSM and RMI emigrants could provide increasing monetary support to their home nations in the future, although evidence suggests that they are currently limited in their income-earning opportunities abroad. World Bank data show that remittances, or the personal funds that the foreign born voluntarily send to their home countries, have become an important source of financial flows to developing countries—in some cases exceeding official development assistance and foreign direct investment. For the FSM and the RMI, many citizens have taken advantage of U.S. migration rights established by the original compact and extended by the amended compacts. As of 2005, RMI data suggest that about 15,000 Marshallese have immigrated to the United States. FSM data suggests that almost twice as many Micronesians live overseas. However, the current level of remittance income provided by these emigrants is unknown. In the RMI, the 2002 household survey suggests that RMI citizens send more money out to RMI emigrants than they receive in remittances, owing to the emigrants’ lack of high-paying jobs and inability to afford repatriation of funds. Our previous work has shown that RMI and FSM emigrant populations have limited income-earning opportunities abroad, largely because of inadequate education and vocational skills. The 2003 U.S. census of FSM and RMI migrants in Hawaii, Guam, and the Commonwealth of the Northern Marianas Islands (CNMI) confirms this characterization, showing that almost half of the emigrants live below the poverty line (see table 3). Nonetheless, economic experts emphasize that with an upgrading of skills, the FSM’s and the RMI’s free access and strong historical links to the U.S. market create potential for the two nations to achieve an expansion in remittance income that could contribute to long- term economic advancement. To date, JEMCO and JEMFAC have not discussed FSM and RMI progress toward budgetary self-reliance and long-term economic advancement or the role for compact grants in attaining these development goals. FSM and the RMI development plans specify the objectives of increased private sector development, strengthened education and training, and improved public sector management as means of achieving the goals of budgetary self-reliance and long-term economic growth. The amended compacts’ fiscal procedures agreements requires the JEMCO and JEMFAC to monitor FSM and RMI progress toward their long-term development objectives, however the oversight committees have not defined what actions they will undertake to meet this requirement. At the fiscal year 2004 and 2005 annual JEMCO and JEMFAC meetings, as well as at a March 2006 JEMCO meeting, compact management committees focused on approving sector grants and discussing grant administration issues. For example, to approve the FSM health and education sector grants, JEMCO has required supplementary information on health insurance programs and that a certain amount of the FSM’s education grant is spent on textbooks. The JEMCO meetings have not included discussion of FSM progress toward its long-term development goals. At the 2005 JEMFAC meeting, the RMI government provided a brief overview of GDP and employment data, yet the presenting official reported that there was no meaningful JEMFAC discussion of RMI long-term growth issues resulting from the presentation. For example, while the RMI government presented data on migration to the United States, JEMFAC did not discuss the linkage between compact education spending and improving RMI emigrant’s skills to encourage increased remittance income over the long-term. Through agency comments, HHS emphasized that an annualized schedule for committee meetings does not provide enough frequency for addressing both grant administration issues and long-term growth issues, particularly given the relative lack of communication between JEMCO and JEMFAC members in between meetings. HHS suggested that communication be improved through periodic teleconference and videoconference updates. FSM and RMI officials report that they have implemented a few legislation actions to improve the private sector environment, such as bankruptcy and mortgage laws, yet progress on key policy reforms required to stimulate investment has been slow. According to FSM and RMI private sector representatives as well as various U.S., IMF, ADB, and country reports, an enabling business environment in either country requires substantial reforms in taxes, land ownership, and foreign investment regulations as well as a reduction in public sector competition with the private sector. Despite several years of policy dialogue on taxes, the FSM has agreed on elements of tax reform but has no plan for implementation and the RMI has not agreed on structural change to its tax system. In attempts to modernize complex, traditional land tenure systems, land registration offices have been established in both countries; however, in both countries, inadequate access to land and uncertainties over land ownership and land values continue to create costly disputes, disincentives for investment, and problems regarding the use of land as an asset. Further, despite amendments to foreign investment regulations, the regulations in both countries continue to be confusing and relatively burdensome, according to economic experts and private sector representatives. Finally, several years of public sector reform efforts have also failed to reduce government involvement in private sector activities. Thus far, the JEMCO and JEMFAC committees have not evaluated the lack of FSM and RMI progress in implementing economic reforms to stimulate investment and improve tax income, identified problems encountered or recommended ways to improve assistance for these objectives. Both the FSM and the RMI identified the need for economic reform within their national development plans, and both countries have implemented or are pursuing some legislative actions. For example, FSM officials report that newly enacted legislation, although varying by state and national government, include laws for bankruptcy, mortgages, long-term leases, and secured transactions to allow movable assets to serve as collateral. Some governments have also tried to improve foreign investment processes or created small business development centers. To create continued and strengthened demand for reform, the ADB has also recently assisted both countries in holding several “Dialogue for Action” retreats that enable public and private sector representatives to develop a common vision for sustainable development through economic reform. Our interviews with ADB and country participants suggested that these retreats can be helpful for improving the public sector/private sector dialogue on economic challenges facing each society. However, ADB experts also emphasized that, in developing country commitment to reform, the FSM and the RMI will need to overcome the “aid curse”—or the distorted incentives for effective public sector management through, e.g., public sector downsizing, which result from dependency on large external aid flows. Despite several years of commitment to, and recommendations for, policy reforms to stimulate investment in the FSM and the RMI, key reforms have not yet been implemented. According to FSM and RMI private sector representatives and a number of economic and country experts, policy reforms are needed in the areas of tax, land, foreign investment, and the public sector to improve business incentives and create an enabling environment for domestic and foreign investment. Tax structures in the FSM and the RMI remain complex and unequal and engender business disincentives. The FSM tax system has been criticized by economic experts, the FSM government, and the FSM private sector for (1) multiple taxation of the same products (2) weak administrative collection, audit, and enforcement capacity (3) taxation on a gross rather than net basis, and (4) duplicative national and state tax administrations. Since 1994, the IMF and other experts have recommended, among other tax reforms, implementing a value-added tax (VAT), a simplified net profit tax, and a single modernized independent tax authority. In 2005, the FSM Task Force on Tax Reform developed a tax reform proposal, endorsed by the FSM President, that included these principles. Nonetheless, despite the fact that such reforms are estimated to require 2 to 3 years for implementation, the FSM government has neither begun to implement the proposal nor specified an implementation plan. Although the FSM government has made some efforts to improve tax administration, actions by existing tax authorities in the national government and each state government continue to exhibit duplication and inefficiency. The RMI government and economic experts have recognized for several years that the RMI tax system is complex and regressive, taxing on a gross rather than net basis and having weak collection and administration capacity. The RMI stated in its comments to this report that their private sector representatives’ most common complaint on the RMI tax system is the need for better and tighter enforcement. The RMI Office of Tax and Revenue reported that it has focused on improving tax administration and has raised some penalties and tax levels. However, legislation for income tax reform has failed and needed changes in government import tax exemptions have not yet been addressed. Inadequate access to land and uncertainties over land ownership and land values continue to create costly land disputes, disincentives for investment, and problems regarding the use of land as an asset in both the FSM and the RMI. Land tenure systems in each nation are complex and based on traditional and customary rights, often for multiple individuals, such that most parcels do not have a registered, legal title. Our interviews with FSM and RMI officials and private sector representatives suggested that costly boundary disputes are common. Land values are also uncertain owing to the lack of a developed land market or price data on lease transactions, such that banks are unable to effectively conduct mortgage secured lending. Given that a major proportion of FSM and RMI wealth lies in property, the inability to use it to secure financing for development is problematic. Using land for foreign investment in the FSM and the RMI is even more difficult. Economic experts report that foreigners are prohibited from owning land in both nations and are also unable to secure a valid lease when land values or ownership is uncertain. Land reform issues have been discussed in the FSM and the RMI for several years, and land registration offices have been established. However, such offices have lacked a systematic method for registering parcels, instead waiting for landowners to voluntarily initiate the process. Both the FSM and the RMI land registration offices reported that landowners have shown little interest in land registration, partly owing to the cultural issues associated with traditional land ownership structures. In the RMI, for example, only 5 parcels have been, or are currently being, registered by the land registration office. The functionality of land registration offices in both the FSM and the RMI has also been limited by a lack of registered surveyors and trained staff. Although the FSM and the RMI have amended various aspects of their foreign investment laws to streamline the process, the overall climate for foreign investment remains complex and nontransparent, according to economic experts and private sector representatives. In the FSM, experts report that foreign investment regulations vary between states, creating confusion and additional requirements for investors who want to invest in several states. In both the FSM and the RMI, foreign investment regulations remain relatively burdensome, with reported administrative delays and difficulties in obtaining permits for foreign workers. According to an Interior official, a shipping company with service from the U.S. West Coast to Guam has for years been seeking permission to provide shipping service to the FSM and the RMI but has consistently been refused entry by those nations. The climate for foreign investment is also reportedly affected by private and public interests’ protecting local businesses from foreign competition. For example, experts report that foreign investment is restricted from some industries in both the FSM and the RMI, and some FSM states require a certain percentage of local ownership in foreign investment. Pohnpei state, for instance, requires 30 percent local ownership for foreign investment and prohibits foreign activity in retail, according to its Foreign Investment Board. Interviews with country officials, private sector representatives, and an ADB expert also suggest that local businesses sometimes lobby the foreign investment boards against approval of certain applications. Extensive FSM and RMI government involvement in commercial activities continues to hinder private sector development, owing to high public sector wages and government enterprises that directly compete with private industry. The FSM’s and the RMI’s public sector reform efforts since the 1990s have been based on restructuring government operations to (1) reduce the size and cost of the civil service, (2) reduce government involvement in market-oriented enterprises that could be more efficiently operated by the private sector, and (3) improve government provision of critical support services. One example of a reform success highlighted by economic experts is the RMI’s restructuring of its Social Security Administration to reduce operating costs and improve service provision. However, despite government endorsement of public sector reform principles, early efforts to reduce public sector employment have generally failed in both the FSM and the RMI, and the share of public sector employment has increased over the past few years. FSM and RMI public sector wages also remain about twice the level of private sector wages, contributing to the large government wage bill and effectively drawing the most skilled employees out of the private sector into public sector jobs. In addition, the FSM and the RMI governments continue to conduct a wide array of commercial enterprises that compete with private enterprises, although the share of employment accounted for by these enterprises, as well as estimated direct public enterprise subsidies, has declined in recent years (see table 4). Nonetheless, IMF and ADB officials expressed concern that the FSM and the RMI governments are not committed to reducing their participation in commercial activities, despite the fact that most of the enterprises have drained public finances through poor financial performance, requiring subsidization or entailing debt (see examples in table 4). In conjunction with the ADB, the FSM prepared a comprehensive program for public sector enterprise reform in 1999 that identified two enterprises per state and national government for privatization (such privatizations later became a condition for receiving ADB loan assistance) and entailed plans for the creation of a Public Sector Enterprise Unit. This unit has not yet been fully staffed, and the ADB loan requirement was reduced to one enterprise per state and national government, a condition that has not yet been met. The RMI has yet to prepare a comprehensive policy for public enterprise reform. Our interviews with economic experts and FSM and RMI officials suggested that although they plan to privatize some public enterprises, they intend to expand others. To date, JEMCO and JEMFAC have not addressed the lack of FSM and RMI progress in implementing reforms that their development plans specify are needed to stimulate investment and improve tax income. Different from the original compact, the legislation implementing the amended compacts specifically directs the JEMCO and JEMFAC to address FSM and RMI policy reforms by (1) evaluating progress in implementing these policy reforms, (2) identifying problems encountered, and (3) recommending ways to increase the effectiveness of U.S. assistance. In the 2004 and 2005 JEMCO and JEMFAC meetings, as well as in a 2006 JEMCO meeting, compact management committees focused on grant approval and administration and did not address the status of reforms or include discussions of how compact grant assistance could be leveraged to improve the policy environment for private sector growth and investment. Specifically, compact management committees did not discuss the lack of FSM and RMI progress in tax, land, foreign investment, or public sector reform; factors that contributed to this lack of progress; or the interdependence of policy reform implementation with effective compact grant implementation. Opportunities exist to create linkages between grant administration and economic reforms. For example, sector grants in public sector capacity building could be used to address capacity constraints that have been identified as an obstacle to reform implementation (e.g., the lack of certified land surveyors for land reform). Further, compact management committees could establish linkages between, for example, grants to tourism promotion agencies and progress in reforming foreign investment regulations to improve the private sector environment for investment or grants to private sector development offices and progress in reforming public enterprises that compete with private industry. The FSM and the RMI face notable challenges to achieving budgetary self- reliance and long-term economic advancement, given their current health and education hardships; dependence on grant assistance; and need to effect reforms that are often politically, culturally, and technically difficult to implement. Tax, land, foreign investment regulation and public-sector reforms, when implemented, will improve the business environment, in turn facilitating the private sector expansion that may help the countries advance their compact goals. However, even with the needed reforms, growth in the FSM’s and the RMI’s private sectors may be limited by structural constraints such as geographic isolation and high transport costs. As a result, the FSM and the RMI may need to expand economic activities beyond their borders—including, as some experts suggest, expanding remittance income by equipping emigrants with better skills and, therefore, stronger income-earning opportunities abroad. Because the amended compacts have been in place for only a few years, it is difficult to determine whether the assistance they provide will contribute to the fundamental changes in FSM and RMI economic structures and institutions necessary to achieve budgetary self-reliance and economic advancement. Expanding FSM and RMI private sector activity and remittance income will require effective compact grant implementation, just as successful compact grant implementation will require FSM and RMI commitment to policy reform. The scheduled coming reductions in U.S. grants to both countries create urgency for the implementation of policy reforms if they require fiscal resources and for capitalizing on opportunities to leverage compact assistance to improve social and economic conditions through reform. To maximize FSM and RMI potential for budgetary self-reliance and long- term economic advancement, we recommend that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of JEMCO and JEMFAC, to ensure—in coordination with other U.S. agencies participating in these committees—that they fulfill their requirements in the following three areas: evaluate FSM and RMI progress in implementing policy reforms needed to improve the business environment and encourage increased investment and tax income, identify problems encountered with policy reform implementation, and recommend ways to improve U.S. assistance for these objectives. We received comments from the Departments of the Interior and HHS, as well as from the FSM and the RMI. A more detailed presentation and response to the comments can be found in appendixes IV through VII. We also received technical comments from Interior, State, Treasury, HHS and the RMI. We incorporated technical comments into our report, as appropriate. The Department of Interior concurred with our recommendation and stated that it is pursuing additional information on the FSM and the RMI economies to support its implementation of the recommendation. The RMI advocated for JEMFAC support in policy reform implementation and emphasized that public sector reforms are particularly vital. HHS also agreed with our recommendation and requested that it be expanded to include JEMCO and JEMFAC requirements for establishing timelines for policy reform implementation. While establishing timelines is not a requirement under the amended compact or its subsidiary agreements, we encourage the JEMCO and JEMFAC to consider this idea as one method to improve U.S. assistance in support of an improved FSM and RMI environment for investment and tax income. Further, Interior, HHS, and the FSM emphasized that the JEMCO and JEMFAC have thus far focused their attention on accountability issues and problems that have arisen within the various sector grants. HHS suggested that, in order to ensure the JEMCO and JEMFAC can address all pertinent short-term and long- term issues, mechanisms to improve communication and information between annual meetings—such as periodic teleconferences and videoconferences—should be pursued. The FSM viewed the report as a potentially constructive contribution to ongoing efforts to pursue budgetary self-reliance and economic advancement, yet disagreed with our conclusion that FSM development prospects remain limited. In addition to providing copies of this report to your offices, we will send copies of this report to other appropriate committees. We will also provide copies to the Secretaries of the Interior, State, and Health and Human Services, as well as the President of the Federated States of Micronesia and the President of the Republic of the Marshall Islands. We will make copies available to other interested parties upon request. If you or your staff have any questions regarding 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 VIII. The amended compacts implementing legislation requires that we report on political, social, and economic conditions in the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) as well as the use and oversight of U.S. assistance to those nations. In compliance with the legislation’s requirement, this report examines each country’s (1) political and social environment for compact grant implementation; (2) economic conditions, including overall growth, fiscal balances, and private investment; and (3) status of economic policy reforms. To identify key aspects of the FSM and the RMI political and social environment for compact grant implementation, we reviewed the U.S., FSM, and RMI annual compact reports for 2004; U.S. Department of State reports on FSM and RMI political systems and human rights practices; political assessments by nongovernmental organizations such as Transparency International and the University of Hawaii; and information from the Pacific Islands Forum regarding FSM and RMI participation in regional agreements and organizations. We identified key areas of concern in delivery of health and education services by reviewing FSM and RMI development plans, and reports prepared in conjunction with the Asian Development Bank (ADB), the World Bank, or the United Nations Development Program. We obtained FSM and RMI socioeconomic statistics on noncommunicable diseases, access to safe water and sanitation, teacher certifications and literacy skills, and Pacific Island Literacy Level student test scores from the FSM Departments of Health and Education and the RMI Ministries of Health and Education. We obtained regional socioeconomic statistics on population trends, teenage fertility, child mortality rates, immunizations, human poverty, and GDP and aid per capita from the World Bank’s World Development Indicators, the U.S. Census International Database, and the 2005 United Nations Human Development Report. To assess FSM and RMI economic conditions, we reviewed the U.S., FSM, and RMI annual compact reports for 2004; FSM and RMI development plans; recent International Monetary Fund (IMF) Article IV documents for each nation; ADB Country Strategies and Program Updates; 2005 FSM and RMI Pacific Island Economic Reports (PIER) prepared in conjunction with the ADB; and expert reviews of FSM and RMI fiscal structures and tax systems. We obtained data on FSM and RMI economic indicators such as gross domestic product (GDP), employment, government finances, migration, and private sector development from the IMF; the FSM’s 2005 Statistical Tables; the RMI’s 2004 Annual Yearbook and 2005 Employment Statistics; the OECD’s international development statistics; the U.S. Department of Census; and the World Bank’s World Development Indicators. To describe the status of economic policy reforms in the FSM and the RMI, we reviewed the documents mentioned above; the FSM Tax Reform Task Force 2005 Report to the President; the RMI 2005 Budget Statement; ADB progress reports on the RMI Private Sector Development Project and the FSM Private Sector Development Loan; and RMI Final Reports from the 2005 Dialogue For Action Retreats sponsored by the ADB. We obtained data on FSM and RMI public sector enterprises from the FSM’s 2005 Statistical Tables; the RMI’s 2004 Annual Yearbook; and the most recent available public enterprise audit reports. In addition, we held extensive interviews with officials from the U.S. Department of the Interior (Washington, D.C.; Honolulu; the FSM; and the RMI) and the Department of State (Washington, D.C.; the FSM; and the RMI). We also interviewed officials from the U.S. Departments of Treasury and Health and Human Services (Washington, D.C., and Honolulu) and experts from the ADB (Manila, the Philippines), the IMF (Washington, D.C.), the World Bank (Washington, D.C.) and the Pacific Islands Development Program at the East-West Center (Honolulu). We traveled to all four states in the FSM and to the RMI (Majuro). We met with the governor’s and legislature’s offices in each of the FSM states and the President’s office in the RMI. We had detailed discussions with FSM (national and state governments) and RMI officials from foreign affairs, finance and budget, economic affairs, health, education, land management, tourism and fisheries, environmental protection, and audit agencies. In each location, we also met with numerous representatives from private sector businesses, banks, and community organizations. To ensure accuracy in our report, we asked experts at the ADB, the IMF, the World Bank, the Boston Institute of Development Economics, and the University of Hawaii’s East-West Center with knowledge of the FSM and the RMI economies, as well as former members of the FSM’s Economic Management and Policy Advisory Team, to provide a technical review of our findings and information on the reliability of data used to support those findings. In conjunction with our own assessment, we determined that trade data, remittance data, and data on the private sector profits contained weaknesses. Exact data for these elements were not presented in the report and related findings were corroborated with other reliable data. For other social and economic data included in the report, we determined they are sufficiently reliable for our purposes. Nonetheless, our interviews with U.S., country, and international officials revealed important constraints to the FSM’s and the RMI’s capacity to prepare regular, reliable, and complete data that would allow for a more thorough analysis of social and economic trends, particularly in the future. Trend data on a variety of social indicators, such as teacher qualifications and student drop-outs, could assist in evaluation of the effectiveness of compact education assistance. However, much of this data are just now being collected in a systematic way. Also, given that both nations have weak domestic capacity to produce statistics, they rely heavily on external consultants for this purpose. In the FSM, the contract for statistical assistance from external consultants has now expired. As such, both FSM and Interior officials have expressed concern for that nations’ capacity to produce future statistics. We conducted our review from August 2005 through March 2006 in accordance with generally accepted U.S. government auditing standards. We requested written comments on a draft of this report from the Departments of the Interior, State, Health and Human Services, and Treasury, as well as the governments of the FSM and the RMI. All comments are discussed in the report and are reprinted in appendixes IV through VII. Further, we considered all comments and made changes to the report, as appropriate. Economic studies of small island economies suggest common challenges for socioeconomic development. According to international development organizations, developing nations in the Pacific have exhibited relatively poor economic performance and face common constraints to growth such as geographic isolation and high transport costs. Such nations have also exhibited the need for improvements in delivery of health and education services, a challenge heightened when youths account for a large share of the population. Environmental challenges from climate change and increasing population density are also common threats to ensuring sustainable livelihoods in the Pacific. Table 5 provides estimated socioeconomic data on various Pacific island nations in order to illustrate some of these commonalities as well as areas where the FSM and the RMI characteristically differ. For example: The RMI has a relatively small population, but both the RMI and the FSM have a relatively large population density at 331 and 181 people per square kilometer, respectively. The RMI also has a very high teenage fertility rate. Except for Palau—also a nation with a Compact of Free Association with the United States—the FSM and the RMI have the highest levels of aid per capita. The FSM’s child mortality rates are significantly lower than the RMI’s, and its immunization rates are significantly higher. The RMI provides a significantly higher proportion of the population access to improved sanitation. Private sector representatives in the FSM and the RMI characterized the business environment in their nation as obstructive and costly. They attribute this characterization to elements of the political environment (e.g., poor information), lack of progress in economic reforms (both legal and financial), and poor government performance in providing services. World Bank national business environment surveys suggest that a high cost of doing business is a common problem for small island states. However, the survey results show that FSM and RMI business environments are particularly costly in several areas. For example, of 155 countries surveyed, the FSM and the RMI are among the worst 10 to 20 countries in terms of the cost of enforcing contracts and the degree of investor protection. In interviews with private sector representatives, problems were noted with FSM and RMI business environments (see fig. 7). The following are GAO’s comments on the Department of the Interior letter dated May 16, 2006. 1. Regarding our finding that compact management committees have not discussed FSM and RMI progress toward budgetary self-reliance and long-term economic advancement at their annual meetings, we recognize that the Deputy Assistant Secretary submitted a statement for the record at the opening of the 2005 JEMCO meeting that mentioned the lack of sustainability in the FSM’s economic dependence on government expenditures. However, the Deputy Assistant Secretary did not read his statement to the committee and the issue of FSM progress toward their long-term development goals was not discussed by the JEMCO. 2. We recognize that Interior has contracted with the U.S. Department of Agriculture’s Graduate School to obtain further economic information on the FSM and the RMI. While we agree with the importance of gaining this further information, we believe that sufficient information is available for the committees to begin meeting their requirement to evaluate FSM and RMI progress in implementing reforms, identify problems encountered, and recommend ways to improve U.S. assistance for these objectives. For example, multiple expert studies as well as FSM and RMI commitment to, and recommendations for policy reforms in the areas of tax, land, foreign investment, and the public sector have existed since the 1990s. The following is GAO’s comment on the Department of Health and Human Services letter dated May 23, 2006. HHS agreed with our recommendation and requested that it be expanded to include JEMCO and JEMFAC requirements for establishing policy reform implementation timelines. The amended compacts’ U.S. implementing legislation does not include establishing timelines for policy as a specific required action for the JEMCO and JEMFAC. Nonetheless, in fulfilling their requirement to identify problems encountered with policy reform implementation and recommend ways to improve U.S. assistance, the JEMCO and JEMFAC should consider this suggestion. As noted in our conclusions and by HHS, the urgency of pursuing policy reform suggests that establishing timelines for such reforms could be a useful method to improve U.S. assistance. We also appreciate HHS’s suggestion to improve communication and information between annual meetings through periodic teleconferences and videoconferences and have added language to the report to reflect this suggestion. We have also added language to the report recognizing HHS’s efforts to improve vaccine coverage. The following is GAO’s comment on the Federated States of Micronesia letter dated May 30, 2006. Regarding the FSM’s disagreement with our conclusion that its development prospects remain limited—the FSM confirms the accuracy of our description of its recent economic performance, its constraints to growth, and its need for economic policy reforms. Given these current realities, we maintain that prospects for long-term economic growth in the FSM remain limited. We do not assert, however, that economic development cannot be attained. If key policy reforms were implemented, the business environment would likely improve and facilitate private sector expansion that may help the FSM advance its compact goals. Further, we agree that implementation of policy reforms will not, in of itself, produce economic development. As such, the FSM will also likely need to identify and capitalize on niche market opportunities as well as to create conditions to maximize remittance income, particularly through improving the education and health of its citizens. Establishing connections with the overseas business community may be one way to pursue such opportunities and should be included in meaningful JEMCO discussions of FSM progress toward their economic goals. As we emphasized earlier, the scheduled coming reductions in U.S. grants creates urgency for implementation of policy reforms and for capitalizing on opportunities to leverage compact assistance. The coming reductions in U.S. grants, paired with current economic realities, also suggests the need for JEMCO discussions to be based on frank assessments of current limited prospects for economic growth in the FSM and what actions need to be pursued to improve those options. The following are GAO’s comments on the Republic of the Marshall Islands letter dated June 1, 2006. 1. Regarding our recommendation, we believe that economic reforms in each of the areas discussed (e.g., tax, land, foreign investment, and public sector) are needed to improve the RMI’s prospects for long-term economic growth and have clarified the report language. We also agree that the annual decrement in compact grant funding is a major challenge to achieving this objective, particularly if implementation of key policy reforms requires fiscal resources. 2. We recognize that the FSM and the RMI were required under the amended compacts to contribute an initial $30 million to their trust funds. Recent RMI GDP performance may have differed if this funding were used to provide current goods and services rather than for savings. Nonetheless, the RMI’s contribution to their trust fund does not alter the extent of RMI economic dependence on external assistance. Our description of RMI economic performance was also based on broad trends from 2000 to 2005, rather than exclusively on the 2 years of bump-up assistance in 2002 and 2003. 3. We will address amended compact implementation issues and trust- fund issues in two separate reports, forthcoming. We have also added language to this report indicating the RMI’s concern over delays in setting up its trust fund. 4. We have clarified our estimates and figures with regards to funding streams they include and exclude. Section 177 funds are not included in our analysis. 5. Section 211 of Title Two of the Amended Compact with the RMI states that compact grants shall be used for assistance in education, health care, the environment, public sector capacity building, and private sector development, or for other areas as mutually agreed, with priorities in the education and health sectors. 6. We have added language regarding RMI consultations with the private sector and their desire for improved tax enforcement. The effectiveness of U.S. and ADB technical assistance to the RMI is outside the scope of this report. We note, however, that the RMI allocated no compact funding to a public sector capacity building grant in fiscal year 2004 and less than 1 percent of compact sector grant funding to such a grant in fiscal year 2005. 7. We discuss remittances in our report as one option that the RMI may consider in pursuing the economic goals under the amended compact and that the JEMFAC may consider when discussing compact grant implementation. In the RMI’s METO 2000 Statement of Development Strategies and its 2001 Strategic Development Plan entitled “Vision 2018,” the RMI estimates that between 500 to 800 new job entrants will need to find employment each year from 1999 to 2009. To meet this objective, the ready access provided under the compact for Marshallese to live and work in the U.S. must be preserved. These documents also emphasize that the education system needs to equip Marshallese to succeed both in the RMI and abroad. Economic experts have emphasized that the RMI’s free access and strong historical links to the U.S. market provide the RMI with relatively good opportunities to expand remittance income, particularly if migrants had upgraded skills. Improved skill provision should benefit both RMI emigrants as well as domestic economic prospects. 8. We have clarified our reference that 2003 data on international visitor arrivals are for other Pacific island nations. Such data are not available for Kiribati and Nauru. The World Bank has estimated that, in 2002, Kiribati had 5,000 international visitors. However, Kiribati also has a per capita GDP that is less than one-third of the RMI’s. 9. RMI employment data indicate that the RMI did succeed in reducing public sector employment from about 3,760 jobs in 1997 to about 3,530 jobs in 2001. However, since then, public sector employment has risen to about 4,320 jobs in 2005. 10. We have modified language in the report to clarify each of these points. We have added language to the report to include the volatility in tax income from the fisheries and tourism sectors and the fact that RMI offices related to reform efforts, such as land registration offices, have been funded with compact grants. In addition to the persons named above, Emil Friberg, Assistant Director; Leslie Holen; Reid Lowe; Mary Moutsos; Kendall Schaefer; and Seyda Wentworth made key contributions to this report. 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 1987, the United States began providing economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. In 2004, through amended compacts with the FSM and the RMI, the United States committed to provide more than $3.5 billion until 2023. Joint U.S-FSM and U.S.-RMI compact management committees are required, among other things, to monitor progress toward specified development goals and address implementation of policy reforms to stimulate investment. The legislation implementing the amended compacts (P.L. 108-188) requires that GAO periodically report on political, social, and economic conditions in the FSM and the RMI. In compliance with this requirement, GAO examined each country's (1) political and social environment, (2) economic environment, and (3) status of economic policy reforms. FSM and RMI political and social conditions challenge, respectively, effective compact grant implementation and health and education progress. Regarding political conditions, for example, the FSM states and national government have been unable to agree on implementation of the compact infrastructure grant, while the RMI government has had difficulty securing agreement from land owners regarding its use of leased land for compact-related projects. Social challenges in both countries include persistent health and education problems despite substantial expenditures. For instance, the FSM and the RMI have low immunization rates relative to other countries with similar income levels. The FSM and the RMI economies show limited potential for achieving longterm development objectives. Both economies depend on public sector expenditures--funded largely by external assistance--and government budgets have growing wage expenditures, heightening the negative fiscal impacts they will face as compact grants decline. As a result, long-term economic growth must come from the private sector and increased income sent home from FSM and RMI emigrants ("remittances"). However, poor business environments hamper private industry in both countries, and FSM and RMI emigrants' lack of marketable skills hinders increasing revenue from remittances. Compact management committees have not discussed the countries' progress toward budgetary self-reliance and long-term economic advancement at their annual meetings. FSM and RMI progress in key policy reforms has been slow. Country officials reported passing some new mortgage and bankruptcy laws, but other needed reforms have not been implemented. For example, according to economic experts, tax systems remain inequitable and inefficient and foreign investment regulations remain confusing and relatively burdensome. FSM and RMI development plans include reform objectives in each of these areas; however, compact management committees have not addressed the nations' slow progress in implementing reforms. |
NOAA operates GOES as a two-satellite system that is primarily focused on the United States. These satellites are uniquely positioned to provide timely environmental data about the earth’s atmosphere, its surface, cloud cover, and the space environment to meteorologists and their audiences. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites’ ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA’s weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several satellites at a time as part of a series and launches new satellites every few years (see table 1). NOAA’s policy is to have two operational satellites and one backup satellite in orbit at all times. Four GOES satellites—GOES-10, GOES-11, GOES-12, and GOES- 13—are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, with GOES-12 covering the east and GOES-11 the west. GOES-13 is currently in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. GOES-10 is at the end of its service life, but it is being used to provide limited coverage of South America. The others in the series, GOES-O and GOES-P, are planned for launch over the next 2 years. NOAA is also planning the next generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2015. NOAA plans for the GOES-R program to improve on the technology of prior series, in terms of both system and instrument improvements. The system improvements are expected to fulfill more demanding user requirements by updating the satellite data more often and providing satellite products to users more quickly. The instrument improvements are expected to significantly increase the clarity and precision of the observed environmental data. NOAA originally planned to acquire six different types of instruments. In September 2006, however, NOAA decided to reduce the scope and technical complexity of the GOES-R program because of expectations that total costs, which were originally estimated to be $6.2 billion, could reach $11.4 billion. Specifically, NOAA reduced the minimum number of satellites from four to two, cancelled plans for developing a critical instrument—the Hyperspectral Environmental Suite (which reduced the number of planned satellite products from 81 to 68), and divided the Solar Imaging Suite into two separate acquisitions. The agency estimated that the revised program would cost $7 billion. In addition to the reductions in scope, NOAA also delayed the launch of the first satellite from September 2012 to December 2014. NOAA is solely responsible for GOES-R program funding and overall mission success. However, since it relies on the National Aeronautics and Space Administration’s (NASA) acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program. Within the program office, there are two project offices that manage key components of the GOES-R system—the flight and ground segment project offices. The flight project office, managed by NASA, is responsible for awarding and managing the spacecraft segment contract, delivering flight-ready instruments to the spacecraft segment contractor for integration onto the satellites, and overseeing the systems engineering and integration. The ground segment project office, managed by NOAA, oversees the ground contract, satellite data product development and distribution, and on-orbit operations of the satellites. NOAA and NASA have made progress on the GOES-R program. In January 2008, NOAA approved the program’s move from the preliminary design and definition phase to the development phase of the acquisition life cycle. This approval also gave the program the authority to issue the requests for proposals for the spacecraft and ground segment projects—which it did in January 2008 and May 2008, respectively. The program office plans to award the prime contract for the spacecraft segment in May 2009 and the contract for the ground segment in June 2009. In addition, between September 2004 and December 2007, the GOES-R program awarded contracts for the development of five key instruments. These instruments are currently in varying stages of development. Figure 1 depicts the schedule for both the program and key instruments. NOAA has made several important decisions about the cost, scope, and schedule of the GOES-R program. After reconciling the program office’s cost estimate with an independent cost estimate, the agency established a new program cost estimate of $7.67 billion, an increase of $670 million from the previous estimate. Agency officials plan to revisit this cost estimate after the spacecraft and ground segment contracts are awarded but stated that it was developed with a relatively high level of confidence and that they believe that any adjustments would be well within the $7.67 billion program budget. To mitigate the risk that costs would rise, program officials decided to remove selected program requirements from the baseline program and treat them as options that could be exercised if funds allow. These requirements include the number of products to be distributed, the time to deliver the remaining products (product latency), and how often these products are updated with new satellite data (refresh rate). Specifically, program officials eliminated the requirement to develop and distribute 34 of the 68 envisioned products, including aircraft icing threat, turbulence, and visibility. Program officials explained that these products are not currently being produced by legacy GOES satellites; they are new products that could be produced from the advanced GOES-R instruments. In addition, the program slowed planned product latency on the remaining products by as much as 10 minutes for hurricane intensity and 6 minutes for volcanic ash detection and height. It also reduced the refresh rates on these products by as much as 55 minutes for sea surface temperatures, cloud top observations, and vertical moisture profiles in the atmosphere. Program officials included the restoration of the products, latency, and refresh rates as options in the ground segment contract—items that could be acquired at a later time. NOAA also delayed GOES-R program milestones including the dates for issuing the requests for proposals by up to 6 months and awarding the contracts for the spacecraft and ground segments by 12 and 10 months, respectively. The dates when the satellites would be available for launch have also slipped by 4 months, with the first satellite launch now scheduled for April 2015. Program officials attributed these delays to providing more stringent oversight before releasing the requests for proposals, additional time needed to evaluate the contract proposals, and funding reductions in fiscal year 2008. Recent events have raised doubts about the feasibility of the GOES-R launch date. Specifically, after the spacecraft segment contract was awarded and then protested in December 2008, NASA decided to re-evaluate the proposals. NASA now plans to re-award the contract in May 2009. Because NASA has agreed to a 72-month development cycle for the spacecraft segment (from contract award date to launch readiness), the launch date of GOES-R will likely be delayed until at least May 2015. Any delays in the launch of the first GOES-R satellite run counter to NOAA’s policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage. This policy proved useful in December 2008, when NOAA lost communication with GOES-12, but was able to use GOES-13 as an operational satellite until communication was restored. However, beginning in November 2014, NOAA expects to have two operational satellites in orbit (O and P), but it will not have a backup satellite in place until GOES-R is launched. If NOAA experiences a problem with either of its operational satellites before GOES-R is in orbit, it will need to rely on older satellites that are beyond their expected operational lives and therefore may not be fully functional. GOES-R has taken steps to address lessons from other satellite programs. These actions include ensuring sufficient technical readiness of the spacecraft and ground segments prior to awarding the contracts. However, key risks remain and important actions remain to be completed in selected areas. Specifically, key technology risks remain—affecting both the ground segment and the instruments. While the hardware that is to be used for the ground segment is mature, key components have not previously been integrated. In addition, the program office has identified the Advanced Baseline Imager and the Geostationary Lightning Mapper instruments as having a high level of risk associated with cost due in part to the technical challenges posed by each instrument. Program officials reported that they have sufficient management reserves to address these risks. To manage such risks, NOAA uses earned value management, a proven means for measuring progress against cost and schedule commitments and thereby identifying potential cost overruns and schedule delays early, when the impact can be minimized. Two key aspects of this process are (1) conducting comprehensive integrated baseline reviews to obtain agreement from stakeholders on the value of planned work and validate the baseline against which variances are calculated and (2) using monthly variance reports to provide information on the current contract status, the reasons for any deviations from cost or schedule plans, and any actions taken to address these deviations. To its credit, the GOES-R program office is using earned value management to oversee the key instrument contracts and plans to use it on the spacecraft and ground segment contracts. To date, the program office has performed integrated baseline reviews on the instruments and obtains and reviews variance reports for each of the instruments. However, the program’s integrated baseline review for the Advanced Baseline Imager did not include a review of schedule milestones, the adequacy of how tasks are measured, and the contractor’s management processes. Further, the variance reports for two instruments—the Advanced Baseline Imager and the Geostationary Lightning Mapper—do not describe all of the significant variances. Program officials explained that they meet with the contractor on a monthly basis to discuss all of the variances, but they were unable to provide documentation of these discussions or the reasons for, impact of, or mitigation plans for the variances. As a result of these shortfalls, the program office has less assurance that key instruments will be delivered on time and within budget, and it is more difficult for program managers to identify risks and take corrective actions. Before it was cancelled in September 2006, the Hyperspectral Environmental Suite was originally planned as part of the GOES-R satellite series to meet requirements for products that are currently produced by GOES satellites as well as new technically-advanced products not currently produced by GOES satellites. NOAA still considers these requirements to be valid, and NOAA and the science community still have a need for the advanced products. NOAA had planned to use the new sounding products to improve its performance goals, such as helping to increase the lead times associated with severe thunderstorm warnings from an average of 18 minutes in 2000 to as much as 2 hours by 2025, and helping to increase the lead times associated with tornado warnings from an average of 13 minutes in 2007 to as much as 1 hour by 2025. In addition, NOAA had planned to use the new coastal waters imaging products to provide more accurate and quantitative understanding of areas for which NOAA has management responsibilities. In particular, the coastal water imaging products could have been used to predict and monitor the growth, spread, severity and duration of harmful algal blooms. Recent studies suggest that harmful algal blooms are occurring more frequently because of climate change. NOAA, NASA, and the Department of Defense assessed alternatives for obtaining advanced sounding and coastal water imaging products from a geostationary orbit. The results of the analysis recommended that NOAA work with NASA to develop a demonstration sounder to fly on an as-yet undetermined satellite and to evaluate other options for coastal waters imaging. NOAA plans to assess the technical feasibility of various options and to have the National Research Council make recommendations on long-term options for coastal water imaging. However, NOAA has not defined plans or a timeline for addressing the requirements for advanced products. Further, agency officials were unable to estimate when they would establish plans to fulfill the requirements. Until a decision is made on whether and how to provide the advanced products, key system users will not be able to meet their goals for improving the lead times or accuracy of severe weather warnings, and climate research organizations will not obtain the data they need to enhance the science of climate, coastal, environmental, and oceanic observations. In our report, we are making three recommendations that, if implemented, could improve the management and oversight of the GOES-R acquisition. These are: ensuring that any rebaselining of a key instrument includes an assessment of milestones, adequacy of resources, task and technical planning, and management processes; ensuring that reasons for cost and schedule variances are fully disclosed and documented; and, if feasible, developing a plan and timeline for restoring the advanced capabilities removed from the program. In written comments on a draft of this report, the Department of Commerce agreed with our findings and recommendations and outlined steps it is taking to implement them. The department also provided technical comments on the report, which we incorporated as appropriate. In summary, NOAA has made repeated and continuing efforts to learn from problems experienced on other satellite programs. The GOES-R satellite series is now in development, but program costs have increased, the scope of the program has been reduced, and schedules have been delayed. Further, unless the program exercises contract options, key benefits in terms of new products and faster data updates will not be realized. Of particular concern are the three years of launch delays since 2006. In addition, recent events make it likely that the launch of GOES-R will continue to slip, which increases the risk of having gaps in satellite coverage. Until NOAA and NASA act to address this risk, the United States’ ability to maintain the continuity of data required for weather forecasting is in jeopardy. In addition, NOAA has not yet developed a plan or a timeline for recovering the advanced capabilities that were removed. Until such decisions and plans are made, the geostationary user community may not be able to make significant improvements in their severe weather forecasts, or their ability to monitor our coastal environments. Mr. Chairman and members of the Subcommittee, this concludes our statement. We would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact David A. Powner at (202) 512-9286 or by e-mail at [email protected]. Other key contributors to this testimony include Colleen M. Phillips, Assistant Director; Carol Cha; William Carrigg; Neil Doherty; Franklin Jackson; Kaelin Kuhn; Lee McCracken; and Eric Winter. 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 Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellite-R series (GOES-R). GOES-R is to replace the current series of satellites, which will likely begin to reach the end of their useful lives in 2014. This series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to summarize its report being released today that (1) determines the status of the GOES-R program, (2) evaluates whether plans for the acquisition address problems experienced on similar programs, and (3) determines whether NOAA's plan will be adequate to support current data requirements. NOAA has made progress on the GOES-R acquisition, but the program's cost, schedule, and scope have changed. The GOES-R program has awarded development contracts for key instruments and plans to award contracts for the spacecraft and ground segments by mid-2009. However, after reconciling program and independent cost estimates, the program established a new cost estimate of $7.67 billion--a $670 million increase from the prior $7 billion estimate. The program also reduced the number of products the satellites will produce from 81 to 34 and slowed the delivery of these products in order to reduce costs. More recently, the program also delayed key milestones, including the launch of the first satellite, which will likely be delayed from December 2014 until at least May 2015. This delay in the GOES-R launch runs counter to NOAA's policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage if GOES-O or P fail prematurely. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. These actions include ensuring sufficient technical readiness of the system's components prior to key decisions. However, technical challenges remain on the ground segment and instruments, the program did not perform a comprehensive review after rebaselining a critical instrument, and it has not documented all of the reasons for cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-R program will repeat the same mistakes that have plagued other satellite programs. While NOAA and the science community expressed a continuing need for advanced products that were removed from the program, the agency has not developed plans or a timeline for meeting these requirements. Until a decision is made on whether and how to proceed in providing the advanced products, key system users, such as weather forecasters, will not be able to meet their goals for improving the accuracy of severe weather warnings. |
Maintaining that federal procurement requirements contributed to some of its cost, schedule, and performance problems in the 1980s and early 1990s, FAA sought a statutory exemption from the federal acquisition system, including the FAR, and those parts of title 5 of the United States Code, parts II and III, that govern federal civilian personnel management. According to FAA, exemptions from these requirements would enable it to streamline its acquisition processes, be more responsive to the airline industry’s needs, and increase the efficiency of ATC operations while maintaining safety. Congress enacted legislation in November 1995 that exempted FAA from key federal procurement statutes and the FAR, and directed FAA to develop a new acquisition management system. In response to these legislative initiatives, FAA implemented a new, streamlined acquisition process—the Acquisition Management System (AMS)— on April 1, 1996. We developed a knowledge-based model of commercial best practices based on our findings about how leading private firms manage costly and complex acquisitions effectively—that is, within cost, schedule, and performance targets. The use of this knowledge-based model has been found to reduce the risks associated with developing products and increase the likelihood of successful outcomes. The model divides the product development cycle into four phases and related activities. Table 1 presents these phases and activities and explains what takes place during each. AMS provides guidance for selecting and overseeing investments over their life cycle. Like our best practices model, it is divided into phases and activities, although the divisions sometimes occur at different points. Table 2 summarizes AMS’s phases and activities. To implement the new, performance-based organization for managing ATC modernization and operations, as the President and Congress directed in 2000, FAA appointed a chief operating officer in August 2003 and formally established the Air Traffic Organization (ATO) in February 2004. ATO, under the direction of a six-member executive council, is now responsible for further implementing acquisition reforms for major ATC systems. AMS establishes an acquisition life-cycle management system that encompasses both contracting and program management, whereas the FAR is primarily a contracting system that focuses on contract formation and contract administration. As a result, AMS is broader in scope than the FAR. See figure 1. In addition, AMS takes the form of guidance. This guidance is expressed in documentation of FAA policy, handbooks, templates, flowcharts, forms, and standard contract language. It is not regulatory. By contrast, the FAR is a set of published regulations—a legal foundation that has the force and effect of law for the federal agencies that are required to follow it. Furthermore, the FAR is more detailed and prescriptive in establishing contracting requirements and can require more administrative involvement. This fundamental difference between AMS and the FAR may suggest to some that AMS is more flexible. FAA personnel can choose how to apply AMS’s provisions to a major acquisition. Nonetheless, procurement officials under the FAR also have flexibility because the FAR encourages innovation consistent with its direction (and other applicable legal requirements), provides a wide selection of contracting solutions, and permits contracting officials to choose the methods that they consider most suitable for a given situation. AMS comprises six policy sections and five appendixes. The procurement policy section of AMS covers a range of topics, including contract funding and administration, contracting with small and disadvantaged businesses, and compliance with labor laws. According to this section, competition is FAA’s preferred method of contracting, but single-source contracting is permitted when appropriate to fulfill the agency’s mission. This policy section also describes the procurement of commercially available or nondevelopmental items. Other sections of AMS cover project management tools that the FAR does not address, such as investment analysis, configuration management, and integrated logistics support. AMS also addresses areas that fall outside project management and procurement, including real property management—an area that becomes important when FAA must lease or purchase real property so that it can install ATC systems such as radars or antennas on property that it does not currently own. FAA’s policy directs FAA staff to “conduct this business in a fair and equitable manner following best practices.” Although the FAR includes requirements that address procurement planning and major systems acquisition, it does so only in the context of government procurement policy and procedure. Agencies subject to the FAR find the broader program planning requirements, which appear in AMS but not in the FAR, in documents such as the Office of Management and Budget’s Circular A-109 and in their own planning guidance. For example, DOD has issued a series of directives and instructions on this subject. The contracting procedures set forth in section 3 of AMS do not prescribe detailed contracting procedures for various categories of procurements, as do those detailed under the FAR. Instead, AMS provides two basic contracting models for obtaining products and services through FAA’s contracting process. The first model is called “Complex and Noncommercial Source Selection” and is used for complex, large-dollar, developmental, noncommercial items and services. This is the model that typically would be used for investments approved by the Joint Resources Council. The second model is called the “Commercial and Simplified Purchase Method” and is typically used for commercial items that are less complex and less costly. Procurements of such products or services may be routine in nature and are generally purchased on a fixed-price basis. Generally, source selection under AMS follows a screening process, with the awardee being selected on a “best value” basis from among those who remain in consideration when the selection is made. AMS sets out a nonregulatory FAA policy that is binding on FAA personnel as FAA employees. AMS also sets out other guidelines that FAA states should be followed unless there is a rational basis for doing otherwise. AMS is subject to such internal controls and enforcement as the Administrator decides and to general overarching legal requirements, such as the Government Performance and Results Act of 1993 (GPRA).FAA has also deemed certain acquisition laws applicable to its procurements (sometimes with modifications), such as the Service Contract Act. There is also a legal requirement, created by the 1995 legislation exempting FAA from the FAR, that small and socially or economically disadvantaged firms be given all reasonable opportunities to receive contract awards. FAA has adopted a dispute resolution process with some legal underpinnings. Otherwise, as the preface to AMS states, “nothing in this document creates or conveys any substantive rights.” In short, although FAA is subject to the general legal requirement that government decisions cannot be arbitrary or capricious, AMS does not establish regulatory requirements for the conduct of procurements and does not create or convey substantive legal rights. In contrast to AMS, the FAR is a set of published regulatory requirements. It has the force and effect of law, and agencies that are subject to it are bound to follow it. The FAR’s requirements provide for a range of procurement strategies and approaches. In addition to negotiated procurement methods, it allows two-step sealed-bid and two-phase design-build methods, among others. It includes streamlined procedures for soliciting and evaluating offers to furnish commercial items, as well as permits the use of simplified acquisition procedures in a broad range of procurements. Furthermore, the FAR supports a diverse selection of available contract types, product- testing tools, and other tools that an agency’s contracting personnel may select when conducting an acquisition to meet the agency’s needs. Although contracting personnel in agencies subject to the FAR are required to comply with it, they enjoy broad discretion in their management of procurements. For example, the FAR allows wide latitude in drafting requirements statements, from performance-based statements of work to design specifications as necessary. It allows broad discretion in framing solicitations and in conducting procurements, including scoring proposals, determining how negotiations will be conducted, eliminating firms whose proposals are not competitive, and selecting the awardees whose proposals afford the government the best value when evaluated against the selection criteria established in the solicitations. Because AMS consists of broad guidance while the FAR comprises detailed and prescriptive regulatory requirements, FAA managers view AMS as giving them more flexibility than they would have under the FAR, particularly in two areas—competition and oversight. Whereas the FAR generally requires full and open competition, AMS calls for providing “reasonable access to” competition to firms interested in obtaining contracts—a less rigorous standard than full and open competition. AMS further states that the “preferred” method of selecting sources is to compete requirements among two or more sources. By contrast, full and open competition requires that all responsible sources be permitted to compete. Under AMS, there is no policy that firms that want to participate actually get a chance to do so. Rather, FAA told us that its system is beneficial because the agency can use screening requests to preselect competing firms, eliminating those firms that FAA believes are not likely to receive an award. The following example illustrates the differences between AMS and the FAR in their respective requirements on exceptions to competition. FAA may contract with a single source when this approach is determined to be in the best interest of FAA. The FAR, however, allows exceptions to full and open competition only for certain specified conditions (such as unusual and compelling urgency or the availability of only one source). The FAR describes in detail the circumstances of these conditions and the requirements for using them as justification for not providing for full and open competition. The FAR also requires the contracting officer to prepare a justification document that must generally be approved by higher-level agency procurement officials (up to the agency’s senior procurement executive) depending on the estimated dollar value of the procurement. The content of this justification is prescribed by the FAR. When not providing for full and open competition, the contracting officer is required under the FAR to solicit offers from as many potential sources as is practicable under the circumstances. The FAR prohibits contracting if the justification for less than full and open competition results from a lack of advanced planning. For a more detailed comparison of AMS and the FAR, see appendix III. Although some of the FAA personnel we interviewed see AMS as more efficient and flexible than the FAR, other current and former FAA procurement officials we interviewed who have experience using both the FAR and AMS did not agree that AMS is more flexible than the FAR. According to these officials, the FAR may appear inflexible and cumbersome to persons who lack experience with it, but those who are familiar with it are able to navigate its complexities effectively. The FAR requires full and open competition, but as experienced procurement personnel know, the system does not break down when emergencies necessitate quick and decisive action. For example, we recently reported that agencies generally complied with applicable FAR requirements in awarding new contracts for work in Iraq using other than full and open competition.In some circumstances, the government’s legitimate need for prompt action was sufficient to justify selecting a contractor on an expedited basis from among the firms that appeared able to meet the government’s emergency need. In other cases, the agencies reasonably determined that only one source could meet their requirements. AMS provides some discipline through its various phases, activities, and decision points for acquiring major ATC systems; however, it does not ensure the use of a knowledge-based approach found in the best practices for managing commercial product developments and DOD acquisitions that we have identified in numerous past reports.Commercial best practices call for specific knowledge to be captured and used by corporate-level decision-makers to determine whether a product has reached a level of development (product maturity) sufficient to demonstrate its readiness to move forward in the acquisition process. The capture of such knowledge and its use by executives helps to avoid cost overruns, schedule slips, and performance shortfalls that can occur if decision-makers commit to a system design before acquiring critical technology, design, or manufacturing knowledge. The absence of these key best practices under AMS puts FAA’s major ATC acquisitions at risk of cost overruns, schedule slips, and performance shortfalls. Commercial best practices call for managing acquisitions using a knowledge-based approach, including (1) using established criteria to attain specific knowledge at three critical junctures in the acquisition cycle, which we call knowledge points, and (2) requiring oversight at the corporate executive level for each of these knowledge points. For example, at each knowledge point, successful product developers apply specific indicators, or criteria, to determine whether they have attained the knowledge they need to move to the next phase or activity in the acquisition process. Such developers also conduct corporate executive- level reviews to ensure that they obtain the insights and perspectives of stakeholders throughout their organization. If the knowledge attained does not meet the criteria for advancement or if the executive reviewers determine that further development is inconsistent with their priorities, the acquisition does not move forward. Table 3 summarizes the knowledge points, criteria, oversight reviews, and timing of oversight reviews included in our model of best practices for major acquisitions. Experience with commercial best practices has shown that to the extent that the level of knowledge called for at each knowledge point is not attained, organizations take on risks in the form of unknowns that will persist into the later stages of development, where they will take more time and money to resolve if they become problems. Such problems lead to cost increases and schedule delays. AMS has some good features, including phases and key decision points indicative of an acquisition process that has some elements of discipline; however, AMS does not ensure that high levels of knowledge are attained and that corporate executive-level reviews occur before major commitments of agency resources are made. For example, like the best practices model, AMS identifies critical junctures, which it terms “decision points.” Three of these decision points occur during the initial acquisition phase (mission need, initial investment, and the final investment decision). A fourth decision point occurs before production, and a fifth decision point occurs before the start of the final acquisition phase (in-service management). AMS also calls for detailed technical and programmatic information that decision-makers can use at the first three decision points to assess whether or not FAA should initiate an acquisition program. This information includes a final requirements document, a final acquisition program baseline, a final investment analysis report, an acquisition strategy paper, and an integrated program plan. Finally, AMS, like our best practices model, calls for senior executives to review the information and determine whether the acquisition is ready to move forward. The FAA executives who make the decisions at these points include associate and assistant administrators, acquisition executives, the chief financial officer, the chief information officer, and legal counsel; they form the Joint Resources Council (JRC), FAA’s senior decision-making body for major ATC acquisitions. Table 4 summarizes this information. AMS departs from the best practices model in two key ways—it does not call for high levels of knowledge to be attained at three critical junctures (knowledge points), and does not call for corporate executive-level oversight at one of five junctures. Specifically, AMS does not establish explicit, written criteria for (1) the information needed to determine technology maturity at solution implementation, (2) releasable drawings at critical design review and production process controls at production. Our best practices model calls for attaining specific knowledge and setting out criteria for what information should be available to help organizations minimize risks in the form of unknowns. Risks associated with such unknowns can persist into the later stages of development, where they can take more time and money to resolve if they become problems, potentially leading to cost increases and schedule delays. In addition, AMS does not provide for corporate executive-level oversight reviews at two of the three key junctures where our best practices model calls for such reviews. Although AMS calls for three Joint Resources Council reviews during the initial acquisition phase—while our model calls for a single corporate executive-level review—AMS allows the council to delegate its oversight responsibility later in the acquisition process to the program managers within the service organization responsible for an acquisition. By contrast, our model calls for two corporate executive-level reviews later in the acquisition process. According to FAA, its approach gives program managers flexibility, expedites decision-making, and allows the executives with the most knowledge about a major acquisition to make key decisions about its continued development. FAA’s reliance on this approach assumes that the program managers will inform higher-level managers if they are unable to meet the performance schedules and systems requirements approved by the Joint Resources Council. However, although program managers may have the most knowledge about their particular acquisition, they may not have the agencywide perspective of the Joint Resources Council members. Having an agencywide perspective, including a broad understanding of an acquisition’s potential impact on other agency projects and operations, is especially critical when an acquisition includes the production of multiple units and requires a substantial commitment of agency resources, as do FAA’s primarily multimillion-dollar acquisitions, such as controller workstations and radars. Because decisions about moving a major acquisition forward require both a program manager’s specific knowledge of the acquisition itself and a senior executive’s understanding of the acquisition’s potential impact on other agency projects and operations, our best practices model calls for both measurable criteria at key points in the acquisition process to ensure that specific knowledge has been captured and corporate executive-level reviews to ensure that senior decision-makers have the opportunity to independently consider this knowledge. Without higher-level reviews such as our best practices model recommends and the Joint Resources Council could provide later as well as early in the acquisition process, FAA cannot ensure that it has fully considered the impact of advancing an acquisition on other agency projects and operations. This opportunity for full consideration is a central advantage of managing acquisitions as a portfolio, as we concluded in our August 2004 report on FAA’s information technology investment management process. Figure 2 contrasts FAA’s process for reviewing an acquisition’s progress under AMS with the process that we found leads to successful commercial acquisitions. ! To facilitate the comparison of AMS with out best practices model in this report, we have done the following: (1) placed FAA's "Mission Analysis" and "Investment Analyses" activities in the "Needs and Solution Identification" phase to make it comparable with the "concept and technology development" phase in our best practices model; (2) depicted only the final investment decision point, recognizing that the investment analysis phase includes an initial investment decision; and (3) placed “system integration” and “system demonstration” in the solution implementation phase. AMS does not explicitly call for a design review decision point, which would fall between system integration and system demonstration. To its credit, FAA continues to improve its AMS process. For example, the agency is currently modifying its mission needs activity to make the selection of major ATC acquisitions more consistent with the overall goals of modernizing the National Airspace System. In addition, the Air Traffic Organization has established an executive council to review major acquisitions before they are sent to the Joint Resources Council. This review is designed to screen acquisitions to determine which ones are important enough to warrant higher-level review by the Council. Finally, FAA is currently revising AMS to bring it in line with the Office of Management and Budget’s guidance. Specifically, the agency is incorporating OMB Exhibit 300, which provides the investment justifications and management plans required for major ATC acquisitions. According to our review of seven major ATC systems and analysis of FAA’s performance in acquiring major systems, AMS has not resolved the long- standing problems that FAA experienced before implementing AMS, but the agency is beginning to focus more on the expected results of its major acquisitions. (See table 5.) Specifically, our review found that AMS guidance did not call for requirements that were specific enough to minimize requirements growth or unplanned work for five of these systems. This lack of specificity resulted in the inadequate development or definition of requirements, growth in requirements, unplanned work, or a reduction in performance for five of these systems. In addition, for three of these systems, FAA underestimated the difficulty of modifying available software to fulfill its mission needs. Because AMS guidance was not sufficient to account for the risks associated with modifying available software, FAA encountered unexpected software development needs, higher costs, and schedule delays. The two systems we reviewed that were initiated after AMS was implemented are currently meeting cost and schedule milestones; however, both systems are showing symptoms of FAA’s past problems with developing requirements and managing software, and it is too soon to tell if these programs will remain within their cost, schedule, and performance parameters. In addition, our work on FAA’s major acquisitions, along with that of the DOTIG and others has shown that the problems FAA experienced before 1996 in acquiring major systems persist under AMS and that effective acquisition management, rather than the use of a specific contracting process (e.g., the FAR or AMS) is key to successful acquisitions. To its credit, FAA is beginning to focus more on results, largely through its new Air Traffic Organization, which has been charged with taking a more performance-based approach to managing the agency’s acquisitions. Our reviews of seven of FAA’s costliest ATC system acquisitions found that the problems FAA experienced with requirements and software management and their related impact on cost, schedule, and performance goals persist today under AMS.Figure 3 identifies these seven acquisitions and their milestones, which are expressed in terms of AMS decisions even when the acquisitions were initiated before AMS was implemented. (See app. V for a description and the status of each of these projects.) Specifically, for 6 of these 7 major ATC acquisitions, FAA did not consistently (1) clearly define system requirements at the investment decision point or (2) adequately assess software complexity. Moreover, as FAA has acknowledged, it has never managed its major acquisitions by focusing on how each would improve the efficiency of ATC operations while maintaining or improving safety. Although FAA has made progress in improving its acquisition of major ATC systems—by, for example, improving the maturity of its processes for acquiring software, using a “build a little, test a little” approach to acquisitions as it did for Free Flight Phase 1,and restructuring its organization to minimize stovepipes—long- standing problems persist in these areas. In addition, the two systems we reviewed that were initiated after AMS’s implementation are currently operating within cost and schedule goals; however, they are showing symptoms of past problems with developing requirements and managing software complexity. Moreover, our work for more than two decades— before and after AMS’s implementation—has cited these types of weaknesses as central reasons for the agency’s long history of cost, schedule, and performance shortfalls. This work has also found that the effectiveness of an agency’s acquisition management has had a greater impact on the success of its major acquisitions than the contracting process used (e.g., the FAR or AMS). For five of the seven acquisitions we reviewed, AMS guidance did not call for requirements that were specific enough to minimize requirements growth or unplanned work. For four of these five acquisitions—STARS, LAAS, NEXCOM, and ATOP—incomplete and poorly defined requirements in the final requirements documents, used at the investment decision point to assess an acquisition’s readiness to enter the development phase, led to requirements growth, unplanned development work, or a reduction in system performance.For the fifth acquisition—ASR-11—FAA misjudged the extent to which the high-level requirements that were used to support the commercial-off-the-shelf/nondevelopmental item (COTS/NDI) procurement by the Department of Defense could result in a product capable of meeting FAA’s mission or user needs. As a result, unplanned software changes were required. FAA’s cost estimate for STARS has grown from its original estimate of $0.94 billion in 1996 to $1.46 billion in 2004 and will deploy only 50 of the 172 STARS initially planned. Much of the cost growth has been due to FAA requirements creep. As a result, the STARS program has experienced delays of more than five years from its original plan, in part due to added requirements to the commercial-off-the-shelf Initial System Configuration (ISC). However, the STARS ISC was satisfactory for use by the Department of Defense as deployed. A final requirements document was approved, and the development of LAAS was scheduled to begin in 1999. However, poorly established requirements resulted in the addition of 113 new requirements to the initial specification, entailing significant software and hardware changes. Furthermore, LAAS may not achieve its promised capabilities because FAA has been unable to develop technologies necessary to warn pilots of a disruption in the LAAS signal. Until this technology is developed, LAAS cannot be operated safely. As a result, FAA recently cut the fiscal year 2005 funding for LAAS, and the program will revert to a research and development effort. FAA developed a final requirements document for the NEXCOM system, but the requirements lacked the specificity needed to assess the development risk. According to a NEXCOM contractor program official, this led to miscommunication about the program requirement relating to signal interference. This official stated that they misunderstood this requirement and had not planned on the additional development work for the NDI solution to meet such program objectives and delayed the program 21 months. Another program requirement involved the NEXCOM radios meeting or exceeding the operational coverage area of the existing voice system. The existing radios had power output levels of 50 watts but the NEXCOM contractor could only achieve 34 watts of power to meet the coverage requirement. A program official stated that the contractor and FAA had not agreed on the testing procedures to assess the power levels. This posed an “unacceptable consequence” and, as a result, FAA performed additional testing or flight checks of the reduced radio performance (50 watts versus 34 watts) and determined that the performance reduction should not affect NEXCOM’s mission or its coverage requirement. FAA did not follow the AMS guidelines that call for completing a final requirements document before proceeding to the development phase for ATOP. The Joint Resources Council approved a delay in developing the final requirements until after contract award. This decision resulted in schedule delays and additional unplanned software development. The ATOP program office asserted that the requirements remained very stable and that the program is within cost and schedule objectives established by the Council. However, FAA’s internal documents revealed that the requirements were not adequately defined. For example, the ATOP Investment Analysis Study reported to the Joint Resources Council prior to contract award that the lack of more detailed ATOP requirements at this stage of acquisition added risk and was of concern to the investment analysis team. Under AMS, this team is responsible for, among other things, conducting risk analyses for the various acquisitions. Furthermore, an ATOP Assessment Team conducted a study in March 2003 and determined that at the ATOP contract award, “requirements were written at a high level and not mutually understood by FAA and the contractor.” However, FAA management allowed the ATOP program to proceed to solution implementation without the final requirements document and, according to the contractor, this resulted in schedule delays and growth in the amount of software needing development. The high-level requirements for ASR-11, jointly generated by FAA and the Department of Defense, to support a COTS/NDI acquisition, resulted in a product that did not initially meet the FAA mission or user needs. The software changes that were required to meet FAA’s target detection needs, as well as significant hardware design changes, parts obsolescence, and production issues, added approximately two years to system qualification and acceptance. For three of the seven major ATC acquisitions we reviewed—ITWS, LAAS, and ATOP—FAA’s AMS guidance was not sufficient to address the risks associated with modifying available software to fulfill FAA’s mission needs. In all three cases, FAA officials underestimated the difficulty of modifying available software. Our work has shown that underestimates are likely to result in unexpected software development, higher costs, and schedule delays. ITWS experienced delays from the beginning because of the complexity of its software development. Although the program appeared to be progressing according to its baseline, immediately after the critical design review in September 1998, the contractor revealed that it had exceeded the target cost by $4 million. In addition, the contractor claimed that the program did not recognize that the computer processor originally planned for the program was becoming outdated, that the manufacturer planned to discontinue its production because the market was demanding a processor with greater processing and storage capability, and that as a result, the original computer processor would not be available to the program. Consequently, ITWS experienced cost increases, schedule delays, and performance shortfalls. According to the contractor and the original acquisition plan, all systems were scheduled for delivery by December 2001, but that date has now stretched to after 2009. LAAS’s technology maturity was not adequately assessed, and further development was needed. Specifically, the potential for radio interference through the atmosphere was not understood and could limit LAAS’s operations. FAA has now placed all LAAS activities in research and development. FAA did not adequately assess LAAS’s software development. At the time of the contract award, the contractor and FAA estimated that 80 percent of the software that LAAS required had been developed. FAA later determined that only 20 percent had been developed. FAA and the contractor attribute this discrepancy to a lack of communication on the steps necessary to satisfy the program’s requirements. FAA agrees that it should have conducted a software audit and a software capabilities assessment, but pressures to keep LAAS on schedule resulted in an inadequate assessment. The ATOP contractor underestimated by about half the extent to which legacy nondevelopmental item software, which is the core of the ATOP system, met the program’s 1,036 requirements. As a result, a significant amount of unanticipated new software code development and other modifications were required. As figure 3 illustrates, FAA initiated at least one rebaselining decision for three of the five acquisitions that were begun before AMS was implemented and were later transitioned to AMS. These rebaselining decisions responded to delays and cost growth—problems that arise when requirements are not stable, a program’s design is not fixed, or software code growth is not controlled. For example, FAA rebaselined STARS two times—first in 1999 and again in 2002. Similarly, 2 years after the investment decision for ITWS, FAA rebaselined the program twice, in 1997 and again in 2001. Given the frequency of these past rebaselining decisions for major ATC systems and the number of years that elapsed before or between the rebaselining decisions (3 to 4 years), it is too soon to tell whether the two systems that were initiated under AMS—ATOP and ERAM—will require similar rebaselinings and ultimately meet their cost, schedule, and performance goals. Although both programs are currently operating within their cost and schedule goals and have not yet been rebaselined, FAA has had problems with managing its major acquisitions in the past and is currently having difficulties developing requirements and managing software complexity. Furthermore, as we reported in May 2004, FAA’s budget increased from $9 billion in 1998 to $14 billion in 2004 but will be constrained for the foreseeable future. In such a constrained budget environment, cost growth and schedule problems can have serious negative consequences for ongoing modernization efforts—postponed benefits, costly interim systems, delays in funding other systems, or reductions in the number of units purchased. Reviews of FAA’s acquisition process, conducted by FAA, GAO, the DOTIG, and others have shown that FAA has improved its management of major ATC acquisitions in recent years but continues to experience cost overruns, schedule slips, and performance shortfalls under AMS. Table 7 summarizes the results of 22 internal and external reviews of FAA’s major ATC acquisitions. According to these reviews, issued from 1997 through 2004, the same problems have persisted over many years, despite various initiatives to address them, and FAA needs to strengthen its management controls. For example, a key FAA review of eight major ATC acquisitions, published in 1999, 3 years after AMS was implemented, found that these acquisitions, though on track to meet their performance goals, were not meeting their cost and schedule baselines. FAA attributed these cost and schedule issues to new or poorly understood requirements, underestimates of the acquisitions’ technical complexity, and funding shortfalls. In addition, our reviews of major FAA acquisitions—initiated before and after AMS was implemented—have found for more than two decades that FAA’s failure to meet schedule, cost, and performance baselines for major ATC acquisitions has been due to shortfalls in planning, weak management controls, and a lack of systematic processes for acquiring new systems, including inadequate requirements management, cost-accounting data, and estimates of technical difficulty. As we reported in August 2004, judged against the criteria of GAO’s framework for information technology (IT) investment management, which measures the maturity of an organization’s investment management processes, FAA has established about 80 percent of the basic selection and control practices that it needs to manage its mission-critical investments for the National Airspace System. For example, FAA’s business units actively monitor projects throughout their life cycles.However, the agency’s senior IT investment board does not regularly review investments that are in the “in-service management,” or operational phase, and this creates a weakness in FAA’s ability to oversee more than $1 billion of its IT investments. In addition, the agency has not yet established the practices that would enable it to effectively manage its annual IT budget of about $2.5 billion, and agency executives lack assurance that they are selecting and managing the mix of investments that best meets the agency’s needs and priorities. DOT has responded to our recommendations to FAA to strengthen its IT investment management capability. Moreover, other reviews, such as those by Booz-Allen & Hamilton and MITRE, have identified other shortfalls, which reflect a lack of proper management controls and planning. For example, in 1997, Booz-Allen & Hamilton found, among other things, that FAA had not clearly defined organizational roles and responsibilities within the various phases of AMS and that greater guidance and training under AMS were warranted. In 1999, Booz-Allen & Hamilton reported that FAA had not demonstrated improvement in adhering to planned costs and schedules under AMS and that the agency needed to better manage its development of requirements and address persistent funding shortfalls. Moreover, in 2001, a MITRE report on selected major acquisitions found inadequate management controls and deficiencies in both contractors’ performance and in FAA’s measurement of acquisition performance. See table 7 for a chronological listing of the reviews. FAA’s recent reorganization, which brought ATC acquisitions and operations together in the ATO, is expected to help the agency address many of the concerns we have identified for more than two decades, including those identified in this report. For example, the ATO is continuing to develop and refine specific guidance for critical areas, such as requirements management, software development, and cost estimation. In addition, as the overseer of both ATC acquisitions and operations, the ATO is in a position to facilitate more effective management of major ATC acquisitions than has occurred in the past. The ATO is attempting, for example, to link acquisition decisions directly with expected improvements in operational efficiency without compromising safety. This is important, given that FAA has spent about $2.5 billion on ATC modernization per year since 1996 while operating costs have continued to rise—from $4.6 billion to $7.5 billion over the past decade. FAA had not completed its reorganization or implemented all of its initiatives at the time of our audit. With the establishment of the ATO, FAA consolidated requirements development from two organizations (the organization sponsoring an acquisition and the former agencywide acquisition organization) into a single new organization—the Air Traffic System Requirements Service. In addition, the ATO developed guidance to better manage requirements during the middle phase of AMS (solution implementation). According to FAA officials, some more complex development efforts may need to develop systems requirements and a more detailed requirements document than AMS currently calls for in the final requirements document. More important, in January 2003, FAA issued guidance on requirements management, Roles in Requirements Management During Solution Implementation Phase, which provides for integrated requirements teams that maintain responsibility for requirements management throughout an acquisition’s life cycle. According to this guidance, when the final requirements document is accepted by the Joint Resources Council at the investment decision point, a requirements baseline is established and any proposed changes to the requirements must be assessed for their impact on the program and shown to be operationally suitable, affordable, executable, and justifiable. An FAA official on an integrated requirements team stated that any changes that may affect an acquisition’s cost and the schedule require approval by the Executive Committee. The FAA official also stated that this guidance has already helped to stabilize NEXCOM’s requirements during the solution implementation phase. Other FAA officials representing the Joint Resources Council acknowledged that the guidance should ensure greater control over program requirements growth, but said that not all program offices have consistently applied it. To better manage software programs for ATC modernization acquisitions, FAA established a centralized process improvement office that reports to the Chief Information Officer (CIO). This office developed an FAA integrated capability maturity model (i-CMM), a software development and management model that is similar to a model developed by Carnegie Mellon University called the Capability Maturity Model Integration (CMMI®), which is used to appraise the maturity of an organization’s processes for acquiring software. However, FAA’s i-CMM goes beyond Carnegie Mellon’s model to reflect international standards. The CMMI® appraisal methodology calls for assessing process areas—such as project planning, requirements management, and quality assurance—by determining whether key practices are implemented and overarching goals are satisfied. Both the i-CMM model and CMMI® appraisal methodologies provide a logical framework for measuring and improving key processes needed for achieving quality software and systems. However, as we reported in August 2004, FAA projects are not required to use the capability maturity model for process improvement, and individual projects that use the i-CMM model are allowed to choose which process areas they seek to improve and to determine when they are ready for an appraisal of their progress. To date, fewer than half of FAA’s major ATC projects have used this model. The recurring weaknesses we identified in our project-specific evaluations are due in part to the flexibility these projects were given in deciding whether and how to adopt this process improvement initiative. Furthermore, after combining its ATC organizations into a single performance-based organization (the ATO), FAA is reconsidering prior policies, and it is not yet clear whether process improvement will remain a priority. Without a strong senior-level commitment to process improvement and a consistent, institutionalized approach to implementing and evaluating it, FAA cannot ensure that key projects will continue to improve systems acquisition and development capabilities. As a result, FAA will continue to risk the project management problems—including cost overruns, schedule delays, and performance shortfalls—that have plagued past acquisitions. To address these shortcomings, we recommended that the Secretary of Transportation address specific weaknesses and institutionalize FAA’s process improvement initiatives by establishing a policy and plans for implementing and overseeing process improvement initiatives. FAA has taken steps to improve its cost estimation for major ATC projects by issuing guidance on how to develop and use pricing under AMS. For example, AMS policy calls for audit trails to record and explain the values that are used as inputs to cost models. In addition, it calls for agency officials, when reporting to executive oversight agencies and Congress, to disclose the level of uncertainty and imprecision that are inherent in cost estimates for major ATC systems. According to AMS policy, estimators record the procedures, ground rules and assumptions, data, environment, and events that underlie their development or update of a cost estimate. This information supports the credibility of the cost estimate, aids in the analysis of changes in program costs, enables reviewers to assess the cost estimate effectively, and contributes to the population of FAA databases that can be used for estimating the cost of future programs. Finally, despite a delay of many years, FAA officials told us that they are in the final stages of completing the agency’s cost-accounting system and plan to have it in place across the agency by the end of this calendar year, which will bring FAA into compliance with the Federal Managers' Financial Integrity Act of 1982. This measure will help reduce the likelihood of cost overruns or improper payments for unallowable costs and provide decision-makers with critical information. As we have reported in the past, a cost- accounting system is critical to managing major ATC acquisitions, because without it, FAA lacks the information it needs to reliably estimate operating costs over an acquisition’s life cycle. In May 2004, the FAA Administrator testified to Congress that, to date, in attempting to improve the efficiency of ATC operations while maintaining safety, FAA had not managed its major ATC acquisitions to be aware of their cost implications for its operations. The Administrator said, however, that the agency was taking its first steps to fundamentally change how it makes acquisition decisions by adopting a more results-oriented approach. Under this approach, the agency plans to link its decisions to fund major acquisitions directly with their expected contribution to improving operational efficiency and controlling escalating operating costs. Whereas, in the past, FAA measured results in terms of its progress in completing and deploying a major ATC system, it was now going to focus on how a given system improved operational efficiency. Such an approach holds promise for helping FAA more effectively manage its portfolio of major ATC acquisitions by providing a sound basis for choosing among competing priorities. However, because FAA has only recently begun to incorporate this type of analysis of acquisitions’ costs and operational efficiency into its decision-making and management processes, it is still too early to assess the results. In addition, to its credit, FAA has created a training framework for its acquisition workforce, which we found mirrors human capital best practices that we have identified. In January 2003, we reported on FAA’s efforts to define and train its workforce to meet the requirements of the Clinger-Cohen Act of 1996. This act required FAA and other civilian agencies to establish education, training, and experience requirements for their acquisition workforce. Our work on public and private best practices has identified six elements of training as critical to acquisition. These elements include (1) prioritizing the acquisition initiatives most important to the agency, (2) securing top-level commitment and resources, (3) identifying those who need training on specific initiatives, (4) tailoring training to meet the needs of the workforce, (5) tracking training to ensure it reaches the right people, and (6) measuring the effectiveness of training. These six elements are crucial for successfully implementing acquisition initiatives and reforms. Agencies that do not focus their attention on these critical elements risk having an acquisition workforce that is ill equipped to implement new processes. The probability of success is higher if training is well planned rather than left to chance. In 2003, we found that FAA’s model for training its acquisition workforce largely mirrored public and private- sector best practices and that the agency had highly developed processes for four of these six elements. See figure 4. Since 2003, FAA has taken some steps to measure the effectiveness of its training. For example, the agency collects and reviews participants’ assessments of the knowledge they have gained, the extent that learning objectives were achieved and the applicability and usefulness of the training. In addition, members of FAA’s Intellectual Capital Investment Plan Council have attempted to make qualitative judgments about the impact of the training on the effectiveness or efficiency of their organizations. However, FAA is still developing an evaluation program with metrics to measure the extent to which organizational goals are achieved when individual training objectives are met. Industry and government experts believe training and human capital investments are prerequisites for successfully introducing and implementing effective acquisition best practices. FAA’s acquisition workforce plays a critical role in addressing long-standing weaknesses that we and others have identified with FAA’s acquisition of major ATC systems. Given the importance of training for acquisition workforces, it will be important for the ATO to put mechanisms in place to comprehensively evaluate the effectiveness of the training it provides to improve the knowledge base of FAA’s acquisition workforce. To improve its investment management decision-making and oversight of major ATC acquisitions, the ATO also initiated the following procedures: Integrate AMS and the Office of Management and Budget’s Capital Planning and Investment Control Processto develop a process for analyzing, tracking, and evaluating the risks and results of all major capital investments made by FAA. Conduct Executive Council reviews of project breaches of 5 percent in cost, schedule, and performance to better manage cost growth; Issue monthly variance reports to upper management to keep them apprised of cost and schedule trends. Monitor progress in meeting the goals identified in FAA’s Flight Plan, the agency’s blueprint for action through 2008. The Executive Council tracks this progress monthly and reports to the Administrator, using a color-coded system to keep her apprised of how well FAA is meeting its goals. Green denotes that a goal will be met, yellow denotes that some of the activities leading to a main goal may be in jeopardy but the overall goal can be achieved, and red denotes serious concerns about reaching a goal without major intervention. A formal progress report is issued quarterly and made publicly available on the agency’s Web site; and Increase the use of cost monitoring or earned value management systems to improve oversight of programs. Despite FAA’s current and planned efforts to improve its acquisition of major ATC systems under the ATO, given the newness of these efforts and the agency’s poor track record in this area for more than two decades, it is critical for FAA to (1) modify AMS to more fully reflect the best practices followed by high-performing acquisition organizations, (2) follow through on planned improvement initiatives, and (3) adopt a continuous improvement approach to acquiring new ATC systems. In the early 1990s, FAA contended that it needed relief from the FAR to remedy long-standing problems with cost, schedule, and performance shortfalls in its major ATC acquisitions; however, our work for more than two decades in this area has found that acquiring major ATC systems successfully depends more on managing an acquisition process well than on using a specific contracting process (e.g., the FAR or AMS). While our recent work has shown some improvement in FAA’s management of major ATC system acquisitions, some key problems that existed before 1996 persist under AMS—including difficulty with clearly defining system requirements at the investment milestone and adequately assessing complex software requirements. These problems continue to make these acquisitions vulnerable to cost, schedule, and performance shortfalls. Without further measures to improve the development and management of requirements and to better estimate the complexity of the software development needed for major ATC systems, such shortfalls are likely to persist. Although AMS provides some discipline for acquiring major ATC systems through its various phases, activities, and decision points, it does not require that (1) specific knowledge be attained using explicit written criteria and (2) corporate executive-level oversight be provided to determine—independently from the program offices—whether a system has reached a level of development (product maturity) sufficient to move forward in the acquisition process. Commercial best practices call for such knowledge-based decision-making at the corporate executive-level to help ensure that acquisitions are not moved into the development phase prematurely, to obtain greater predictability in ATC system program costs and schedules, to improve the quality of the ATC systems that are deployed, and to deliver new capability to the National Airspace System faster. A knowledge-based approach is also important because it provides assurance that agency decision-makers have critical information about an acquisition’s ability to meet a mission need and FAA’s readiness to move forward in the acquisition process before making large commitments of agency resources. Absent such an approach, FAA lacks assurance that it has obtained the critical technological, design, or manufacturing knowledge that best practices call for to avoid cost overruns, schedule slips, and performance shortfalls. As a result, FAA is not doing all that it can to systematically address persistent shortcomings in its management of major ATC acquisitions. Moreover, although FAA has established a framework for training its acquisition workforce under the ATO, it has not yet developed comprehensive performance criteria to evaluate how effectively it has implemented this framework. As a result, the agency lacks assurance that its use of this framework is having the intended effect of improving the knowledge base of this workforce. We are making five recommendations to the Secretary of Transportation. To reduce the risk of persistent cost and schedule shortfalls in major ATC system acquisition programs, to improve the quality of the ATC systems that are deployed, and to deliver new capability to the National Airspace System faster, we recommend that the Secretary of Transportation advise the FAA Administrator to take the four following actions: Modify AMS to specify that requirements be more clearly defined for major ATC systems, including providing more detailed guidance on setting clear, objective, and measurable requirements that reflect customers’ needs, before making large investments of agency resources. Establish a strategy for identifying and measuring all additional development needed for complex software (e.g., commercial-off-the- shelf or nondevelopmental items) used for major ATC systems. Develop explicit written criteria for the key decision points called for under best practices, including the capture of specific design and manufacturing knowledge. Require corporate executive-level decisions at these key decision points (before an acquisition moves from integration to demonstration and, again, before it moves to production). In addition, to assure FAA that the training framework it has adopted for the ATO’s acquisition workforce is improving the knowledge base of this workforce as intended, we recommend that the Secretary advise the Administrator to develop performance criteria to comprehensively evaluate the framework’s effectiveness. We provided copies of a draft of this report to DOT for review and comment and met with Department and FAA officials, including the ATO's Vice President for Acquisition and Business Services, to obtain their comments. FAA officials told us that they have made great strides in improving their acquisition of major ATC systems under AMS; however, they recognize that there is room for improvement and are firmly committed to implementing best practices for acquisitions. These officials generally agreed with the report's findings and conclusions and said that our recommendations would be useful to them as they continue to refine their acquisition management system, including training their acquisition workforce. The agency provided us with oral comments, primarily technical clarifications, 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 of this report to interested congressional committees, the Secretary of Transportation, and the Administrator, FAA. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please call me at (202) 512-2834 if you or your staff have any questions concerning this report. Key contributors to this report are listed in appendix VI. Our review of the Federal Aviation Administration’s (FAA) general procurement of goods and services focused on the Air Traffic Organization (ATO) and its predecessor offices. According to FAA officials, the ATO has recently begun to consider ways to better leverage its buying power by taking a more strategic approach to procurement. While FAA uses the Acquisition Management System (AMS) for all FAA acquisitions, including the procurement of such goods and services as office supplies, computers, telephone services, and engineering and technical support services, these procurement activities take place in a decentralized environment of independent, transaction-oriented buying processes. Each FAA unit determines its need for goods and services and procures them as necessary, leaving headquarters with limited oversight of the agency’s total procurement spending. For example, in 2003, FAA units carried out over 346,000 procurement actions for goods and services and purchase cardholders made an additional 335,000 transactions. This fragmented environment does not permit the agency to leverage its buying power through lower-cost, consolidated contracts, at the local, regional, or national level and to rationalize the number of suppliers best suited to meet the agency’s needs. At the same time, as part of a strategic procurement effort, FAA can use spend analysis to monitor trends in small and disadvantaged business participation so that it can balance the goals of lower-cost contract consolidation and promoting small business contracting opportunities. Spend analysis, a tool used in a strategic approach to procurement, provides knowledge about how much is being spent for what goods and services, who the buyers are, who the suppliers are, and where the opportunities are to leverage buying power. Our past work shows that private companies are using spend analysis as a foundation for employing a strategic approach to procurement. The analysis identifies where numerous suppliers are providing similar goods and services—often at varying prices—and where purchasing costs can be reduced and performance improved by better leveraging buying power and reducing the number of suppliers to meet the company’s needs. Our research on commercial best practices has found that spend analysis is an important driver of strategic planning and execution. As part of an overall strategic procurement effort, companies use spend analysis to (1) define the magnitude and the characteristics of their spending, (2) understand their internal clients and supply chain, (3) create lower-cost consolidated contracts, and (4) monitor spending with small and disadvantaged businesses to achieve socioeconomic procurement goals. We previously reported that six agencies, including DOT, did not take advantage of opportunities to obtain more favorable prices on purchase card buys with frequently used vendors—vendors where an agency spends more than $1 million annually. In these six agencies, which accounted for over 85 percent of federal government purchase card spending, frequently used vendors accounted for purchases totaling nearly $3 billion in 2002. We recommended several actions—including conducting spend analysis using available data and gathering additional information where feasible—that could ultimately help these agencies achieve $300 million annually in potential savings. In fiscal year 2003, FAA procured nearly $4 billion in goods and services and spent an additional $132 million using purchase cards. According to senior FAA officials, the agency has just begun to implement a strategic approach to general procurements. Other federal agencies are beginning to use strategic tools such as spend analysis to improve their spending for goods and services, and some have initiatives under way to obtain more favorable prices on purchase card buys. According to a senior FAA acquisition official, FAA has to balance the need of its units to independently make purchases that pertain solely to unit requirements with the agency’s need to aggregate purchases of goods and services that are used by more than one unit. FAA has hired a consultant to help begin the use of spend analysis. This effort could reduce the agencywide costs for mobile wireless services by 40 percent—an effort expected to save the agency $8 to $10 million annually. FAA intends to expand its use of spend analysis to target other procurement category savings opportunities, including information technologies, training, facilities, and professional services, as its accounting systems improve. FAA has taken some preliminary steps to set up a spend analysis program; however, progress has been challenging for FAA because of deficiencies in its accounting systems. For example, because the agency’s accounting system did not identify all of the mobile wireless services for which it was being billed, the contractor implementing the spend analysis had to obtain this information from the wireless providers. FAA will need to expedite its efforts in this area to fully realize potential savings. Our prior research has shown that setting up a spend analysis program can be challenging. Companies have had problems accumulating sufficient data from internal financial systems that do not capture information on all of what a company buys or is using in different, unconnected parts of the company. Despite these challenges, companies that have developed formal, centralized spend analysis programs have been able to track their costs and identify areas for strategic sourcing and savings opportunities. In our recent report on spend analysis, we found that DOT, at the time of our review, had not yet begun to collect the data needed for a strategic approach to procurement; however, the department is engaged in ongoing efforts to improve procurements, and its top leadership is committed to using spend analysis to change the way goods and services are purchased. One obstacle to using spend analysis that the department cited during our review was a lack of comprehensive and reliable spending data. However, since we completed our review, the department reports stepping up efforts to use currently available data and evaluate business intelligence software to overcome those obstacles. In commenting on our report, Transportation’s senior procurement executive told us that the department is expanding its spend analysis efforts. For example, his office recently reviewed purchase card spending data to identify volume discount opportunities and is now using the results to negotiate new discount agreements with several office product vendors. In addition, he told us that to facilitate future agencywide purchase card spend analyses, DOT awarded a task order in June 2004 to one bank card company that will provide purchase-card audit software and enhanced data-mining capabilities. He also indicated that the department’s leadership supports fiscal year 2005 funding to enhance spend analysis capabilities and that software options for the new agencywide spend analysis system are now being evaluated as part of an ongoing financial and procurement review. To compare FAA’s Acquisition Management System (AMS) with the Federal Acquisition Regulation (FAR), we reviewed AMS and changes in it over time. We also compared FAA’s acquisition authority under the FAR and under AMS. In addition, we identified relevant recommendations from reports that we, the Department of Transportation’s Inspector General (DOTIG), and others have issued to determine which recommendations have been implemented, rejected, or left open, and to evaluate how those recommendations have modified FAA’s acquisition policies and practices. We also collected and summarized published reports and analyzed available life-cycle management data on the current status of major and nonmajor acquisitions being carried out under AMS. To determine the ways in which FAA’s acquisition policies compare with our best practices model, we used information from several of our products that examine how commercial best practices can improve outcomes for acquisition programs. This model consists of four phases: (1) concept and technology development; (2) product development, which includes both integration and demonstration activities; (3) production; and (4) operations and support. In between these four phases are three key knowledge points at which commercial firms must have sufficient knowledge to make large investment decisions. We also reviewed and analyzed AMS, accessible at http://fast.faa.gov. Furthermore, to clarify the content of FAA’s acquisition process, we met with various FAA vice- presidents and officials from FAA's Acquisition Planning and Policy Division. Next, we compared and contrasted FAA's acquisition policies with the best practices for commercial acquisitions identified in our past reports. Our analysis focused on whether FAA's policies contained the measurable criteria and management controls necessary to achieve FAA's intent of minimizing cost, schedule, and performance risks. We also interviewed current and former FAA procurement officials that have experience using both the FAR and AMS. To determine if FAA has effectively implemented its new acquisition authority and improved its acquisition outcomes, we reviewed seven of FAA’s most expensive major ATC acquisitions, including the Airport Surveillance Radar 11 (ASR-11), Standard Terminal Automation Replacement System (STARS), Integrated Terminal Weather System (ITWS), Local Area Augmentation System (LAAS), Next Generation Air/Ground Communications System (NEXCOM), Advanced Technologies and Oceanic Procedures (ATOP), and En Route Automation Modernization (ERAM). See table 7 for specific program costs. We also selected these seven acquisitions because we considered them to fall into two basic categories-pre-AMS and post-AMS. Five of the acquisitions were initiated before AMS was implemented in April 1996 and were transitioned into AMS at various times before their completion. The two remaining acquisitions—ATOP and ERAM—were initiated and have remained completely under AMS. We then reviewed program documents and reports and interviewed program and agency officials responsible for developing these acquisitions, as well as other acquisitions experts in the private sector. For some acquisitions, we discussed programmatic issues with representatives of the primary contractor for the specific acquisition to obtain information on the practices and procedures used for the acquisition. In addition, we interviewed some current and former FAA procurement officials with experience using both the FAR and AMS to obtain their views on the use of each contracting process and how the two compare. Furthermore, to see how FAA has progressed in addressing problems with its acquisitions, we reviewed our work on acquisitions over the last 20 years, as well as reports by the DOTIG, FAA, Booz-Allen & Hamilton, and MITRE. Because the data in this report on cost, schedule and performance are used as background information or to otherwise provide a description of acquisitions, we did not assess their reliability. The effect of the current budget process on FAA’s ability to successfully modernize the National Airspace System, including acquiring major ATC systems is not within the scope of this review. FAA’s business processes, including its acquisition of major systems, differ significantly from the business processes followed by most other federal agencies. FAA relies on its Acquisition Management System (AMS), which establishes FAA internal acquisition policy. AMS resulted from the adoption of language in the Department of Transportation and Related Agencies Appropriations Act, which directed the FAA Administrator to develop and implement an acquisition management system for FAA. The adoption of this language (section 348) followed FAA’s assertions that the requirement that it conduct procurements in accordance with the Federal Acquisition Regulation (FAR) was at least a contributing factor in its repeated failure to complete air traffic control (ATC) and other modernization programs on schedule. The Administrator was directed to put in place a system that would address the “unique needs of the agency” that FAA contended prevented its acquisitions from being timely and cost-effective. Section 348 distinguished FAA from other federal agencies by removing FAA from the federal acquisition system. Under section 348, FAA was no longer subject to title III of the Federal Property and Administrative Services Act of 1949, which among other things requires that the government procure supplies and services competitively. It removed FAA as an agency subject to the Office of Federal Procurement Policy Act and eliminated the requirement that FAA comply with the FAR. While mandating that FAA conduct its acquisitions so that “all reasonable opportunities to be awarded contracts shall be provided to small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals,” section 348 eliminated the requirement that FAA comply with the Small Business Act. Furthermore, it made the procurement protest system of the U.S. Government Accountability Office inapplicable to FAA, although disappointed offerors can still file protests with FAA’s Office of Dispute Resolution for Acquisition. Much of AMS guidance concerns project, financial, and property life-cycle management issues. In fact, FAA’s policy describes AMS as applying to all investment programs regardless of cost or the appropriation funding them. It recognizes that a single investment program may span multiple procurements and projects. It applies, according to its terms, to the activities associated with needs analysis, determination of requirements, analysis of investment alternatives, establishment of investment programs, allocation and expenditure of resources, procurement and deployment of needed products and services, in-service management of fielded capability, and eventual disposal of obsolete products. AMS focuses on the following key program milestones: Mission Analysis—encompasses those key corporate and service-level processes that define, coordinate, and integrate the work of service organizations, thereby providing strategic direction to keep FAA responsive to the service needs of its customers. Mission analysis is used to update a mission need statement, which in turn may identify capability shortfalls or technological opportunities, that is, unmet needs. Unmet needs are presented to the Joint Resources Council (JRC) for a mission need decision. To be approved, the unmet need should be supported by the updated mission need statement and the initial requirements document, including a concept of use, and the initial investment plan. Investment Analysis—builds on the results of the mission need decision by developing detailed plans and final requirements for each proposed investment program and by defining an acquisition program baseline that establishes cost, schedule, performance, benefit, and risk- management boundaries for the program. AMS calls for planning the entire solution—an effort that may use market survey data but is based in large measure on FAA’s assumptions and data. The service organization produces a final implementation and life-cycle support strategy. A detailed program plan and an acquisition program baseline are also produced. The results are presented to the JRC for a “final investment decision.” Solution Implementation—encompasses acquiring, accepting, deploying, installing and preparing for the operational use of an approved investment. Approval of the investment carries with it authorization for the service organization to conduct all acquisitions needed to execute the investment decision, subject to any constraints established in the final investment decision. In-Service Decision—is an FAA system qualification milestone, which is achieved when an otherwise operational investment is satisfactorily tested to demonstrate its operational effectiveness and suitability before it is placed in service in the National Airspace System. The JRC designates the decision maker. In-Service Management—covers activities throughout a system’s life cycle, starting at the time that an investment becomes operational. In- service product improvements may eliminate latent defects, fix systemic problems, and enhance the utility of the investment. These changes may be made within the approved acquisition program baseline without corporate-level approval. In-service management also includes planning, programming, and developing supporting budget input; monitoring and assessing performance, cost of ownership, and support trends; and planning for service-life investment decisions. Service Life Extension—seeks a new investment decision by the JRC when a current capability is unable to satisfy demand or when another solution may be more effective. The JRC can decide to revalidate the mission need satisfied by the solution by upgrading or refurbishing fielded capability or by replacing that capability with another equivalent or new superior solution. The JRC may also decide that the capability should be retired. Although the FAR includes requirements addressing procurement planning and major system acquisition, AMS as just outlined differs significantly from the FAR in its focus and scope. The FAR addresses planning and major system acquisition in the context of government procurement policy and procedure. Agencies other than FAA find the broader program planning and management issues addressed in AMS outside of the FAR, in documents such as the Office of Management and Budget’s (OMB) Circular A-109, in their own planning guidance, such as the Department of Defense’s (DOD) 5000 series,and in established knowledge-based best practices. As indicated earlier, much of AMS focuses on just such issues. Only AMS section 3 addresses procurement policy and procedure. A further significant foundational difference between AMS and the FAR is that AMS sets out a nonregulatory FAA policy, whereas the FAR was adopted and is maintained as a set of published governmentwide regulatory requirements, which form a legal basis for federal agencies’ contract decision-making. AMS is binding on FAA personnel as FAA employees and establishes other guidelines that FAA states should be followed unless there is a rational basis for doing otherwise. AMS is subject to such internal controls as the Administrator chooses to enforce and general overarching legal requirements, such as the Government Performance and Results Act of 1993 (GPRA). There is a legal requirement, created by section 348, that small and socially or economically disadvantaged firms be given all reasonable opportunities to receive contract awards. FAA in its Office of Dispute Resolution for Acquisition has adopted a dispute resolution process with some legal underpinnings. Otherwise, as the preface to AMS states, “nothing in this document creates or conveys any substantive rights.” In short, FAA has assumed no legal obligation to follow AMS other than to ensure that its actions are not arbitrary and capricious or contrary to law. By contrast, the FAR has the force and effect of law, and agencies that are subject to the FAR are bound to follow it. When FAA personnel apply the procurement methodology in AMS chapter 3, they are applying guidance that closely parallels some of the procedures set out in the FAR. The AMS Chapter 3 acquisition process parallels a subset of the varied selection of procurement methods available under the FAR, requiring that all competitive FAA contracts be negotiated with the awardee being selected on a “best value” basis. The FAR also provides a much more detailed set of information and guidance than does AMS. A comparison of high-level differences and similarities between AMS and the FAR is presented in table 8. As table 8 indicates, AMS incorporates a less rigorous competition standard than the FAR imposes on the rest of the government. AMS states that it is FAA's policy to provide reasonable access to competition for firms interested in obtaining contracts. According to AMS, in selecting sources, the preferred method of procurement is to compete requirements among two or more sources. However, there is no requirement to ensure that firms that want to participate actually get a chance to do so. Instead FAA may limit competition for further consideration in its screening process to firms with known capabilities or past performance. AMS states that authority is delegated to appropriate levels. Once the final investment decision is made, and subject only to any constraints imposed by that decision, the service-level organization is responsible for conducting required acquisitions. Contracting personnel as well as other specialists are then assigned to teams that are responsible to a program manager within the service-level organization. FAA states that this approach increases the pace of doing business. By comparison, the FAR gives contracting professionals clear control over contracting decisions by requiring that procurement decisions be made by procurement professionals—typically contracting officers or their superiors. As part of our work, we interviewed project management personnel within FAA as well as current and former FAA procurement officials that have experience using both the FAR and AMS. Generally, FAA personnel see AMS as more efficient and flexible than the FAR, although 9 years after AMS’s adoption, many FAA officials have only limited knowledge of and experience with the FAR. The FAA project managers we interviewed see AMS as more efficient and flexible than the FAR, but some procurement officials with experience in applying both AMS and the FAR did not agree with the view that the FAR was unduly rigid. According to these officials, the FAR may appear inflexible and cumbersome to persons who are inexperienced with it, but those who are familiar with it are able to navigate its complexities effectively. For example, even though the FAR generally requires full and open competition—a process that can take time to give all interested firms an opportunity to participate—contracting officers may be able to expedite the procurement process by using authorized streamlined procedures or, if circumstances warrant, by justifying sole-source or limited competition. Since FAA developed and implemented AMS in 1996, GAO and the DOTIG have made recommendations to improve FAA’s acquisition processes. FAA has adopted many of these recommendations and incorporated them into AMS (see table 9). These implemented recommendations address four main themes: Developing a strategy for culture change that relies on successfully integrating the various elements of acquisition, including specific responsibilities and performance measures for all stakeholders, and providing the incentives needed to promote the desired changes. Establishing an effective management structure for developing, maintaining, and enforcing the ATC systems architecture to provide an overall plan for the National Airspace System (NAS). This management structure should assign the responsibility and accountability to develop, maintain, and enforce a complete and unified ATC system by ensuring that every project conforms to the overall plan. Improving cost and schedule tracking to provide data for estimating the costs and schedules of programs. To estimate the costs and time needed for projects, a historical database that includes cost and schedule estimates, revisions, reasons for revisions, actual cost and schedule information, and relevant contextual information is needed. Improving the management of modernization projects, including the use of project reviews, milestones, and baselines, and cost-accounting information to ensure that programs can be adjusted as needed. The reports identified in table 10 provide recommendations to address problems we and the DOTIG have identified under these four themes. Standard Terminal Automation Replacement System (STARS) STARS is a joint FAA and Department of Defense (DOD) program. It will replace aging legacy terminal FAA and DOD automation systems with terminal ATC systems. Civil and military air traffic controllers across the nation are using STARS to direct aircraft near major airports. In June 2003, FAA commissioned STARS for use at the Philadelphia International Airport in Pennsylvania. Currently, STARS is fully operational at 24 FAA terminal radar control facilities and 17 DOD facilities. Under the ATO’s new business model of breaking large and complex programs into smaller phases to control cost and schedule, STARS is a candidate for further deployment to about 120 FAA and DOD operational facilities. In May 2004, FAA changed STARS’s cost and schedule estimates for the third time and estimates that it will cost $1.46 billion to deploy STARS at 50 operational facilities. Contractor: Raytheon. Projected date for last deployment (F&E) FAA’s Facilities and Equipment (F&E) account funds capital projects. Certification issues – FAA also experienced problems in certifying STARS, in part because of aggressive scheduling. FAA’s approach to certifying STARS was oriented to rapid deployment to meet critical needs. To meet these needs, FAA compressed its original 32-month development and testing schedule into 25 months. This compressed schedule left only limited time for human factor evaluations and not enough time for computer human interface issues and involvement of controllers and maintenance technicians. Airport Surveillance Radar Model–11 (ASR-11) ASR-11 will provide high-quality digital data to terminal controllers in terminal environments. It will also provide a more reliable replacement for aging analog radars like ASR-7 and ASR-8; it will also provide digitized radar data for the new automation systems such as STARS. In addition, ASR-11 will provide six levels of weather information, a significant improvement over the current two levels. The ASR-11 program is a joint program with DOD—that is, DOD is managing the program to joint specifications, and FAA will provide DOD with the funds to procure 112 units. ASR-11 is a nondevelopmental item. The in-service decision was made in 2003, and the radar is being deployed to 108 sites. The ASR-11 program is scheduled to be rebaselined for cost and schedule in fiscal year 2005. Contractor: Raytheon. Estimated cost (F&E) The Capital Investment Plan does not support the service as required in the current Acquisition Program Baseline, which could put the program in jeopardy. Integrated Terminal Weather System (ITWS) ITWS provides automated weather information for use by air traffic controllers and supervisors in airport terminal airspace (60 miles around the airport.) It provides products that require no meteorological interpretation to air traffic controllers, air traffic managers, pilots, and airlines. ITWS provides a comprehensive current weather situation and highly accurate forecasts of expected weather conditions for the next 30 minutes. Current FAA plans call for the installation of 34 systems that will service various airports. Six systems are operational, and feedback from users is satisfactory. In May 2004, the ATO Executive Council rebaselined the program to include a weather-forecasting capability in the production baseline, a new requirement to provide operational support for the New York prototype, and change the operations and maintenance cost baseline for the program. However, the council did not include additional funding, and therefore, in order to stay within the capital improvement program’s (CIP) funding levels, the program has proposed to defer 12 of the planned 34 systems installations. Contractor: Raytheon. Projected date for last deployment (F&E) Jan 03 – Jul 03 Funding issues –The program requested and obtained approval to rebaseline. The baseline is being modified to incorporate the Terminal Convective Weather Forecasting (TCWF) capability into the production baseline. As directed by the ATO Executive Council, responsibility for funding operational support for the New York prototype system is also being added to the baseline. The ATO Executive Council also directed that the cost of the program remain at the current CIP funding levels for fiscal years 2005, 2006, and 2007. In order to stay within the CIP funding levels, the program proposed to defer 12 of the planned 34 systems installations. Schedule issues – Because of constrained funding, 12 airports will not receive ITWS capabilities until after 2009. Local Area Augmentation System (LAAS) LAAS is a precision approach and landing system that will augment the Global Positioning System (GPS) to broadcast highly accurate information to aircraft on the final phases of a flight. LAAS consists of both ground and avionics components. Ground components include GPS reference receivers, which monitor and track GPS signals; very-high-frequency transmitters for broadcasting the LAAS signal to aircraft; and ground station equipment, which generates precision approach data and is housed at or near an airport. Aircraft will be equipped with avionics to receive LAAS signals. FAA’s fiscal year 2005 budget eliminated funding for LAAS, and remaining fiscal year 2004 funds will continue to validate LAAS requirements and address radio frequency interference issues. FAA officials will reconsider national deployment when more research results are completed. Estimated cost (F&E) $530.1 million $696.1 million Cost adequate requirements development in the early stages of the program, a lack of under of a mission software development, and an unrealistic development schedule. standing of a mission degradation issue, incomplete software development, and an Cost issues – LAAS cost estimates are not reliable, reflecting inadequate requirements development in the early stages of the program, a lack of understanding of a mission degradation issue, incomplete software development, and an unrealistic development schedule. Schedule issues – The LAAS schedule was not realistic. Specifically, FAA lacked an understanding of the integrity requirement and software development, which were the two biggest technological maturity issues facing the LAAS program. Performance Issues – FAA has not resolved the integrity requirement that ensures pilots are alerted in a timely manner when the LAAS signal is not reliable. FAA has not been able to prove that the system is safe during solar storms. An analysis of the effects of solar storms on the LAAS signal’s integrity is under way, but an atmospheric monitoring device that could address this issue may not be available until fiscal year 2009. Next Generation Air/Ground Communications (NEXCOM) The Next Generation Air/Ground Communications (NEXCOM) project is to replace the existing analog ATC communications system with a new digital system that would have greater capabilities. The initial development, of a multimodal digital radio (MDR), is to be followed by the development of aircraft avionics and ground systems. NEXCOM is expected to increase the number of available communications channels, provide simultaneous voice and data transmission between controllers and pilots, and require a digital form of authentication, designed to prevent “phantom controllers” from gaining access to the communications system. FAA plans to deploy 6,000 MDR pairs (a radio pair is one receiver and one transmitter) during the first phase, which will provide voice channels to aircraft in the en route environment. NEXCOM completed Independent Operational Test and Evaluation assessment of the radio component at the Santa Barbara, California, Remote Center Air/Ground Communications facility, and radios were approved for in-service and national deployment in July 2004. The avionics component’s development is scheduled to be completed by 2006. However, proposed funding cuts to FAA’s fiscal year 2005 budget required the termination of the ground station development, which would enable communications in the more efficient digital mode. Contractor: ITT for MDR. Estimated cost (F&E) $318.40 million$318.40 million $0 Estimated cost is only for the NEXCOM MDR. The NEXCOM ground station contract was canceled in March 2004 and is being terminated. Risks and Challenges Schedule issues—FAA planned to base the MDR on a nondevelopmental item (NDI), and the initial schedule allowed only limited development. However, FAA’s requirement that communications channels be free of signal interference (“quiet channels”) was more demanding than the NDI solution was capable of achieving. As a result, further development was necessary, delaying the initial operational capability and in-service decision by 21 months. Performance—The NEXCOM radio meets its operational requirement for coverage. However, to achieve this requirement FAA determined that the NEXCOM radios would have to achieve the same power output level (50 watts) that the existing radios produced. The contractor is delivering radios that put out no more than 34 watts per channel. This posed an “unacceptable consequence” and FAA performed additional tests or flights checks and determined that the reduced power would not adversely affect operations and has approved the use of the lower-output radios. Advanced Technologies and Oceanic Procedures (ATOP) The Advanced Technologies and Oceanic Procedures (ATOP) program introduces new controller workstations, data-processing equipment, and software designed to enhance the control and flow of oceanic air traffic to and from the United States. ATOP processes aircraft position updates automatically, whereas currently, oceanic traffic control operations are performed manually and updated via paper flight strips. ATOP is designed to present flight data “electronically” in a format similar to these paper strips. ATOP completed operational testing at its first site, the Oakland Air Route Traffic Control Center (ARTCC) and achieved initial operational capability (IOC) on June 30, 2004. Currently, ATOP is in limited use for 4 hours a day 5 days a week in one of nine sectors under Oakland’s control. Plans to fully transition ATOP to all nine sectors depend upon feedback from the initial trials and sector-by- sector capabilities. Other operational considerations still to be resolved are additional staff needs, ATOP’s training schedule, and coordination with North American Aerospace Defense Command on an interface device. FAA is currently in the early phases of installing ATOP at the New York ARTCC and is scheduled to achieve IOC in March 2005. Additional software that will incorporate radar data into ATOP is under development and scheduled to be completed by November 2004. This software is expected to be operational at the final site, the Anchorage ARTCC, in March 2006. Contractor: Lockheed Martin Transportation and Security Solutions. Risks and Challenges Cost issues—Although the contractor’s costs to develop ATOP have grown by approximately $20 million, FAA is not responsible for these cost increases because it has a fixed-price contract arrangement with the contractor. Schedule issues— ATOP achieved its initial operational capability milestone of June 2004 but a more aggressive development schedule was agreed to with the ATOP contractor to achieve this milestone by April 2003 or 14 months earlier. An ATOP Assessment Team determined that the contractor could not achieve this earlier date due poor requirements development, unrealistic schedule estimates, and inadequate evaluation by the contractor of the software complexity. The development delay has exacerbated the scheduled transition from the current oceanic system to the ATOP and would cost an additional $4 million a year to operate and maintain the old system until ATOP is fully operational. Program officials told us they were not certain when the transition could be achieved because several operational issues needed to be resolved including ATOP operational trials sector by sector, training schedule, and filling new controller positions, and budgetary allocations to support these activities. Performance – ATOP achieved initial operational capability in June 2004 and is limited basis in one of nine sectors of the Oakland Air Route Traffic Control Center. En Route Automation Modernization (ERAM) The En Route Automation Modernization (ERAM) program will enable air traffic controllers to provide ATC services to users of en route airspace (generally, high-altitude airspace at 10,000 feet or above). Services provided to users include separation, routing, and advisory services needed to meet FAA’s mission of providing safe, efficient, and reliable air traffic management. Specifically, ERAM is to replace the hardware and software in the current en route Host computer system, the direct-access radar channel, and associated infrastructure. This replacement will result in the installation of new system en route automation architecture at each air route traffic control center (ARTCC). In concert with other en route programs, ERAM will modernize the en route infrastructure to provide a supportable, open-standards-based system that will be the basis for future capabilities and enhancements. ERAM is to be deployed at 20 ARTCCs in the continental United States. FAA awarded a letter contract to Lockheed Martin in December 2002. To date, ERAM has not breached any JRC cost or schedule parameters. However, the ERAM program is highly software intensive, requiring the writing of over 1 million lines of software code. In addition, Lockheed Martin is behind schedule because of software design and production control issues that Lockheed expects to resolve. Lockheed Martin officials stated that it does not expect any downstream impact from the current negative schedule variance of about $1 million. Contractor: Lockheed Martin Transportation and Security Solutions. Projected date for last deployment (F&E and O&M) Software Issues – Software development is one of ERAM's major risk items. The ERAM program is a high-risk effort because of its size and the amount of software code – over 1 million lines of software code expected. Lockheed Martin is experiencing cost variances because of software engineering difficulties. According to its cost performance report, software engineering costs are being hampered by lower productivity than originally planned and by software code growth across the program. However, according to FAA officials, these additional software development costs can be easily absorbed within the contractor’s management reserve that is currently on the contract. In addition to the individuals named above, Tamera Dorland, Elizabeth Eisenstadt, Brandon Haller, Bert Japikse, Carolyn Kirby, Steve Martinez, Richard Scott, Adam Vodraska, and Dale Yuge made key contributions to this report. | The Federal Aviation Administration's (FAA) multibillion-dollar effort to modernize the nation's air traffic control (ATC) system has resulted in cost, schedule, and performance shortfalls for over two decades and has been on GAO's list of high-risk federal programs since 1995. According to FAA, performance shortfalls were due, in part, to restrictions imposed by federal acquisition and personnel regulations. In response, Congress granted FAA exemptions in 1995 and directed it to develop a new acquisition management system. In this report, GAO compared FAA's AMS with (1) the FAR and (2) commercial best practices for major acquisitions, and (3) examined FAA's implementation of AMS and its progress in resolving problems with major acquisitions. FAA's Acquisition Management System (AMS) is broader and less prescriptive than the Federal Acquisition Regulation (FAR), but both afford managers flexibility. AMS establishes an acquisition life-cycle management system, including both a contracting and program management system, whereas the FAR is primarily a contracting system. In addition, AMS takes the form of guidance--it is not regulatory, while the FAR is a set of published regulations--a legal foundation that has the force and effect of law that most federal agencies are required to follow. AMS provides some discipline for acquiring major ATC systems; however, it does not ensure a knowledge-based approach to acquisition found in the best commercial practices for managing commercial and DOD product developments that we have identified in numerous past reports. Best practices call for (1) use of explicit written criteria to attain specific knowledge at key decision points and (2) use of this knowledge by executives at the corporate level to determine whether a product is ready to move forward. Attainment and use of such knowledge by executives helps to avoid cost, schedule, and performance shortfalls that can occur if they commit to a system design prematurely. While AMS has some good features, including calling for key decision points, it falls short of best practices. GAO's review of seven major ATC systems and analysis of FAA's performance in acquiring major systems found that AMS has not resolved longstanding problems it experienced prior to its implementation of AMS--including developing requirements and managing software--and is just beginning to focus on how these acquisitions will improve the efficiency of ATC operations. While FAA has made progress by providing guidance for avoiding past weaknesses, it has not applied these improvements consistently. According to FAA officials, reorganization under and improved oversight by FAA's new performance-based Air Traffic Organization should help ensure greater consistency and an increased focus on results. Past GAO reports have demonstrated that the success of an acquisition process depends on good management, whether it be under AMS or the FAR. |
At the time of the regulatory takeover, Monarch Life was domiciled in Massachusetts and licensed in all 50 states and the District of Columbia. Monarch Life was subject to solvency monitoring in each state in which it was licensed. As the state of domicile, Massachusetts had primary responsibility for taking action to resolve the insurer’s financial troubles. As of December 1990, about 5 months before it entered receivership, Monarch Life reported assets of $4.5 billion. The insurer’s business included variable life insurance, annuities, and disability insurance. As a wholly-owned subsidiary of the holding company, Monarch Life, in turn, owned two life insurance company subsidiaries: Springfield Life Insurance Company, Incorporated, domiciled in Vermont, and First Variable Life Insurance Company, domiciled in Arkansas. Springfield Life was placed in receivership by Vermont regulators in May 1991. First Variable, however, was not taken over by Arkansas regulators. Finally, the holding company also owned various real estate and investment management companies. A holding company structure provides opportunities for an insurance company to diversify its business and increase efficiency by sharing administrative operations with affiliated companies. Also, a holding company can draw on its resources to provide capital infusions and financial support for a troubled insurance subsidiary. However, interaffiliate transactions may pose risks to an insurer’s solvency. An insurer faces the risk that affiliates may not repay money borrowed from the insurer. Selling or transferring assets from affiliated companies to an insurer also places the insurer at risk of receiving poor quality assets. Moreover, financial problems within a holding company structure may adversely affect an insurer. An overleveraged holding company cannot provide financial support for its insurer and may attempt to divert funds from the insurer to assist ailing noninsurance affiliates. Abusive interaffiliate transactions have contributed to several major life insurance failures. The Baldwin-United failure in 1983 was caused in large part by abusive interaffiliate transactions in which the holding company siphoned cash from its insurance subsidiaries. In an investigation of the 1991 failure of Guarantee Security Life, the Permanent Subcommittee on Investigations of the Senate Committee on Governmental Affairs learned that Guarantee Security allegedly used phony investments in unreported affiliates to mask its insolvency. We previously testified that interaffiliate transactions drained the capital or masked the financial condition in four other failures: Executive Life of California, Executive Life of New York, First Capital, and Fidelity Bankers. Every state has statutory guidelines requiring insurers to disclose transactions with affiliated companies, and many states require prior regulatory approval to prevent abusive transactions. State regulators rely on off-site analyses of insurer-reported statutory financial statements and periodic on-site examinations to monitor insurer solvency. The National Association of Insurance Commissioners (NAIC) has a program for accrediting state insurance departments that meet its financial regulation standards. These standards define the laws and regulations, as well as various regulatory practices and procedures, that NAIC believes, at a minimum, are needed for effective insurance solvency regulation. The Massachusetts Division of Insurance was accredited by NAIC in December 1993. To determine whether interaffiliate transactions had a role in Monarch Life’s financial problems, we reviewed the insurer’s annual statutory financial statements filed with state regulators, financial statements filed with the Securities and Exchange Commission (SEC) by the insurer as well as its parent holding company, public reports of regulatory examinations of Monarch Life as of 1985 and 1988, and court proceedings pertaining to the receivership. We also met with Monarch Life officials and reviewed legal documents pertaining to the insurer’s lawsuit against its former law firm and independent auditors. To evaluate the adequacy of regulatory oversight by the Massachusetts Division of Insurance, we attempted to establish when Massachusetts regulators became aware that transactions with affiliated companies could endanger Monarch Life’s solvency and what actions regulators took to protect policyholders. We reviewed financial analysis files of the Massachusetts Division of Insurance and interviewed regulatory officials responsible for managing the Monarch Life receivership. We also reviewed the workpapers from the examination conducted in 1989 for the 3-year period ending December 31, 1988 (hereafter “the 1988 examination”). The public report of the 1988 examination was issued in January 1990—10 months before the holding company’s public disclosure of Monarch Life’s financial problems. We sought to identify how examiners assessed Monarch Life’s transactions with affiliated companies and whether the examination detected any problems. In particular, we attempted to determine whether the examiners followed guidance on investigating interaffiliate transactions recommended in NAIC’s Financial Condition Examiners Handbook. Compliance with NAIC’s examiners handbook is required for a state to be accredited. We also examined Massachusetts insurance holding company laws in place at the time of the Monarch Life takeover, as well as amendments to those laws adopted in November 1993. We used NAIC data to determine to what extent Massachusetts had adopted NAIC’s model Insurance Holding Company System Regulatory Act. This model—one of the minimum standards for accreditation—details regulatory authorities recommended by NAIC for monitoring an insurance company within a holding company structure. In particular, we considered whether Massachusetts had (1) requirements for prior approval of material transactions, (2) examination access to affiliated companies, and (3) sanctions for violating insurance holding company laws. NAIC had added such provisions to the model Insurance Holding Company System Regulatory Act following the Baldwin-United failure. We obtained written comments on a draft of this report from the Massachusetts Division of Insurance and incorporated its comments where appropriate. (See app. I for the text of Massachusetts regulators’ comments.) We did our work in Boston and Springfield, MA, between January 1993 and July 1994 in accordance with generally accepted government auditing standards. Financial troubles of the holding company endangered the solvency of Monarch Life and led to the regulatory takeover. In December 1989, the holding company reported $72 million in losses on its real estate investments, including estimated costs for disposing of those assets. In May 1990, the holding company borrowed $235 million from a consortium of banks and pledged its stock in Monarch Life as collateral for the debt.In addition to the stock pledge, the loan agreement included a net worth covenant requiring the holding company to maintain a minimum capital level. As a result of the depressed real estate market, the holding company reported additional losses in 1990 on its real estate operations. In the third quarter report it filed with SEC in November 1990, the holding company disclosed that real estate losses of $103 million caused a default on the net worth covenant in the loan agreement. At that time, the holding company informed the Massachusetts Division of Insurance that its real estate losses and resulting inability to repay money borrowed from Monarch Life had adversely affected the insurer’s liquidity and capital resources. In the fourth quarter, the holding company reported additional losses of $20 million and defaulted on the interest payment due on its loan. Further, the holding company disclosed that, because it had pledged its Monarch Life stock, it could lose control of the insurer to its bank creditors. In 1985, the holding company had begun operating a cash pool account to control and maximize use of available cash from its subsidiaries within the holding company group. According to the “Short-Term Investment Pool” agreement dated September 1986, Monarch Life was to transfer its available cash to the holding company’s pool account at the end of each day. In return, Monarch Life was to receive a short-term interest rate on its cash funds, which previously had been placed in noninterest-bearing accounts. In 1986, the holding company reportedly had bank lines of credit totaling $125 million, which were to guarantee the availability of Monarch Life’s cash on a demand basis. Any subsidiary in the holding company system could borrow cash from the pool account at the holding company’s short-term interest rate. In effect, the pool account represented loans from Monarch Life to the holding company and other subsidiaries. These loans were not secured by collateral, and Monarch Life had no controls to ensure that affiliates borrowing from the pool account could repay their loans. Table 1 shows how much the holding company owed to Monarch Life at year-end from 1985 to 1989. In 1985, before the pool was formally established, the insurer lent nearly $7 million to the holding company. By the end of 1986, Monarch Life had a balance of $70 million—approximately 59 percent of its reported capital and surplus—in the holding company’s pool account. By year-end 1989, the insurer’s balance in the pool account had grown by 57 percent to nearly $111 million—about 80 percent of its reported capital and surplus. Given the size of its “investment” in the holding company’s pool account compared with its surplus, Monarch Life’s financial health depended on the holding company’s ability to repay the cash. The pool account provided a means for the holding company to divert cash from Monarch Life. Instead of servicing short-term cash needs, the holding company used the insurer’s cash to finance long-term real estate investments. However, the holding company did not have the financial resources to repay the insurer’s cash. By September 1990, the holding company owed nearly $165 million to Monarch Life and its subsidiary—equivalent to over 110 percent of Monarch Life’s reported capital and surplus. In the third quarter 1990 report it filed with SEC, the holding company disclosed that it had discontinued the pool account and was trying to repay Monarch Life. Of $157 million owed to Monarch Life and its subsidiary as of November 1990, the holding company partially repaid the balance by transferring three subsidiaries to Monarch Life. The holding company estimated the subsidiaries were worth $60 million. In its 1990 annual statutory financial statement, Monarch Life wrote off $63 million of its balance in the pool account and nearly $4 million on its holdings of common stock of the holding company. At the holding company’s direction, Monarch Life also invested directly in several affiliated real estate entities. In December 1989, Monarch Life and its two insurance subsidiaries invested $53 million—equivalent to 38 percent of Monarch Life’s reported capital and surplus in 1989—in an affiliated real estate limited partnership. According to Monarch Life officials and Massachusetts regulators, the holding company created the partnership because it did not have the liquidity to repay cash borrowed through the pool account. The partnership’s assets had been transferred to the newly created partnership from the holding company’s real estate affiliates, and the holding company, as the general partner, continued to control the underlying properties. The partnership served as a way for the holding company to transfer assets, including mortgage loans exceeding 75 percent of the properties’ values, that would not qualify as legally permitted investments if held directly by Monarch Life. According to Monarch Life, the insurer and its subsidiaries lost $34 million on the limited partnership. In June 1990, Monarch Life paid $33 million to purchase three bank loans on the marina joint venture of an affiliated real estate company. At that time, the real estate market in Massachusetts was depressed, and the marina units were not selling. The three loans had been overdue since March 1990, and the venture was on the verge of bankruptcy. The failure of the joint venture would have bankrupted the real estate affiliate and could have precipitated a chain of defaults under the holding company’s various loans and lines of credit. Monarch Life’s purchase of the three bank loans disguised the possible insolvency of the affiliate and potential credit crisis for the holding company itself. We question whether the investment—representing 33 percent of Monarch Life’s reported 1990 capital and surplus—in a troubled real estate venture was in the best interest of the insurance policyholders. According to Monarch Life officials, the insurer lost nearly $20 million as a result of its investment. Monarch Life faced additional risk by acting as a loan guarantor for some of the holding company’s real estate operations. As of December 1990, Monarch Life was committed to lend $6 million to the holding company’s limited partnerships and had guaranteed mortgage loans for the holding company’s real estate ventures totaling about $69 million—$14 million more than the estimated value of the underlying properties. According to the Massachusetts receivership petition in 1991, Monarch Life received little, if any, compensation for the loan guarantees, which were highly risky given the inadequate underlying collateral. Until the holding company’s disclosures in November 1990, the Massachusetts Division of Insurance was unaware of the interaffiliate transactions that depleted Monarch Life’s assets and undermined its solvency. The statutory financial statements that Monarch Life filed with state regulators did not disclose information crucial for regulators to fully assess the risks of the insurer’s transactions with affiliated companies. Further, the last triennial examination of Monarch Life did not detect the riskiness of the pool account transactions because examiners did not assess whether the holding company could repay the loans. Once the holding company disclosed that its inability to repay Monarch Life endangered the insurer’s solvency, Massachusetts regulators responded swiftly to protect the insurer’s policyholders. Timely, accurate, and complete information about an insurer’s assets is crucial for effective solvency regulation. If financial reporting does not fairly and promptly present an insurer’s true condition, regulators cannot act quickly to resolve problems. Monarch Life—like all insurers domiciled in Massachusetts—was required to submit quarterly and annual statutory financial statements as well as annual audited statutory financial statements. However, Monarch Life’s statutory financial statements indicated neither the magnitude of its investments in affiliates nor the economic substance of the pool account. In its 1989 statutory financial statements, Monarch Life disclosed its purchase of the limited partnership from the holding company as an interaffiliate transaction but did not reveal that the partnership itself was a related party. In its 1990 statutory financial statement, Monarch Life did not indicate that its purchase of the marina bank loans resulted in its investment in an affiliated joint venture. Monarch Life reported its participation in the pool account as “Other Long-Term Invested Assets” and did not identify these amounts as unsecured long-term loans to affiliated companies. Moreover, statutory financial statements filed with Massachusetts regulators did not fully disclose the magnitude of Monarch Life’s loans to the holding company. Monarch Life officials and Massachusetts regulators alleged that the holding company manipulated the pool account to lower the balances reported in Monarch Life’s quarterly and annual statutory financial statements. Figure 1 shows the insurer’s pool account balance at the end of each month from December 1988 to January 1990. During this time period, the pool account balance in each of Monarch Life’s quarterly reports—March, June, September, and December—was lower than the monthly balances both preceding and following the quarter’s end. The December balance of nearly $111 million reported in Monarch Life’s 1989 annual financial statement was sizably less than its November balance of nearly $190 million. The $111 million balance (80 percent of Monarch Life’s capital and surplus at year-end 1989) did not trigger closer scrutiny by Massachusetts regulators, in part because the reported balance was less than $125 million—the amount of the holding company’s lines of credit which were to guarantee the availability of the insurer’s cash on a demand basis. Monarch Life has alleged that the holding company drew down its lines of credit to manipulate the pool balances and did not disclose the pool’s illiquidity. Monarch Life’s statutory financial statements also did not portray its full exposure to the pool account because Monarch Life was not required to consolidate the financial accounts of its wholly-owned subsidiaries. In accordance with Massachusetts statutory accounting practices, Monarch Life reported the statutory capital and surplus of its insurance subsidiaries as assets on its own statutory financial statements. Monarch Life reported its pool account balance of nearly $111 million in its 1989 statutory statement, but its subsidiary, Springfield Life, also had a pool account balance of $15 million at year-end. Whereas Monarch Life’s pool account balance alone represented 80 percent of its capital and surplus, the combined exposure of the insurer and its subsidiary totaled 91 percent.Financial information consolidating details about the assets and liabilities of wholly-owned subsidiaries would have been useful to regulators monitoring Monarch Life’s solvency. We reported in 1989 that most states required on-site examinations only once every 3 to 5 years, although regulators could examine a troubled insurer more frequently. Regulatory examinations took months or even years to complete. According to NAIC’s examiners handbook, the state of domicile is to lead the examination of a multistate insurer, and examiners from other states in which the insurer is licensed can participate. The final examination report is to be distributed to all states where an insurer is licensed and filed as a public document. We previously found that time lags between triennial examinations, as well as reporting delays, had impaired regulators’ ability to evaluate financial deterioration and take corrective action in the case of other life insurance failures. By law, the Massachusetts Division of Insurance was required to examine the financial activities of domestic insurance companies at least once every 5 years, but the state’s practice was to examine life insurers on a triennial basis. Massachusetts regulators examined Monarch Life as of 1985 and again as of 1988. The insurer was not due to be examined again until 1993 by law, or until 1991 on a triennial basis. The public examination reports we reviewed did not reveal the problems with interaffiliate transactions that led to the regulatory takeover of Monarch Life. The public report of Massachusetts’ 1985 examination of Monarch Life did not mention the pool account. The public report of Massachusetts’ 1988 examination—issued in January 1990—listed Monarch Life’s $102 million balance in the pool account but did not discuss whether the balance was recoverable. The reported examination scope included “a general examination of the accounts and records of the subsidiaries” within the insurer’s control. According to the Special Counsel to the Receiver of Monarch Life, however, the 1988 examination did not detect the riskiness of the pool account transactions because the examiners did not follow examination policies and procedures. NAIC’s examiners handbook identifies unsecured loans to affiliates as a potentially abusive transaction and suggests examiners verify that an insurer’s cash accounts are not used for the benefit of affiliates. NAIC’s examiners handbook also recommends confirming collateral for loans and obtaining information as to the financial capability of affiliated companies to repay material balances. Even though Monarch Life’s pool account balance represented 72 percent of its capital and surplus in 1988, we saw no evidence in the 1988 examination workpapers that Massachusetts examiners assessed the holding company’s ability to repay the pool account loans. The Massachusetts examiners verified that Monarch Life transferred cash in the amounts reported as of 1988, but the workpapers contained no evaluation of whether Monarch Life could recover its money. In an October 1993 report on the Massachusetts Division of Insurance, the Massachusetts State Auditor found that the state’s field examinations of insurance companies were ineffective. In a sample of 6 of 14 examinations completed in fiscal year 1990, state auditors found that 5 of the 6 sets of examination workpapers contained no evidence of an internal control assessment. The sixth set—those for Monarch Life—included limited control testing but no conclusions about control adequacy. Moreover, the regulatory examinations focused on account-by-account balances reported in the insurers’ annual statutory financial statements and did not provide an overall assessment of solvency. In particular, the State Auditor cited the 1988 examination of Monarch Life as an example of the examination report describing each account balance but providing no conclusions about the insurer’s solvency. In its response to the State Auditor’s report, Massachusetts indicated that its examination process has changed significantly since the receivership of Monarch Life in May 1991. In late 1991, Massachusetts hired a new deputy commissioner to oversee the examination and financial surveillance units and replaced the former examination managers with technically qualified professionals with insurance experience. Starting in 1993, Massachusetts was to implement a new examination handbook and increase supervisory review of examiners’ work. NAIC’s accreditation of Massachusetts in December 1993 signified that a review team determined, among other things, that Massachusetts was in compliance with NAIC’s examiner’s handbook. In its comments on this report, the Massachusetts Division of Insurance said that it had upgraded its examination capability by hiring more examiners and using independent auditors and actuarial firms to assist in examinations of large insurance companies. Once the holding company disclosed that its financial condition endangered Monarch Life’s solvency, Massachusetts regulators moved swiftly to protect the insurer’s policyholders. In November 1990, the Division of Insurance ordered Monarch Life to cease payments to the holding company and began a special examination to assess Monarch Life’s financial condition. Massachusetts regulators disapproved Monarch Life’s request to pay a dividend of $25 million to the holding company at year-end 1990. In December 1990, Monarch Life reduced its operations by selling $3 billion in variable life insurance policies to another insurer. In a letter to the Massachusetts governor dated November 29, 1990, the Massachusetts insurance commissioner projected that the Division’s “forceful actions will prevent any threat of insolvency for Monarch Life, but the situation will require continued vigorous regulatory action on our part over the next few months.” At that time, Massachusetts regulators believed that the financial woes of the holding company would not have a direct effect on Monarch Life. However, on the basis of the special examination results, Massachusetts regulators initiated the receivership on May 30, 1991, in order to safeguard Monarch Life’s assets for policyholders. Acting on behalf of Monarch Life, the Massachusetts Insurance Commissioner, as Receiver, filed an involuntary bankruptcy petition against the holding company in the United States Bankruptcy Court on May 31, 1991. Under the bankruptcy reorganization, the former holding company’s bank creditors became the majority shareholders of the reorganized holding company. As part of the reorganization, Monarch Life was released from court-supervised receivership in September 1992 but remained under the close supervision of the Massachusetts Division of Insurance. Monarch Life ceased selling new life insurance and annuities during 1992. Monarch Life also ceased selling disability insurance in June 1993 because of higher than expected losses. On the basis of a special actuarial examination conducted as of September 1993, Massachusetts regulators directed Monarch Life to increase its insurance loss reserves and sell its subsidiary, First Variable, to increase liquidity and capitalization. Because the bank shareholders objected to the sale, which was crucial to the insurer’s recapitalization, Monarch Life’s financial condition was deemed unsound, and Massachusetts regulators put the insurer back in receivership in June 1994. In our 1992 testimony about four large life insurance failures, we reported that interaffiliate transactions of insurance companies were a regulatory blind spot. State regulators did not regulate either the parent holding companies or the noninsurance affiliates and subsidiaries of the failed insurers. Instead, state regulators were to evaluate and control the insurers’ transactions with affiliated companies. In the case of Executive Life, California regulators could not effectively assess interaffiliate transactions and protect policyholder interests because Executive Life repeatedly failed to report and secure approval for transactions with affiliated companies. Massachusetts regulators relied on insurer-reported data to assess whether Monarch Life’s transactions with affiliates were fair and reasonable. Under Massachusetts laws, Monarch Life was required to file registration statements describing the financial condition of the holding company and the identities of all companies within the holding company system, as well as reports of material transactions. According to Monarch Life officials and Massachusetts regulators, however, the insurer and its parent holding company repeatedly failed to comply with Massachusetts holding company reporting requirements. As a result, Massachusetts regulators were unaware of risky interaffiliate transactions that depleted Monarch Life’s assets and undermined its solvency. “Intercompany transactions and intermingling of assets make it nearly impossible to estimate the solvency of an insurer without looking at the various entities that are a part of the holding company, including the parent. Effective regulation of insurance holding company systems requires state regulators to review consolidated financial statements with uniform accounting standards and to examine the financial transactions among the parent holding company and its affiliates as a unitary economic enterprise.” At the time of the Monarch Life takeover in 1991, Massachusetts lacked the authority, recommended under NAIC’s model Insurance Holding Company System Regulatory Act, to prevent abusive interaffiliate transactions. In Massachusetts, only large dividends—those exceeding the greater of 10 percent of policyholder surplus or net gain from operations for a life insurer—required prior regulatory approval. NAIC’s model recommends prior approval not only for large dividends but also for any transaction exceeding 3 percent of a life insurer’s admitted assets. Massachusetts could request that Monarch Life produce records and accounts pertaining to interaffiliate transactions but lacked the authority recommended by NAIC to examine the affiliates. Massachusetts also lacked the authority to impose sanctions for violating insurance holding company laws. In November 1993, Massachusetts expanded its insurance holding company legislation to provide greater regulatory authority over an insurer’s transactions with affiliated companies. Massachusetts regulators now have greater authority to prevent potentially abusive transactions beforehand, rather than trying to recover money after a transaction has occurred. Massachusetts regulators gained authority to examine affiliates’ records if an insurer fails to produce data about interaffiliate transactions. Massachusetts also added civil and criminal penalties for violating holding company reporting and approval requirements. NAIC’s accreditation of Massachusetts in December 1993 signified that a review team determined, among other things, that Massachusetts holding company regulations were “substantially similar” to NAIC’s model Insurance Holding Company System Regulatory Act. We support state adoption of the minimum authorities recommended under NAIC’s model Insurance Holding Company System Regulatory Act as an important step towards improving regulatory oversight of an insurer within a holding company. However, even the best holding company reporting requirements cannot prevent dishonesty. Regulators’ ability to enforce Massachusetts insurance holding company laws still relies on prompt and complete disclosure of an insurer’s transactions with affiliated companies. Untimely or incomplete disclosure can hinder regulators’ ability to protect an insurer from potentially abusive interaffiliate transactions. Since a holding company’s operations may be the cause of a subsidiary insurer’s solvency problems, total reliance upon the insurer and its holding company to disclose the nature and extent of potentially abusive transactions is not prudent. On-site examinations are regulators’ primary way to verify insurer-reported information and detect violations of holding company reporting and approval requirements. To adequately assess the consequences of an insurer’s transactions with affiliated companies, examiners must recognize the economic substance of transactions and use procedures for investigating interaffiliate transactions recommended in NAIC’s examiners handbook. The longer the interval between examinations, the greater the opportunity a holding company has to engage in potentially abusive transactions without prompt regulatory detection. Before November 1990, Massachusetts regulators were unaware that Monarch Life would be unable to recover cash diverted by the holding company into risky real estate investments. In part, Massachusetts regulators were unaware because Monarch Life did not disclose the extent and riskiness of its transactions with affiliated companies. Deficiencies in the last triennial examination of Monarch Life also contributed to regulators overlooking the riskiness of Monarch Life’s dealings with affiliated companies. Since the Monarch Life receivership in 1991, Massachusetts has increased regulatory safeguards against potentially abusive transactions between an insurer and affiliated companies. However, the regulatory approach continues to rely on a holding company system to reveal potentially abusive transactions involving an insurance subsidiary. The case of Monarch Life illustrates how an insurer’s failure to comply with holding company reporting requirements can create a regulatory blindspot. Without independent evaluation of insurer-reported data, insurance regulators may not detect problems within a holding company system until losses endanger insurer solvency. In commenting on a draft of this report, the Massachusetts Division of Insurance said the report was fair and accurately addressed an area deserving of regulatory focus. The Division also provided information about improvements in its examination process implemented since 1991 when Monarch Life was placed in receivership. We revised the text to reflect this information and to incorporate where appropriate other technical corrections provided by the Massachusetts Division of Insurance. We are sending copies of this report to interested congressional members and committees, the Massachusetts insurance commissioner, and NAIC’s Executive Vice President. We also will provide copies to others upon request. This report was prepared under the direction of Lawrence D. Cluff, Assistant Director for the Insurance Group, who may be reached on (202) 512-8023 if you have questions concerning the report. Other major contributors were MaryLynn Sergent, Evaluator-in-Charge, and John McDonough, Senior Evaluator. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (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 examined the placing of Monarch Life Insurance Company in receivership, focusing on: (1) whether the actions of the parent holding company or affiliated companies endangered the solvency of Monarch Life; and (2) the adequacy of regulatory oversight leading up to the insurance receivership. GAO found that: (1) the holding company pledged Monarch Life stock as collateral on a loan which endangered its solvency and led to the regulatory takeover by the holding company's creditors; (2) the holding company diverted about $165 million from Monarch Life to fund its real estate activities, but it was unable to repay the loan; (3) Monarch Life lost $54 million in real estate investments and faced additional risk by acting as a loan guarantor for the holding company's real estate operations; (4) the Massachusetts Division of Insurance was unaware of Monarch Life's insolvency until the holding company disclosed its inability to repay its loans in 1990; (5) previous regulatory examinations of Monarch Life's financial statements did not reveal any solvency problems due to inadequate information on interaffiliate transactions; (6) once the holding company publicly announced that its financial condition endangered Monarch Life's solvency, state regulators acted quickly to protect the insurance policyholders; and (7) although Massachusetts expanded its regulatory authority to prevent abusive interaffiliate transactions between insurance companies, it continues to rely on insurer disclosure to enforce insurance holding company laws. |
AOC is responsible for the operation, maintenance, renovation, and new construction of the buildings and grounds of the Capitol Hill complex. Organizationally, AOC consists of nine separate jurisdictions responsible for the day-to-day operations of the U.S. Capitol Building, Capitol Grounds, Senate Office Buildings, House Office Buildings, Library of Congress Buildings and Grounds, Supreme Court Buildings and Grounds, CPP, Botanic Garden, and Security Programs. AOC also has centralized staff that perform administrative and project management functions. AOC has managed major projects throughout the Capitol Hill complex and is currently managing the construction of the CVC. The historic nature and high profile of many of these buildings create a complex environment for AOC to carry out its mission; AOC must balance the diverse and sometimes divergent needs of congressional leaders, committees, members, and staffs as well as the visiting public. Congress has raised concerns about management shortcomings at AOC. For example, in 2001, the Senate Appropriations Committee cited several management issues, including a lack of strategic planning, inadequate financial and project management controls, and an unacceptably high level of worker injuries. Congress subsequently directed GAO to conduct a review of the management of AOC’s operations and, later, to monitor AOC’s progress in addressing recommendations that arose from the review. Our January 2003 report contained 35 recommendations designed to assist AOC in transforming itself into a more strategic and accountable organization. The recommendations were in seven areas, including strategic management, human capital management, financial management, project management, IT management, worker safety, and recycling. The report recognized this transformation as a long-term effort that involves a fundamental change in AOC’s culture. For example, AOC faces the challenge of how best to marshal its jurisdiction-based resources to address the strategic planning and other functional issues that cut across the organization. Changes of this magnitude require the sustained commitment of the agency’s top leadership. Subsequent reports on AOC’s progress that we issued in 2004 and 2006 concluded that, while AOC was making progress on all recommendations, substantial work remained to achieve the goal of becoming more strategic and accountable, and that sustained commitment and assertive involvement by AOC’s leadership would be key to instilling long-term management improvements. Specifically, our last report in this series, issued in February 2006, concluded that the agency had not addressed two issues—communication with external stakeholders and development of internal controls—that affect a wide range of AOC operations, including cost accounting, procurement, and information security. Furthermore, leadership support is vital to ensure that needed improvements are implemented and sustained, but key leadership positions—including those of the COO, CFO, Chief Administrative Officer, and Director of CPP—were vacant and the term of the agency head, the Architect, was due to expire in less than a year. Therefore, it was critical for AOC to quickly fill the vacant management positions with qualified people so AOC would have a cohesive management team in place in preparation for a change in the agency’s top leadership. These reports and two others on the CPP included assessments of two additional areas—facilities management and the CPP—and 29 additional recommendations for AOC, bringing the total number of recommendations to 64. In addition, we and AOC recently worked together to identify lessons learned from the ongoing CVC project, including practices that could be applied to AOC’s future projects and practices that could have been done better or differently. The lessons covered four areas—acquisition planning and policy; decision making, coordination, and communication; project and contract management; and worksite safety and security—and included such lessons as the importance of communicating and coordinating with all relevant stakeholders and identifying and mitigating risks early in the development of a major construction project. During the last year, AOC has filled nine key leadership positions, revised its strategic plan to better align its activities with its mission and goals, and continued initiatives to improve internal controls and accountability. These actions have furthered AOC’s progress in establishing a foundation for becoming a more strategic and accountable organization. It is now important for AOC to continue to build on this foundation by transitioning to new management; determining how best to provide services to AOC’s customers; and making further improvements in communication, financial management, IT management, and project management. The nine leadership positions that AOC has filled during the last year are vital to sustain improvements that have already been achieved, support further transformation efforts, and maintain operations during the transition to a new Architect. These new managers comprise 9 of the 20 managers that report directly to the Architect or the COO. (See fig. 1.) Most of these positions, including those of the CFO and the Chief Administrative Officer, were vacant because of retirements and resignations. To help AOC better meet the needs of its customers, AOC also created and filled two new leadership positions—the Director of Congressional and External Relations and the Director of Planning and Project Management. In addition to these nine positions, AOC has filled seven other management positions over the past year, such as the Deputy Director for the Office of the Chief Administrative Officer, Deputy Director of the Project Management Division, and Director of the Information Technology Division. While these new managers can bring new energy and ideas to the agency, the introduction of so many new managers within a short period makes it challenging to integrate them into AOC while sustaining the progress made thus far. The turnover in AOC’s senior leadership over the past year resulted in a loss of leadership continuity, institutional knowledge, and expertise—a loss that could adversely affect AOC’s ability to continue its progress, at least in the short term. AOC has taken steps to mitigate these factors and integrate the new managers into the agency by, for example, holding weekly senior leadership meetings and monthly detailed briefings on various AOC construction projects. These managers are also part of AOC’s senior executive performance management system, which links the managers’ performance plans to AOC’s mission-critical goals and holds the managers accountable for results. AOC officials also noted that 4 of the 9 new managers have been promoted from within the agency and have the institutional knowledge and expertise gained from several years of experience at AOC. The current vacancy in the Architect’s position further challenges AOC’s ability to sustain progress. The process for hiring the new Architect is in the early stages, and according to the COO, hiring the previous Architect took over a year. Until a new Architect is in place, the COO is authorized to act as the Architect and is assuming the Architect’s duties along with his own. In general, the Architect’s responsibilities include overall management of AOC, support and representation on boards and commissions—including the Capitol Police Board—and management of the CVC project, while the COO’s responsibilities involve developing the agency’s strategic and performance plans, proposing organizational and staffing changes needed to carry out AOC’s mission, and reviewing and directing the operational functions of AOC. The COO identified the management of the CVC project as one of the agency’s major challenges to becoming more strategic and accountable, because the CVC requires significant management attention that could otherwise be focused on AOC’s transformation initiatives. The management responsibilities for the CVC project could increase if, as scheduled, the CVC reaches a critical juncture in the next year as the construction phase ends and operations begin. For example, before the CVC becomes operational, the roles and responsibilities for managing CVC operations, including those of AOC, will need to be determined. Furthermore, the CVC project executive is planning to leave the agency in March 2007, which is likely to place additional responsibilities on the COO. Given these factors, it will be challenging for one person to fulfill the critical roles of the Architect and the COO in completing the CVC and continuing AOC’s progress in becoming more strategic and accountable. AOC has begun preparing for the transition to a new Architect by determining how to support the COO in the absence of an Architect and establishing a transition team for bringing in a new Architect. To support the COO, AOC has begun identifying individuals to assist the COO in managing various areas, such as project management and facilities management. While this strategy will provide support to the COO, it remains to be seen whether the strategy will provide the necessary support during the transition. AOC has also established a transition team that is chaired by the Director of Congressional and External Relations and that includes the COO and the Chief Administrative Officer, among others. This team has begun to prepare background materials for quickly bringing the new Architect up to speed on the agency and its initiatives, once a new Architect has been selected. The team also plans to be involved in preparing potential candidates for the confirmation hearings by providing the candidates with information on AOC’s responsibilities and structure, including its strategic plan. Over the past year, AOC has revised its strategic plan to better focus on its mission and provide a means to demonstrate results. In January 2007, AOC issued the revised plan, which sets forth AOC’s mission—to provide Congress and the public with a wide range of professional expertise and services to preserve and enhance the Capitol complex and related facilities. The revised plan also has three strategic goals—congressional and Supreme Court operations support, heritage asset stewardship, and leadership and administrative support—which cover all of AOC’s operations. The plan includes performance measures that allow AOC to regularly monitor progress in achieving its strategic goals and convey the results of its activities in its annual performance and accountability report. AOC’s revised strategic plan is an important building block in the agency’s efforts to become more strategic and accountable and provides a framework for assessing and prioritizing the agency’s activities. While AOC has defined its mission and goals in its revised strategic plan, the agency has not identified how best to deliver the services—through outsourcing or in-house resources—that support the mission and goals and has not determined whether its workforce has the skills and capacity to deliver those services. These two initiatives—identifying how best to deliver services and developing a workforce plan—are interrelated. For example, contracting out for a service requires a different set of skills to manage the contract than to conduct the work. While AOC has included both initiatives in its strategic plan and COO action plan and recognizes that coordinating these initiatives is important, the agency’s workforce planning efforts do not include an analysis of potential outsourcing opportunities that may arise as the result of AOC’s identification of how best to deliver services. Given recent trends and long-range fiscal challenges, we have reported the need for the federal government to engage in a fundamental review, reassessment, and reprioritization of what the government does, how the government does business, and who does the government’s business. In fiscal year 2005, AOC outsourced about 23 percent of the agency’s operations and maintenance expenditures; this percentage was within the range of operations outsourced by similar organizations (12 to 41 percent). However, AOC has not comprehensively reviewed all the services it provides to determine whether the services could better be provided through outsourcing or in-house resources. Consequently, few activities are outsourced consistently throughout AOC, and contracts are seldom consolidated to obtain similar services across jurisdictions. In 2006, the House Appropriations Committee instructed AOC to develop a plan that analyzes the costs, cost-effectiveness, benefits, and feasibility of the Architect’s entering into contracts with private entities for managing and operating its facilities. AOC submitted a plan to Congress that outlines a long-term strategy for comprehensively reviewing operations and identifying opportunities for additional contracting; however, the plan does not provide time frames for executing this strategy. AOC officials told us that the time frames for the long-term strategy depend on coordination with the new congressional leadership to brief them on AOC’s outsourcing plan. In 2002, the Commercial Activities Panel issued guiding principles for federal agencies to follow when making decisions on whether to outsource services. In briefings to congressional committees, we have reported that these principles could guide AOC in determining how best to deliver its services. For example, the panel recommended that the decision on whether to outsource services should support agency missions, goals, and objectives (as defined in the agency’s strategic plan); be based on a clear, transparent, and consistently applied process; avoid arbitrary full-time equivalent or other arbitrary numerical goals; ensure that competitions involve a process that considers both quality and cost factors; and provide for accountability in connection with all decisions. In addition, AOC has not assessed its current workforce to determine whether it has the appropriate balance of skills needed to provide services and manage contracts for services that are outsourced. An assessment of AOC’s workforce can help AOC leadership further refine their decisions on whether to deliver AOC’s services with outsourcing or in-house resources. As we recommended, AOC has taken steps to identify current and future workforce needs and address potential skill gaps by hiring a contractor to assist in the development of a strategic workforce plan. Although the scope of the contractor’s work will include collecting and analyzing data on AOC’s workforce, it does not include an analysis of potential outsourcing opportunities that may arise as the result of AOC’s identification of how best to deliver services. Furthermore, the COO requested that the workforce planning efforts include an analysis of potential outsourcing opportunities, but the COO’s guidance came after AOC had finalized its workforce planning contract. An AOC official responsible for the contract stated that this level of analysis either would require additional resources for the current contract or would need to be incorporated into a second phase of its workforce planning efforts. Another initiative in AOC’s workforce planning efforts—the implementation of a skills assessment survey—has been delayed to revise the survey instrument and make a more useful tool for collecting data on AOC’s current workforce. An official stated that AOC does not expect the skills assessment survey to be completed in the near future. Consequently, data from the skills assessment survey will not be taken into account in the work being done by AOC’s contractor responsible for developing the strategic workforce plan. AOC took several steps over the past year to improve communication with its external stakeholders, and stakeholders are responding positively to these efforts. To improve communication with congressional stakeholders, AOC hired a Director of Congressional and External Relations. The director is responsible for developing and maintaining positive relations with congressional stakeholders, and she regularly provides them with updates on AOC issues. Other AOC officials, including the COO and the Director of Planning and Project Management, also periodically brief congressional stakeholders on a variety of issues, such as revisions to the strategic plan, the COO’s action plan, and AOC’s budget submission and the status of projects. As a result of these efforts, the COO believes that AOC better understands what Congress wants and is able to set expectations, obtain feedback, and make changes on the basis of that feedback. Congressional stakeholders we spoke with generally agree that AOC’s outreach efforts have improved, and they said that the addition of the Director of Congressional and External Relations has improved AOC’s responsiveness to congressional questions and requests for information. Although AOC has taken steps to improve communication with its congressional stakeholders, it is critical for these improvements to be formalized and sustained. AOC is finalizing written procedures for communicating with congressional and other external stakeholders and plans to brief congressional leadership on these procedures. In instituting these procedures, AOC is working to establish “one voice” for the agency and set expectations for AOC’s response time to stakeholder inquiries. Although congressional stakeholders generally agree that communication has improved, documentation of AOC’s communication procedures can help ensure that AOC deals with its congressional customers using clearly defined, consistently applied, and transparent policies and procedures. AOC also has taken actions to improve communication with its employees, but the effectiveness of these efforts remains to be seen. AOC recently revised its process for collecting and assessing data on employee satisfaction to address our recommendations on systematically collecting and communicating employee feedback. AOC continues to distribute newsletters to its employees; hold biannual town hall meetings and monthly, small-group sessions with the COO; and address issues that were identified in employee focus groups, first held in 2004. AOC also contracted for an ombudsperson to serve as a confidential resource for responding to employee complaints, concerns, and questions on employment-related matters. Although these are positive steps, AOC will not be able to determine the extent to which communication has been improved until the next round of employee focus groups is completed and compared with the results of the 2004 focus groups. AOC originally planned to conduct the next round of focus groups in fiscal year 2007; however, because of fiscal constraints and ongoing transformation efforts, AOC is considering the possibility of conducting focus groups in fiscal year 2008. The effectiveness of AOC’s communication improvements also depends on how well AOC can identify and address issues that may arise as well as communicate the actions that are being taken to address the issues. For example, in 2006, employees involved in repairing AOC’s utility tunnels expressed concerns over how AOC management communicated with them. Although AOC developed a plan to address problems in the utility tunnels, the tunnel workers expressed concern that they had no clear idea of when the problems would be solved. To improve communication, AOC began holding weekly meetings with the tunnel shop workers in April 2006 to discuss tunnel issues and the actions being taken, but workers continued to express frustration about the lack of progress in addressing their safety and health concerns. As issues such as worker safety arise, it is important for employees to see that AOC’s leadership not only listens to their concerns, but also takes action and makes appropriate adjustments in a visible and timely way. AOC has made progress in financial management, IT management, and project management, but sustained commitment is required to continue progress on the long-term efforts in these areas, many of which are needed to improve AOC’s internal controls and accountability. Internal control and accountability are critical elements in managing an organization. Internal control involves the plans, methods, and procedures used to meet missions, goals, and objectives and, in doing so, to support performance- based management. Accountability represents the processes, mechanisms, and other means by which AOC managers demonstrate their stewardship and responsibility for resources and performance. Internal control and accountability initiatives require sustained and committed leadership to ensure successful implementation. While AOC has made progress in all nine areas that are important to a strong strategic management and accountability framework, work remains to develop significant and lasting internal control and accountability improvements in the areas of financial management, IT management, and project management. (See app. I for more information on the status of recommendations in all nine areas, including strategic management, human capital management, facilities management, worker safety, CPP management, and recycling.) AOC has made progress in preparing its financial statements and implementing a new financial management system, but significant work remains to establish an effective internal control framework and cost accounting system. AOC achieved its goal of preparing auditable comprehensive agencywide financial statements with the successful audit of its fiscal year 2005 and 2006 financial statements. To a significant extent, these achievements reflect the increased focus and attention by AOC’s senior management on financial accountability and control. For example, AOC’s senior management regularly meets with the AOC Audit Committee and its internal and external auditors to discuss the status of the financial statement audits, any related findings, and AOC’s corrective plans. In 2006, AOC also implemented the final phase of its new financial management system. AOC has begun efforts to establish a risk-based internal control framework, although progress has been impacted by staffing shortages and limited resources. To improve accountability across the agency, AOC has begun the implementation of its cost accounting system, including working to get employees to charge their time to specific activities and project codes in the time and attendance system and working to develop reporting formats that demonstrate the types of information that can be generated when the system is fully implemented. Although these are important steps, the system will have to be further developed to link AOC’s cost information to the strategic plan, performance measures, and performance-based budgeting—actions that are important to producing reliable information for decision making and performance evaluation. AOC officials noted that further progress in implementing the internal control framework and the cost accounting system will be limited by current resource constraints. Implementing this key effort impacts other AOC initiatives. For example, while AOC has taken steps to improve its cost and timeliness measures for facilities management, it will not be able to accurately and routinely track or benchmark these measures until the cost accounting system is further developed and linked with the facilities management information system. AOC officials noted that it will take several years for the systems and processes to evolve to the point that the system can be fully implemented. Successful implementation of these systems and processes that impact all of AOC’s operations will require sustained organizational commitment to ensure these efforts are appropriately funded, staffed, and monitored. Until these efforts are implemented and operating effectively, AOC continues to face substantial risk in the area of linking cost and financial information to organizational performance. AOC has made progress in improving IT management controls and accountability, but work remains to fully implement an effective agencywide approach to IT management. To improve management controls in AOC’s IT investment management process, AOC developed and approved an IT investment management policy that describes the agency’s investment management process and the roles and authorities of the boards involved in overseeing IT investments. AOC also has begun to plan for and implement the practices in our IT investment management guide associated with corporate, portfolio-based investment decision making. However, AOC has yet to prioritize all IT investments, develop an IT investment portfolio, and oversee each investment from a portfolio approach to ensure that it achieves its cost, benefit, schedule, and risk expectations. According to AOC officials, AOC has begun the process of establishing an IT portfolio management program that will arrange IT investment into a single portfolio and provide visibility, control, and decisions based on project objectives such as costs, resources, and risks. However, until AOC fully institutes these practices, it cannot ensure that the investments address the agency’s strategic goals, objectives, and mission. AOC also took actions to improve internal controls and accountability in the area of project management, but sustained commitment is needed to continue progress in managing project costs and developing a project information system to help manage and track projects. For example, AOC made internal control and accountability improvements by developing and tracking project-management-related performance measures, clarifying the roles and responsibilities of staff in the Project Management Division, and revising its project management manuals. However, AOC’s lack of accurate cost data for the Construction Division—the division that provides construction services in-house (rather than by contractors)— hampers its efforts to fully account for the costs of projects. In April 2006, a peer review group within AOC issued recommendations designed to better track cost data for the division, including standardizing the cost estimating process. AOC is taking steps to address the peer review recommendations, such as developing centralized planning and estimating capabilities to provide better cost estimates for all Construction Division projects, but, according to AOC officials, the agency will not be able to fully account for project costs until the cost accounting system is in place. In addition, AOC plans to modify its project information system to improve AOC’s ability to manage, track, and communicate the status of projects. AOC has developed the requirements for this system, which includes the automation of AOC’s quarterly construction projects progress report. AOC plans to begin modifications to the current system with available in-house resources in fiscal year 2007 and requested funding for further modifications in its fiscal year 2008 budget. Sustained support of these project management initiatives is critical to improving AOC’s efforts to manage projects, identify reasons for project cost and schedule changes, and report to the stakeholders. On the basis of our ongoing work and issued testimonies on AOC’s management of the CVC project, we and AOC worked together to identify lessons learned from the ongoing CVC project, some of which are also relevant for project management across AOC. For example, one lesson suggests the importance of establishing and maintaining a detailed, realistic, and complete project schedule and ensuring that the schedule sufficiently reflects the impact of problems and changes and the likely impact of known risks. Another lesson suggests the importance of clearly identifying qualifications and limitations associated with cost and schedule estimates; understanding risks and uncertainties; and providing Congress with accurate, timely updates on the project’s status, completion date, and costs. Recognizing the need to improve how AOC manages large projects, the agency is adding capital project administrators to its Project Management Division to lead the design and construction activities of larger projects. In responding to a draft of this report, AOC generally agreed with our assessment of the agency’s overall progress, but noted that 2 additional recommendations—1 on institutionalizing financial management practices to support budgeting, financial, and program management and 1 on developing a rigorous approach for collecting worker safety data—should be considered implemented. According to AOC officials, the agency has made significant progress over the past year and installed a solid foundation for further improvements. The officials also recognized that continued focused attention to the agency’s improvement initiatives is essential to maintaining progress. For our recommendation on financial management practices, AOC suggested that the two remaining actions for this recommendation—fully developing and implementing an appropriate risk-based internal control framework and cost accounting and management reporting initiatives—are addressed in the other financial management recommendations. In our August 2004 report, we noted the AOC’s limited progress on the financial management initiatives, which lead us to make additional recommendations calling for senior management to provide strong and visible support and commitment to helping ensure that these important initiatives are successfully implemented. While some progress has been made on these initiatives, AOC officials noted that further progress will be limited by staffing shortages and resource constraints. The potential limited, near-term progress leads us to observe in this report that successful implementation of these systems and processes, which impact all of AOC’s operations, will require sustained organizational commitment to ensure these efforts are appropriately funded, staffed, and monitored. We maintain that full implementation of these initiatives is necessary for institutionalizing internal control and accountability and strengthening and supporting effective budgeting, financial, and performance management at AOC. For the recommendation on collecting worker safety data, AOC officials noted that they believe their current practices—including conducting biennial focus groups, conducting daily shop safety meetings, and establishing a safety hazards hotline—sufficiently meet the requirements of this recommendation. While we recognize that these initiatives provide the agency with some information on worker safety, these initiatives do not provide a rigorous and confidential approach for collecting employee perceptions of AOC’s safety climate, such as perceptions of management commitment, discipline policies, and hazard corrections. This lack of confidentiality can impede the quality of information collected. Furthermore, although AOC established a schedule to collect employee feedback every other year, AOC has not conducted focus groups since fiscal year 2004 and does not have plans to do so until possibly fiscal year 2008. AOC’s recently revised employee feedback manual specifies that AOC can use other means or tools to collect and provide employee feedback information. This would allow AOC to pursue another, more rigorous and confidential method for collecting worker safety data. AOC also made clarifying and technical comments that we addressed in the text of this report. We are sending copies of this report to the appropriate congressional committees. We are also sending this report to the Acting Architect of the Capitol. We will make copies available to others upon request. In addition, this report will be available at no cost 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. If you or your staffs have any questions about this report, you may contact me at (202) 512-6923 or at [email protected]. Major contributors to this report are listed in appendix II. Since January 2003, we have made 64 recommendations in nine areas to improve the Architect of the Capitol’s (AOC) strategic management and accountability framework, which is needed to drive the agency’s transformation effort and address long-standing program issues. These nine areas are strategic management, human capital management, financial management, information technology (IT) management, project management, facilities management, worker safety, Capitol Power Plant (CPP) management, and recycling. Over the past year, AOC has implemented 21 recommendations, bringing the total number of implemented or closed recommendations to 43 out of 64, or 67 percent. This appendix provides (1) the overall progress and remaining actions in each of the nine issue areas and (2) details on the status of the recommendations made in each area (see tables 1 through 9). For the recommendations that have been implemented, the “status” column in the tables includes the month and year of the GAO report that acknowledges the completion of that recommendation. Recommendations implemented since our February 2006 report were given an implementation date of February 2007. AOC has made progress in improving its strategic planning and organizational alignment, establishing meaningful performance measures, improving the process to obtain feedback from employees and customers, and strengthening the relationship between AOC and congressional stakeholders. As a result, AOC has implemented 6 of our strategic management recommendations over the year. Specifically, AOC has issued its revised strategic plan and the Chief Operating Officer (COO) action plan and provided periodic briefings to update congressional stakeholders on these plans and related organizational changes. To improve communication with its employees, AOC revised its employee feedback process manual to establish a process for regularly collecting and reporting employee feedback information. Finally, to improve communication with its external stakeholders, AOC is establishing procedures for communicating with congressional and other external stakeholders and has taken a more proactive approach to communicating with these stakeholders. Although AOC has made progress in the area of strategic management, sustained commitment from the agency’s new leaders is necessary to build upon this progress. To ensure that the strategic plan is current and useful to the agency, AOC leadership should review and update the strategic plan regularly and incorporate any changes that may result from AOC’s review of options and strategies for delivering its services and operations. Furthermore, AOC should continue to work with congressional stakeholders to develop and report key measures that are meaningful to AOC’s customers and reflect the agency’s day-to-day operations. See table 1 for more information on the implementation status of our recommendations on strategic management. AOC has taken steps to strengthen performance management and strategic human capital management by implementing our recommendation to develop the capacity for collecting and analyzing workforce data. Additionally, AOC has hired a contractor to begin developing a strategic workforce plan intended to provide AOC with information on its current and future workforce as well as recommendations on how AOC could meet its strategic goals. Although hiring the contractor is an important step, AOC’s current effort to develop a strategic workforce plan will not include an assessment of how best to deliver (either through outsourcing or in-house resources) the services it provides. Without this type of assessment, AOC’s strategic workforce plan will not provide AOC leadership with the appropriate set of strategies to acquire, develop, and retain its current and future workforce. See table 2 for more information on the implementation status of our recommendations on human capital management. Since our initial follow-up effort in January 2004, AOC has made progress—to varying degrees—on key control and accountability initiatives. AOC has developed agencywide audited financial statements, implemented a new financial management system, and continued to develop and implement a risk-based internal control framework and a cost accounting system that, when fully implemented, should generate meaningful cost and performance reporting information for managers. However, AOC’s senior management needs to continue supporting the full implementation of key financial management and accountability efforts that are critical to AOC’s operations. Although AOC senior management has helped to strengthen AOC’s financial accountability by regularly monitoring and overseeing AOC’s efforts to prepare agencywide comprehensive financial statements and have them audited, it needs to increase focus and attention on completing the development and implementation of the other three key financial management improvement initiatives—an internal control framework, a cost accounting system, and a management reporting system. According to AOC officials, current staffing shortages and funding constraints will likely limit meaningful near- term progress on these efforts. To continue AOC’s progress, it will be essential for AOC’s senior management to provide the commitment, attention, and resources needed to ensure the successful implementation of these important control and accountability initiatives. See table 3 for more information on the implementation status of our recommendations on financial management. AOC continues to make progress toward adopting an agencywide approach to information management and has implemented 2 IT recommendations over the year. Specifically, AOC has developed, approved, and implemented a process, including those practices in our IT investment management guide, for controlling existing projects. AOC also has established the management structure for developing, implementing, and maintaining an enterprise architecture (EA) and has made significant progress toward planning for and implementing the practices in our architecture management guide. These practices include ensuring that adequate resources (i.e., funding, people, tools, and technology) are devoted to the program and developing a written policy for architecture development and maintenance. In addition, AOC has made progress toward addressing our remaining recommendations. For example, it has developed a policy that describes the procedures, practices, and guidelines that govern the management of its IT systems and the required processes that are to be followed when acquiring and developing these systems. Furthermore, AOC has taken steps toward establishing and implementing an effective information security program by designating a chief information security officer with the authority to implement an agencywide security program and by certifying and accrediting its general support systems and major applications. However, more work remains to fully implement our recommendations. For example, AOC has yet to prioritize all IT investments, develop an IT investment portfolio, and oversee each investment using a portfolio approach to ensure that AOC achieves its cost, benefit, schedule, and risk expectations. Until AOC completes these activities, it cannot ensure that the investments address not only the agency’s mission and strategic goals and objectives, but also the impact of the investments on each other. Moreover, AOC has yet to fully implement key architecture practices, such as defining “as is” and “to be” architecture descriptions in terms of performance. Without instituting these practices, AOC risks limiting the quality and utility of its architecture and may not realize the benefits of a well-managed architecture program. In addition, the agency has not consistently demonstrated quality assurance, configuration management, and contract tracking and oversight processes. Until AOC consistently demonstrates these key acquisition processes, the agency runs the risk of projects not performing as intended, being delivered late, and not meeting estimated cost and schedule goals. AOC also has yet to develop system contingency plans for all of its systems and implement a security process to monitor and evaluate policy and control effectiveness. Without instituting these practices, AOC’s data and systems are at risk of inadvertent or deliberate misuse, fraud, improper disclosure, or destruction, possibly without detection. See table 4 for more information on the implementation status of our recommendations on IT management. AOC has made progress on several initiatives that should improve project management and accountability and has implemented 7 project management recommendations over the year. For example, AOC has established performance measures, including measures to track the quality and costs of projects. AOC also has clarified the roles and responsibilities for staff in the Project Management Division and updated guidance for managing projects. In addition, AOC is continuing efforts on longer-term initiatives to improve project management and accountability. For example, AOC plans to modify its project information system to assist managers in more proactively managing projects, provide needed cost and schedule data on projects, and track reasons for changes across all projects. AOC has developed the requirements for this system, which includes the automation of AOC’s quarterly construction projects progress report, and plans to begin modifications with available in-house resources in fiscal year 2007. Additionally, AOC has conducted a review of Construction Division operations and management in 2006 and is currently implementing the recommendations from that review, including recommendations to improve project cost estimating and tracking. However, the new cost accounting system—a system that will be phased in over several years—must be completed before AOC can implement all of the recommendations intended to improve accountability for the Construction Division. Furthermore, AOC is reviewing its methods for estimating Construction Division project costs, including contingency costs and allocations for construction management and administration, to improve the accuracy of project cost estimates. AOC also is finalizing the Capitol complex master plan and anticipates that a draft of the plan will be ready for congressional review in the spring of 2007. See table 5 for more information on the implementation status of our recommendations on project management. AOC has taken steps to improve how it measures performance and tracks demand work orders. For example, in May 2006, AOC began implementing a new facilities management information system that will enhance its tracking and reporting capabilities. Currently, all jurisdictions are using the new system to track demand work orders. As implementation continues, AOC plans to continue analyzing its workload data to develop metrics for the new system. Additionally, AOC officials plan to benchmark AOC’s performance measures with peer organizations. These officials said that they used the International Facilities Management Association’s key performance indicators to develop performance measures for AOC’s revised strategic plan. While these are important steps, AOC must complete the development of its metrics and input its preventive maintenance work orders before it can more accurately track performance. Furthermore, the new facilities management information system must be used in conjunction with the new cost accounting system—a system that will be phased in over several years—before AOC will be able to fully use data provided by the new facilities management information system. See table 6 for more information on the implementation status of our recommendations on facilities management. AOC has taken steps to improve worker safety and has implemented 1 worker safety recommendation over the past year. Specifically, AOC has implemented 7 of 34 specialized safety policies, completed a job hazard analysis process to identify hazards, and implemented a system to track investigations of incidents and follow-up. AOC also has selected a data management system that will track and record employee training, licensing, and certification and clarified the role of the Office of the Attending Physician (OAP), including having OAP provide reports to AOC jurisdictions when employees are due or past due for their medical surveillance examinations. Overall, AOC’s injury and illness rate declined from 17.9 in fiscal year 2000 to 4.9 in fiscal year 2006. However, several critical actions remain to further improve worker safety. For example, AOC will not be able to fully achieve its goal of long-term cultural change until it fully implements the specialized safety policies, which current draft plans indicate will not occur until the end of fiscal year 2009. AOC also needs to align its training system with its system to track and identify corrective actions for hazards and incidents in order to target training needs to address high-risk areas. Finally, although AOC added worker safety as a standard topic in its biennial employee focus group script, AOC needs a more rigorous (and anonymous) approach to measuring employee’s perceptions of AOC’s safety climate, which may identify successful strategies to expand and areas that need focused attention to improve. See table 7 for more information on the implementation status of our recommendations on worker safety. While AOC is making progress in improving worker safety, in March 2006, the utility tunnel workers sent a letter to Congress complaining of unsafe working conditions in the tunnels, including falling concrete, asbestos, and extreme heat. In February 2006, the Office of Compliance (OOC) filed a complaint against AOC concerning hazards in the tunnels, including falling concrete, an inadequate communication system for these confined spaces, and inadequate escape exits. AOC has taken steps to address these issues—including establishing safety and access procedures for the tunnels and upgrading 15 tunnel entry and exit points—and continues to work with the tunnel workers and the OOC to address these issues. AOC has made progress in improving CPP management and efficiently staffing the modernized power plant, but more work remains. For example, AOC took interim steps to modify existing positions—as they have been vacated—to reflect the additional skill sets required to successfully operate and maintain the modernized plant. Since October 2005, AOC has been working with a consultant to develop a new workload analysis and staffing implementation plan and received the results of the analysis and recommendations in November 2006. On the basis of these results, AOC is developing a reorganization plan to reflect the recommendations, which it expects to submit to Congress for approval in March 2007. In anticipation of the staffing changes, AOC has been using attrition to reduce and realign the CPP workforce and is currently keeping seven vacated positions vacant, four of which will be filled by internal candidates and will not impact the staffing numbers. See table 8 for more information on the implementation status of our recommendations on CPP management. AOC has implemented the recommendations related to developing a strategic approach to recycling. In January 2006, AOC finalized its recycling program mission, goals, and performance measures. The performance measures are also in AOC’s revised strategic plan and the Senate and House business plans. To monitor performance, AOC reports on the status of its recycling performance measures in the quarterly Safety, Health, and Environmental Council meetings. Additionally, AOC formed a Legislative Branch recycling group that met for the first time in September 2006. This group plans to meet quarterly to discuss common issues and best management practices. To clarify responsibilities and hold staff accountable for achieving recycling goals, AOC has included recycling tasks in its position descriptions and included recycling responsibilities for recycling managers and supervisors in its evaluation system. For example, the performance evaluation system includes recycling objectives in the ratings of Senate and House recycling managers to hold them accountable for program results. See table 9 for more information on the implementation status of our recommendations on recycling. In addition to the individual named above, key contributors to this report were Shirley L. Abel, Mark Bird, John C. Craig, Elizabeth Curda, Amr Desouky, Elizabeth R. Eisenstadt, Elena P. Epps, Brett S. Fallavollita, Jeanette M. Franzel, Mary Hatcher, Randolph C. Hite, Heather Krause, Neelaxi Lakhmani, Steven G. Lozano, Valerie Melvin, David Merrill, Susan Michal-Smith, Sara Ann Moessbauer, Stephanie Sand, Natalie Schneider, Bernice Steinhardt, John J. Reilly, Jr., Sarah E. Veale, Sara Vermillion, and Merry Woo. | The Architect of the Capitol (AOC) is responsible for the operation, maintenance, renovation, and new construction of the Capitol Hill complex, including the U.S. Capitol, the Library of Congress, and the Senate and House Office Buildings. In 2003, at the request of Congress, GAO issued a management review of AOC that contained recommendations designed to help AOC become more strategic and accountable. Subsequently, Congress directed GAO to monitor AOC's progress in implementing recommendations. This is the fourth status report on AOC's progress and summarizes GAO's assessment of AOC's overall progress and remaining actions in becoming more strategic and accountable, including AOC's responses to specific recommendations GAO made in January 2003 and subsequently. To assess AOC's progress, GAO analyzed AOC documents; interviewed AOC officials; and relied on the results of related GAO reviews, including reviews of the Capitol Visitor Center (CVC). AOC generally agreed with GAO's assessment of its progress, but noted that 2 additional recommendations--1 on financial management practices and 1 on collecting worker safety data--should be considered implemented. GAO acknowledges AOC's efforts in these areas, but maintains that further steps are necessary to fully implement these recommendations. AOC has made progress in becoming more strategic and accountable, but critical actions are needed to sustain and build on this progress. To date, AOC has filled key leadership positions, revised its strategic plan, improved communication, and continued initiatives to improve internal controls and accountability. AOC is thus establishing a foundation for becoming more strategic and accountable. However, completing the transition to new leadership--including the transition to a new Architect of the Capitol (a position that is now vacant)--and other actions remain to bring about lasting improvements in performance. For example, AOC must integrate nine new managers into the agency while ensuring its continued progress. In addition, the Chief Operating Officer faces the challenge of performing the Architect of the Capitol's responsibilities and his own during the CVC project's completion and AOC's management transition. Furthermore, although AOC has revised its strategic plan to better focus on its mission and goals, it has not determined whether it can better deliver the services that support its mission and goals through outsourcing or in-house resources. Finally, a continued focus on communication and other areas that are key to greater internal control and accountability--including financial, information technology, and project management--is needed to sustain and further AOC's progress to date. For example, full implementation of AOC's cost accounting system--a key financial management initiative--is needed to more accurately track facilities management cost measures. Improvements in project management could be achieved, in part, by applying lessons learned in managing the CVC project. Appendix I of this report summarizes AOC's progress on recommendations that GAO has made since January 2003 to help AOC establish a strong strategic management and accountability framework. This year, AOC has implemented 21 recommendations. For example, AOC implemented 6 of the strategic management recommendations, including the development of congressional protocols and the involvement of stakeholders in developing the revised strategic plan. For project management, AOC implemented 7 recommendations, including the development of performance measures. Implementing these 21 recommendations brings the total number of implemented or closed recommendations to 43 out of 64. |
Millions of noncitizens apply annually to enter the United States to live, work, or study. USCIS creates alien files, more commonly called A-files, to document the history of a person’s interaction with USCIS or any DHS entity involved in immigration related actions. USCIS’s Records Operation Handbook (ROH) provides instruction on when and how to create an A-file as well as how to request files and transfer them from one office to another. USCIS maintains A-files on certain individuals, including those who are immigrants or who apply for immigrant status, have become citizens, or have applied for asylum in the United States or refugee status overseas. The A-file is to contain all of the relevant documents of an alien’s interactions with USCIS or other DHS components. For example, the A-file could contain an application for lawful permanent residency and petitions for an alien relative as well as documents related to enforcement actions such as an arrest warrant and the results of any immigration proceedings. While USCIS is the main user of A-files and the official DHS custodian for all of them, other DHS components, such as ICE and Customs and Border Protection (CBP), also use A-files for investigations or other enforcement actions. In addition, information and documents from A-files may be shared with agencies such as the FBI and Department of State. According to senior USCIS officials, USCIS spends about $13 million each year transporting A-files within USCIS and to other components and agencies. USCIS’s long-range plans call for eventually converting paper A-files into electronic files, thus avoiding these transportation costs and making A-files available to multiple users simultaneously. In August 2006, USCIS awarded a 5-year $150 million contract to begin converting A-files. USCIS adjudicates applications for immigration benefits through a network of field offices that include 4 service centers, 33 district offices, and 8 asylum offices. In fiscal year 2005, USCIS’s budget was about $1.8 billion and USCIS adjudicated about 7.5 million applications, of which over 715,000 were applications for naturalization. Naturalization applications are adjudicated at USCIS district offices and require the applicant to, among other things, undergo a security background check, be interviewed by an adjudicator and, demonstrate proficiency in English and a basic understanding of U.S. civics. As part of the adjudications process, adjudicators are to review the applicant’s A-file to identify any information that may disqualify the applicant for naturalization, including information that may indicate potential fraud. Of the over 715,000 naturalization applications adjudicated in fiscal year 2005, USCIS denied about 64,000. All applications for an immigration benefit, including naturalization, are to be filed in the applicant’s A-file. USCIS staff use USCIS’s Central Index System to locate and request the A-file from the last known office location. However, the Central Index System can only identify the office location for the A-file; it does not provide precise information about where in an office an A-file is located. USCIS has NFTS, a system designed to provide more detailed information on the location of an A-file, down to a specific individual or file drawer. USCIS’s predecessor, the Immigration and Naturalization Service, began deploying NFTS in November 2002. The system is now deployed to all records units in USCIS district and asylum offices, the USCIS’s Texas Service Center and National Benefits Center, and all ICE and CBP units. Tentative plans call for deploying NFTS to USCIS’s three other service centers by March 2007. NFTS is a Web-based system that is available to anyone in DHS who needs A-files. Users can obtain a user identification code that allows them to request, receive, and transfer A-files. Web-based training on how to use NFTS is available via DHS component intranet sites, including USCIS’s EdVanatage Learning University, ICE’s Virtual University, and the CBP Learning University. In January 2004, USCIS, ICE, and CBP signed a Service Level Agreement in which USCIS agreed to provide A-files to ICE and CBP, and ICE and CBP agreed to follow the ROH. USCIS’s ROH describes the procedures that are to be followed for locating, sending, and receiving A-files. The ROH states that all DHS staff with access to NFTS should use NFTS to, for example, record the creation of an A-file, request A-files from other offices, record when an A-file is sent or transferred out to another office, and immediately record both when an A-file is received and the file’s specific location. USCIS uses the Computer-Linked Application Information Management System (CLAIMS) 4, as the case management and tracking system for naturalization applications. CLAIMS 4 contains information from the naturalization application and other data, such as the results from security background checks and whether or not the application was approved. CLAIMS 4 can also track the status of a request for the A-file, indicating whether the A-file has been requested, received by the district office adjudicating the application, or deemed lost. Figure 1 shows the steps involved in locating A-files for naturalization applications. USCIS’s Adjudicator’s Field Manual provides adjudicators with guidance on naturalization procedures and how to determine whether an applicant meets the eligibility requirements for becoming a citizen. To improve the quality and consistency of all naturalization application processing, USCIS has issued Naturalization Quality Procedures (NQP) guidelines. The NQP provides detailed checklists that clerical staff and adjudicators must complete at each stage of the naturalization process. These completed checklists must be included in an A-file, along with the naturalization application and related documents. The NQP also requires that adjudicators be certified as NQP trained once every 3 years. Our analysis of USCIS data and interviews with USCIS district officials indicate that A-files are missing in a relatively small percentage of naturalization cases but that DHS staff may not always be updating NFTS when files are moved, resulting in delays in locating A-files or in not locating them at all. The CLAIMS 4 database contains a data field that indicates the status of the A-file request, such as whether the file has been received in the district office, requested but not yet received, or that the A-file has been declared lost. According to data from the CLAIMS 4 database, of the approximately 715,000 naturalization applications adjudicated in fiscal year 2005, the district office received the A-file in 685,000 of these cases (about 96 percent), indicating that A-files may not have been available in about 4 percent (about 30,000) of them. However, USCIS officials told us that this CLAIMS 4 data field is an optional field that USCIS staff may complete at various times during the adjudications process or not at all. USCIS officials told us that of the approximately 30,000 naturalization cases where the A-file status indicated something other than received in the district office, A-files were probably available in a number of them. However, because adjudicators may not always update the A-file data field to indicate whether the A-file was eventually received, how many is unknown. In about 13,000 of the approximately 30,000 cases, the A-file status indicator was blank. Data from USCIS’s quality assurance audit of the naturalization program also indicate that the A-files are missing in a relatively small percentage of cases. In fiscal year 2005, the USCIS Performance Management Division sampled 28,575 naturalization applications adjudicated by district offices. Staff found that A-files were available in all but 129 of 28,575 cases sampled, about 0.5 percent. However, because of limitations in its sampling methodology, USCIS said this percentage cannot be projected to the universe of approximately 715,000 naturalization applications completed that year. Although USCIS officials from the 13 district offices we spoke with acknowledged that their offices do not track how often naturalization applications are adjudicated without an A-file, they believed the percentage was low. They estimated the percentage of naturalization applications in fiscal year 2005 that were adjudicated without A-files ranged from less than 1 percent to 10 percent. GAO’s Standards for Internal Control in the Federal Government states that information needed to achieve an agency’s objectives should be identified and regularly reported to management. According to USCIS’s Naturalization Quality Procedures, having and reviewing an applicant’s A-file is critical to confirming that the applicant is eligible for naturalization and that no incidents have taken place that would disqualify the applicant from naturalization. In a November 2005 memo, the Acting USCIS Director of Domestic Operations stated that not having an A-file should be a “rare” occurrence, but did not quantify what “rare” meant. Since USCIS deems reviewing the A-file critical to the naturalization adjudications process, the lack of precise data on when an A-file is not available limits USCIS’s ability to determine compliance with this critical step and whether additional actions are necessary to ensure A-files are available when needed. According to USCIS officials, adjudicators sometimes have difficulty locating A-files or cannot find them at all because the locations shown in NFTS are incorrect or not up to date. For example, according to a summary of the results of an April 2005 file audit conducted by USCIS’s San Diego district office records staff, nearly 21 percent of the district’s files (11,731 of 56,092 files audited) were not in the location shown in NFTS. Another 34,764 files shown to be under the control of the San Diego district could not be immediately located during the audit. Some of these files may have been in locked file cabinets that audit staff could not access, while others may have been transferred to another location and were no longer in the district. NFTS showed duplicate file locations for 464 files. Audit staff also found 281 of the files that NFTS indicated were lost. About half of the lost files were found within the local ICE Office of Investigations. The other half were found mostly within CBP. In addition, in June 2006 the Los Angeles district office conducted a file audit of three locations that had files. As shown in table 1, about 6 percent of the files indicated by NFTS to be at these three locations could not be found. For some A-files, the office location recorded in NFTS is not up to date. NFTS procedures require that a person receiving an A-file should “immediately” update NFTS. According to the Section Chief of the Records Systems Services Section of USCIS’s Office of Records Management Branch, once a file is sent (either via the U.S. Postal Service or a private package delivery service) from one office to another, it should take no longer than a month for the A-file to arrive at the receiving office and for NFTS to be updated. During our review, USCIS checked NFTS and found 107,000 A-files that have been in transit over a month but had yet to be recorded as received in NFTS. Nearly 63,000 had been in transit more than 3 months. GAO’s Standards for Internal Control in the Federal Government also states that transactions and other significant events should be promptly recorded so that they maintain their relevance, value, and usefulness to management in controlling operations and making decisions. Although USCIS considers compliance with NFTS procedures critical to enabling it to maintain control over A-files, DHS staff are not always complying with these procedures. According to USCIS officials, DHS staff are not always recording the movement of an A-file in NFTS, resulting in inaccurate information on the location of A-files. Officials from 10 of the 13 USCIS district offices we spoke with claim that the failure to record the movement of files in NFTS is a major reason for delays in locating an A-file, in not being able to locate an A-file at all, and in an A-file being declared lost. One district director stated that the cooperation of other DHS components in adhering to file transfer procedures was imperative, especially since they maintained A-files relating to national security investigations and other sensitive issues. According to USCIS records officials, the USCIS Records Division has not conducted a formal study or evaluation as to why NFTS users are not complying with all NFTS and ROH procedures. This cooperation is important, especially because USCIS has no authority to enforce compliance with file-tracking procedures among the other DHS components. The report summarizing the San Diego district’s April 2005 file audit cited above stated that the number of files, in the thousands, that were not in the location shown in NFTS or could not be found was “staggering” and attested to the need to ensure that all personnel in all units and agencies use NFTS and follow procedures. According to the report, several locations were not using NFTS although NFTS was available. USCIS records officials stated that lack of compliance with NFTS procedures was “very prevalent.” As of July 27, 2006, for the 14 district offices we included in our review, NFTS indicated that about 111,000 A-files were lost. USCIS officials offered several reasons why some staff may not be complying with NFTS file-tracking procedures. According to the report summarizing the San Diego district’s April 2005 file audit, additional NFTS training is needed and compliance with the NFTS procedures should be mandated for all sites. The audit report recommended regular NFTS workshops for USCIS, CBP, and ICE staff. USCIS records officials stated that local management may not be emphasizing enough the importance of using NFTS. ICE officials we spoke to commented that they believe some of the NFTS file transfer procedures are cumbersome, resulting in some ICE staff circumventing them and not recording the file movement in NFTS. For example, whether sending or receiving A-files, the ROH requires that they all be routed through the local USCIS records unit whenever a file needs to be transferred from one ICE field location to another. This is because members of USCIS staff are the only ones allowed to transfer a file from one field location to another. However, according to ICE officials, because of the urgency of the situation, ICE personnel may send an A-file directly from one ICE office to another, bypassing the USCIS records units. As a result, the file movement to the new location is not recorded in NFTS. USCIS records officials stated that they do not believe lack of compliance stems from any technical problems with using NFTS because the system is Web-based and relatively easy to use. Missing A-files can cause delays in awarding immigration benefits, hinder USCIS’s ability to uncover immigration fraud, and limit DHS’s ability to take enforcement actions. According to USCIS’s ROH, lost or missing A-files can cause delays or errors in awarding immigration benefits and can hamper investigation and enforcement actions. For example, USCIS procedures for processing naturalization applications allow USCIS to wait up to 3 months to try to find an A-file, thereby delaying adjudicating the application. According to several USCIS district officials, USCIS staff spend additional time and effort trying to locate files that are not in the location identified in NFTS, thus delaying their ability to process benefits quickly. Officials from all of the district offices we spoke with told us that USCIS faces an increased risk of granting naturalization to an ineligible applicant when the adjudicator does not have the A-file available because the file may contain potentially disqualifying information. Officials from several district offices stated that the A-file is needed to look for any inconsistencies between the naturalization application and other applications that the applicant had submitted when applying for previous benefits like legal permanent residency. For example, a naturalization application may contain facts about the applicant’s marital or family (children) status that are inconsistent with information in the A-file, a possible indication of fraud that may not be uncovered without the A-file. These types of inconsistencies cannot be checked without the A-file. In addition, USCIS conducts background security checks on all naturalization applicants via the Interagency Border Inspection System (IBIS). IBIS guidance requires an IBIS name check on all names an applicant may have used. According to several district officials, the A-file may contain other names (aliases) the applicant may have used that should be checked against IBIS. Therefore, without the A-file, any potentially damaging information related to these other names may not be uncovered, increasing the risk of granting naturalization to an ineligible applicant. DHS’s ability to take an enforcement action against an applicant may also be compromised. According to an ICE attorney, some immigration judges may be reluctant to, for example, order an alien removed from the United States without the complete A-file. Officials we spoke with stated that the steps contained in the Naturalization Quality Procedures mitigate somewhat the risk of naturalizing someone who is ineligible. For example, adjudicators must take additional steps when adjudicating a naturalization application without an A-file. Specifically, these steps include verifying the applicant’s lawful admission to the United States and that the applicant has lived in the United States as a lawful permanent resident for the required amount of time—generally, 5 years—and lack of disqualifying information in USCIS databases, extra supervisory reviews to ensure that naturalization processing procedures have been followed, and not scheduling the oath ceremony on the same day that the naturalization application is adjudicated to allow sufficient time for the required supervisory reviews. Data from USCIS’s quality assurance audit of the naturalization program indicate that USCIS staff is following procedures nearly all of the time when adjudicating a naturalization application without an A-file. Of the 129 quality assurance audit cases sampled in fiscal year 2005 where an A-file was not available, USCIS staff did not follow all of the required procedures in 5 cases. Officials from several district offices told us that the standard naturalization adjudication procedures (applicable when an A-file is either available or missing), such as background security checks, somewhat reduce the risk of granting naturalization to someone who is ineligible. For example, as part of USCIS’s background security check, USCIS is to conduct an IBIS name check as well as both a fingerprint and FBI name check. In an April 2006 memorandum, the USCIS Director of Operations directed that naturalization interviews should not be scheduled until all background checks have been completed to ensure that all background security issues are resolved before USCIS interviews the applicant. According to officials from several district offices, the background security checks mitigate, somewhat, the risk of naturalizing someone who poses a potential national security or public safety threat. Although USCIS deems having an A-file critical to adjudicating a naturalization application, USCIS staff are not required to record whether an A-file was used to adjudicate a naturalization application. Recording whether an A-file was used to adjudicate a naturalization application could help USCIS assess the extent of the risk posed by adjudicating naturalization applications without an A-file and what actions may be necessary to address the problem. DHS staff who have access to A-files may not be consistently using NFTS to track the movement of A-files, hindering the ability to locate A-files when needed. While officials offered suggestions as to why staff may not be complying, such as the lack of NFTS training, it is unclear to what extent staff are not complying and why. Knowing the extent to which staff are not complying and why and addressing these reasons would increase DHS’s ability to locate and provide A-files for adjudicators and others, thereby reducing the risk associated with adjudicating a naturalization application and other immigration benefits without the A-file. In order to improve USCIS’s management information, prevent unnecessary delay, and more efficiently adjudicate applications, we are recommending that the Secretary of Homeland Security direct the Director of USCIS to require users to record or note whether an A-file was used to adjudicate a naturalization application and work together with other DHS users of A-files to determine the extent to which staff may not be complying with NFTS procedures for updating the system and why and correct any identified deficiencies in file-tracking compliance. We provided a draft of this report to DHS for review. On October 24, 2006 DHS provided written comments which are shown in appendix II. DHS also provided technical comments which we incorporated as appropriate. DHS agreed with both of our recommendations and stated that the report generally provides a good overview of the complexities associated with the process for ensuring adjudication officers have A-files when adjudicating naturalization applications. Regarding our recommendation to require users to record or note whether an A-file was used to adjudicate a naturalization application, DHS stated that it plans to modify its CLAIMS 4 system to make the data field related to file status mandatory. USCIS plans to make this modification in early to mid 2007. Regarding our recommendation that USCIS work together with other DHS users of A-files to determine the extent to which staff may not be complying with NFTS procedures and why and to correct any deficiencies in file-tracking procedures, DHS stated that information obtained from recently completed visits to USCIS, CBP and ICE field offices will help USCIS determine the level of compliance with file tracking procedures and identify remediation efforts required by each agency. This information will also serve as the basis for a planned joint policy on A-file management. DHS also cited several efforts it has taken or is planning to take to improve the management of A-files. For example, USCIS and CBP records managers have formed a partnership and are working to improve responsiveness to records management needs. USCIS established File Control Offices at several sub-offices allowing these sub-offices to move files to requesting offices as quickly as possible. USCIS’ Records Management Branch will evaluate NFTS reports to track files that are not transferred within a reasonable amount of time and notify appropriate components to ensure compliance with policies and procedures. USCIS will continue on-site training as NFTS continues to be deployed across DHS. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of the Department of Homeland of Security and other 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 or wish to discuss it further, please contact me at (202) 512-8777 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To address all of our objectives, we interviewed United States Citizenship and Immigration Services (USCIS) headquarters officials, reviewed relevant documents, and sent e-mail questionnaires and followed up with phone calls to officials and staff from 13 (Chicago, Dallas, Detroit, Houston, Los Angeles, Miami, Newark, New York City, Philadelphia, San Diego, San Francisco, Seattle and Washington, D.C.) of USCIS’s 33 district offices. We obtained written responses to our questionnaire from another district office (Boston). We selected these offices because they adjudicated most of the naturalization applications. Specifically, USCIS data indicate that these 14 offices adjudicated nearly two-thirds, or about 497,000, of the approximately 715,000 naturalization applications adjudicated in fiscal year 2005. In addition, to examine the extent to which USCIS records how often naturalization applications are adjudicated without an A-file, as well as the reasons why an A-file might be missing and what steps USCIS takes to compensate for any lack of an A-file during an adjudication process we obtained data related to naturalization applications adjudicated in fiscal year 2005 contained in the Computer-Linked Application Information Management System (CLAIMS) 4 database that records information from the naturalization application and related information, the results from USCIS quality assurance audits of a sample of naturalization applications reviewed in fiscal year 2005, and A-files indicated as lost and, as having been in transit and yet to be recorded as received in USCIS’s National File Tracking System (NFTS). We also reviewed policies and procedures related to processing naturalization applications and instructions and guidance about using, locating, and requesting A-files. In a prior review, we determined how USCIS ensures the quality and consistency of adjudicator decisions by reviewing USCIS reports and data on accuracy rates related to its two quality assurance programs, interviewing USCIS officials in the Performance Management Division, reviewing the findings and recommendations of an independent study on USCIS’s quality assurance programs and, discussing supervisory review practices with senior managers at the field offices we visited. However, we did not independently verify the extent and quality of supervisory review. We assessed the reliability of CLAIMS 4 and NFTS data by (1) reviewing summary data and specific data elements for obvious errors in accuracy and completeness, (2) reviewing related documentation, and (3) interviewing USCIS staff knowledgeable about the CLAIMS 4 and NFTS systems. For NFTS, we also observed how A-files are located, transferred, and received. However, we did not independently evaluate whether technical malfunctions may be a factor in the number of files with improperly identified locations, although we have no reason to believe that technical malfunctions have occurred. We found that information and summaries of the NFTS, CLAIMS 4, and quality assurance data were sufficiently reliable for the purposes of this report. We conducted our review from August 2005 through August 2006 in accordance with generally accepted government auditing standards. In addition to the above, Michael Dino, Assistant Director; Richard Ascarate; Jenny Chanley; Frances Cook; Carlos Garcia; Julian King; and Brian Lipman were key contributors to this report. | To document the interactions of aliens with the Department of Homeland Security's (DHS) United States Citizenship and Immigration Services (USCIS) and other government entities, USCIS creates alien files, or A-files. While deemed critical, especially in making citizenship decisions, A-files are sometimes missing during adjudications. In 2002, naturalization was granted to an alien whose A-file was missing and who was later found to be associated with a terrorist organization. GAO focused its review on (1) how often USCIS adjudicates naturalization applications without an A-file and why, (2) the effect that missing A-files can have on the adjudication process, and (3) steps taken to help mitigate the risk of missing A-files. To address these questions, GAO interviewed officials and staff from USCIS and reviewed relevant data, policies, and procedures related to processing naturalization applications and the automated file-tracking system DHS established to track the movement of A-files. A-files were not available to adjudicate naturalization applications in a small percentage of cases. GAO found that of the naturalization applications adjudicated in 2005, about 30,000--or about 4 percent of them--may have been adjudicated without A-files. However, this number may be less because USCIS staff are not required to record whether an A-file was available. USCIS officials said that a major reason A-files were not available for naturalization application adjudications is that staff are not using the automated file-tracking system. USCIS officials suggested that staff might not be using the automated file-tracking system for lack of sufficient training on how to use the system, while local management may not be adequately emphasizing the importance of complying with A-file tracking policies and procedures. Missing A-files can have an impact on the process of adjudicating naturalization applications in several ways. For example, when an A-file is not available at the location indicated in the automated file-tracking system, additional time is spent trying to locate the file, which slows the adjudication process and applicants may wait longer for USCIS to process their application. In addition, missing A-files can hinder USCIS's ability to uncover immigration benefit fraud and limit DHS' ability to take enforcement actions. USCIS has steps in place to help mitigate the risk of adjudicating a naturalization application without an A-file. These steps include verifying the applicant's lawful admission to the United States and conducting extra supervisory reviews to ensure that naturalization processing procedures have been followed. |
Charities are organizations established to serve broad public purposes, such as the needs of the poor or distressed and other social welfare issues. The Internal Revenue Service reported that for 2002, 501(c)(3) organizations, which include charities, had total assets of over $1.7 trillion. In 2004, the Internal Revenue Service (IRS) recognized 820,000 charities, accounting for about 90 percent of 501(c)(3) organizations. Charities can include organizations with missions such as helping the poor, advancing religion, educating the public, or providing disaster relief services. Although the federal government indirectly subsidizes charities through their tax-exempt status and by allowing individuals to deduct charitable contributions from their income taxes, the federal government has a fairly limited role in monitoring charities. States provide the primary oversight of charities through their attorneys general and charity offices. Charities have historically played a large role in the nation’s response to disasters. For example, after the September 11 attacks, 35 of the nation’s larger charities—including the American Red Cross and the Salvation Army—collected almost $2.7 billion to provide food, shelter, mental health services, and other types of aid. Charities’ roles in responding to disasters can vary. Some charities, including the American Red Cross and the Salvation Army, are equipped to arrive at a disaster scene and provide immediate mass care, including food, shelter, and clothing, and in some circumstances, emergency financial assistance to affected persons. Other charities focus on providing longer-term assistance, such as job training, scholarships, or mental health counseling. In addition, new charities may form after disasters to address specific needs, such as the charities established after the September 11 attacks to serve survivors of restaurant workers and firefighters. The U.S. government’s National Response Plan provides a single, comprehensive framework for the federal response to domestic incidents, such as natural disasters and terrorist attacks. The plan provides the structure and mechanisms for the coordination of federal support to states and localities. Major cabinet and other federal agencies are signatories to the plan, along with the American Red Cross and the National Voluntary Organizations Active in Disaster (National VOAD), a national charity umbrella organization. The American Red Cross and National VOAD are the only nongovernmental organizations that signed the Plan. In December 2004, the Department of Homeland Security released the plan, which was developed at the request of President Bush. The plan incorporates and replaces several previous plans for disaster management, including the Federal Response Plan, which was originally signed in 1992. One of the ways the plan changed the Federal Response Plan was by not naming charities active in disaster relief other than the American Red Cross, but instead incorporating them under the umbrella organization, National VOAD. The plan designates 15 Emergency Support Functions, each identifying a specific disaster response need as well as organizations that have key roles in helping meet those needs. The sixth Emergency Support Function, the function most relevant to charities involved in disaster relief, creates a working group of key federal agencies and charitable organizations to address mass care, including sheltering, feeding, and emergency first aid; housing, both short- and long-term; and human services, such as counseling, processing of benefits, and identifying support for persons with special needs. As a direct service provider, the American Red Cross feeds and shelters victims of disasters. In addition to fulfilling this role, the American Red Cross is responsible for coordinating federal efforts to address mass care, housing, and human services under Emergency Support Function 6 with FEMA. The American Red Cross is the only charity to serve as a primary agency under any Emergency Support Function. The plan gives the American Red Cross responsibility for coordinating federal mass care assistance in support of state and local efforts. The American Red Cross also has responsibilities under other Emergency Support Functions, such as providing counseling services and working with the federal government to distribute ice and water. FEMA’s responsibilities include convening regular meetings with key agencies and coordinating the transition of service delivery from mass care operations to long-term recovery activities, among other responsibilities. National VOAD, a membership organization composed of approximately 40 charities that provide services following disasters, is designated as a support agency under Emergency Support Function 6, but it does not provide direct services to victims. Rather, National VOAD is responsible for sharing information with its member organizations regarding the severity of the disaster, needs identified, and actions taken to address these needs. Following September 11, GAO reported several lessons learned that could help charities enhance their response to future disasters. These included easing access to aid for eligible individuals, enhancing coordination among charities and between charities and FEMA, increasing attention to public education, and planning for future events. Further, GAO recommended that FEMA convene a working group to encourage charities involved in disaster response to integrate these lessons learned from the September 11 attacks. Following our report, seven of the largest disaster response charities, in partnership with FEMA, formed the Coordinated Assistance Network (CAN) to ease collaboration and facilitate data sharing. While the network databases are still largely in a pilot phase, both government and charity representatives have praised the potential of the network’s databases to improve collaboration. Easing access to aid for those eligible: We reported that charities could help survivors find out what assistance is available and ease their access to that aid through a central, easy-to-access clearinghouse of public and private assistance. We also suggested offering eligible survivors a case manager, as was done in New York City and in Washington, D.C., following September 11 to help to identify gaps in service and provide assistance over the long term. Enhancing coordination among charities and with FEMA: We also found that private and public agencies could improve service delivery by coordinating, collaborating, sharing information with each other, and understanding each other’s roles and responsibilities. Collaborative working relationships are critical to the success of other strategies to ease access to aid or identify service gaps, such as creating a streamlined application process or a database of families of those killed and injured. Increasing attention to public education: After September 11, we reported that charities could better educate the public about the disaster recovery services they provide and ensure accountability by more fully informing the public about how they are using donations. Charities could improve transparency by taking steps when collecting funds to more clearly specify the purposes of the funds raised, the different categories of people they plan to assist, the services they plan to provide, and how long the charity plans to provide assistance. Planning for future events: Further, we reported that planning for how charities will respond to future disasters could aid the recovery process for individuals and communities. Although each disaster situation is unique, it could be useful for charities to develop an assistance plan to inform the public and guide the charities’ fundraising efforts. In addition, state and local emergency preparedness efforts could explicitly address the role of charities and charitable aid in future events. GAO recommended that FEMA convene a working group to encourage charities involved in disaster response to integrate lessons learned from the September 11 attacks. After our report, FEMA encouraged charities to form a working group to share information following disasters, which became the Coordinated Assistance Network. The seven charities that formed CAN are the Alliance of Information and Referral Services, the American Red Cross, National VOAD, the Salvation Army, 9/11 United Services Group, Safe Horizon, and the United Way of America. The group worked in partnership with FEMA to develop a database to share information between agencies. The CAN network addressed several of the lessons learned that GAO identified. To ease access to aid for those eligible, the network is designed to share client data, such as previous addresses, employment information, and FEMA identification numbers, between charities. CAN is intended to ensure that victims need only explain their circumstances once, rather than repeatedly to different service providers. To enhance coordination among charities and with FEMA, the CAN network is designed to make charities more aware of the services provided by one another and identify any gaps or redundancies in services. Last, to plan for future events, the CAN network intends to build partnerships or working relationships among disaster response charities before disasters strike. While the CAN network databases are still largely in pilot phase, both government and charity representatives have praised the database’s potential to improve collaboration and noted that it functioned well following the disasters, considering that it was not fully developed. Following the hurricanes, charities have raised more than $2.5 billion to assist in hurricane relief and recovery efforts. Many of the charities responding to the disaster have taken steps to coordinate with one another and with FEMA and other government agencies. For example, charities have shared information through daily conference calls and through electronic databases that allowed multiple organizations to access information about services provided to hurricane victims. Some charity representatives we spoke with praised the potential of these systems for sharing information, but also raised concerns that using these systems could be difficult at times. Charities also experienced problems in providing services to victims in some hard-to-reach areas. GAO teams that visited the Gulf Coast region in October 2005 observed that in areas where the American Red Cross did not operate, other charities, such as the Salvation Army and smaller charities—often local churches—provided relief services. Although smaller organizations helped fill the gaps in charitable services in the Gulf Coast region, some concerns have been raised about their ability to provide adequate services to victims. Charities have raised more than $2.5 billion in cash donations in response to the Gulf Coast hurricanes, according to the Center on Philanthropy at Indiana University. The center notes that this number is a low estimate, since it does not include direct giving to individuals, giving to smaller charities, or in-kind donations. As of November 18, the American Red Cross had raised more than $1.5 billion, more than half of all dollars raised. The Salvation Army raised the second-highest amount, $270 million, about 18 percent of the amount raised by the American Red Cross. The Bush-Clinton Katrina Fund and Catholic Charities were the next- largest fund raisers, each raising about $100 million. Charities operating in the Gulf Coast region following the hurricanes coordinated services through the convening of major national disaster relief organizations at the American Red Cross headquarters, daily conference calls organized by National VOAD, and databases established by CAN. The usefulness of the daily conference calls, as well as the CAN databases, was questioned by some charity representatives. In the weeks following Hurricane Katrina, the American Red Cross organized a national operations center with representatives from FEMA and several major national charities, including the Southern Baptist Convention and the Salvation Army, at its headquarters in Washington, D.C. Because of the scale of the hurricane disaster and the large response needed, this was the first time the American Red Cross coordinated this type of national operations center following a disaster. This working group helped the major charities coordinate services on the ground by allowing for face-to-face interaction and ongoing communication, according to charity representatives and FEMA officials. To help fulfill its information-sharing role under Emergency Support Function 6, National VOAD organized daily conference calls with FEMA and other federal government representatives and its member organizations operating in the Gulf Coast region. National VOAD also invited nonmember charitable organizations that were providing relief to hurricane victims to participate in these calls, which sometimes included more than 40 organizations at once. During these calls, both the federal government and charities were able to provide information and answer questions about services provided, needs identified, and the organizations’ abilities to meet these needs. Representatives from charitable organizations told us that these calls were an effective way to coordinate the delivery of supplies among charities and help identify those regions that were most in need of charitable services. Charities were also able to share information through CAN databases. Following the hurricane disasters, CAN created a Web-based shelter registry that provided information about emergency shelters operating in the Gulf Coast region, including their capacity and operating status. CAN also activated the database of victim information, which at the time was being tested in six pilot communities. More than 40 charities–all of whom must sign CAN participation agreements, including the American Red Cross, the Salvation Army, and the United Way of America–were able to access this database and input information about the services they provided to individual clients, according to CAN representatives. Charities could share information about these clients, who were required to sign privacy releases, through the Web-based database, thus reducing service duplication and the need for victims to give the same information to multiple organizations. Although charity representatives we interviewed reinforced the importance of the conference calls and the CAN databases, they also raised concerns about the usefulness of these systems. For example, some representatives were concerned the conference calls had too many participants. Because 40 or more charities might be participating in any one call, the calls often ran long or dealt with issues that may not have been of interest to the whole group, according to some charity officials. Additionally, charity representatives told us that call participants sometimes provided information that turned out to be inaccurate. Charity officials we spoke with were supportive of CAN and its mission, but they raised several concerns about the usefulness of its databases following the hurricane disasters. One concern that we heard from a few charities was that the CAN case management system is still in its developmental stages and was therefore not ready to be activated on such a large scale. Many volunteers had not received sufficient training on the system, and some of the technological glitches had not been completely resolved, according to charity representatives. In addition, representatives told us that the shelter database, which was developed soon after the hurricanes and had not been previously tested, may not have been ready for widespread use. In addition, some officials said that after Katrina there was neither electricity nor Internet access in certain locations, and as a result, the CAN databases could not always be used. Some officials stated that they needed to collect information in writing at the time of the disaster and then input the data into the system once they had Internet access–a task that was time-consuming and diverted resources from other needed areas. CAN officials responded that the CAN databases were created primarily for long-term recovery efforts, which would take place after electricity and Internet access were restored, rather than for short- term relief. Charity representatives also told us that daily conference calls and electronic databases helped with coordination efforts, but these systems were not as important to coordination efforts as pre-existing relationships. Several of the charities we spoke with stated that in order for charities to function efficiently following a disaster, they must have some sort of established working relationship with the other charities involved in disaster relief efforts. One charity representative told us that it is difficult to make introductions in the chaos of a disaster. He stressed that charities that operate in disasters should have memorandums of understanding signed before a disaster strikes–a practice used by many charities–so that they can immediately coordinate efforts in a disaster situation. GAO teams that visited the Gulf Coast in October 2005 observed that the American Red Cross did not provide relief in certain areas because of safety policies; and thus, other charities, such as the Salvation Army and smaller charities, often helped to meet the needs of those areas. The American Red Cross told us that with the American Society for Civil Engineers and FEMA, it had previously developed policies intended to protect the safety of service providers and victims following a disaster. These policies include not establishing shelters in areas that may become flooded during a disaster or in structures that strong winds may compromise. However, victims remained in areas where the American Red Cross would not establish shelters. Further, where the American Red Cross was able to establish shelters, the needs of victims sometimes exceeded the capacity of the American Red Cross, as this represented the largest response effort in American Red Cross history. GAO teams in Mississippi observed that the Salvation Army and smaller charities, such as local church organizations, filled many of the needs for volunteer services that the American Red Cross did not meet. Additionally, GAO teams estimated that in the Birmingham, Alabama, area, a significant portion of the approximately 7,000 evacuees were being cared for and sometimes being housed by local churches and their members. Although smaller organizations provided needed charitable services in the Gulf Coast region, some concerns have been raised about the organizations’ abilities to provide adequate services to victims. Some officials told us that the smaller organizations helped meet important needs, but many of the organizations had never operated in a disaster situation and may not have completely understood the situation. For example, officials told us that some of the small charities that placed children who were separated from their parents in homes did not retain sufficient information about which children were placed where. This made it difficult to locate missing children. Other officials told us that some of the smaller organizations that tried to establish “tent cities” to house evacuees were not prepared to provide the water, sanitation, and electricity these types of shelters require. In closing, the devastation of Hurricanes Katrina and Rita once again challenged federal, state, and local governments and charitable organizations’ abilities to provide large-scale aid to hundreds of thousands of survivors. It also provided a critical opportunity to assess how the nation’s charities have incorporated lessons learned from responding to the September 11 tragedy. Our report on charitable organizations’ contributions after September 11 identified several lessons learned and made important recommendations for improving the delivery of charitable services after disasters. GAO’s ongoing work on the coordination of charitable efforts in response to Hurricanes Katrina and Rita will examine how these recommendations have been implemented and how effectively charities coordinated in response to recent hurricanes. Specifically, this upcoming report will address questions regarding the amount of money charities have raised to assist people affected by the hurricanes and how these funds have been used, how well charities are meeting their responsibilities under the National Response Plan, how well charities are coordinating their relief efforts, how people affected by the hurricanes have accessed charitable services and relief supplies and the challenges they encountered in dealing with charities, and what charities are doing to guard against fraud and abuse. This report will be released next year. 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. Cindy Fagnoni (202)512-7215, [email protected]. Individuals making key contributions to this testimony included Andrew Sherrill, Tamara Fucile, Mallory Barg Bulman, Scott Spicer, Rachael Valliere, Walter Vance, Richard Burkard, Bill Jenkins, and Norm Rabkin. 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 devastation and dislocation of individuals experienced throughout the Gulf Coast in Louisiana, Mississippi, Alabama, and Texas in the wake of Hurricanes Katrina and Rita has raised concern about both the charitable sector's and the government's abilities to effectively respond to such disasters. To strengthen future disaster response and recovery operations, the government needs to understand what went right and what went wrong, and to apply these lessons. The National Response Plan outlines the roles of federal agencies and charities in response to national disasters. Recognizing the historically large role of charities in responding to disasters, the plan included charities as signatories and gave them considerable responsibilities. In addition to carrying out the responsibilities outlined in the National Response Plan, charities served as partners to the federal government in providing both immediate and long-term assistance following Hurricanes Katrina and Rita. GAO was asked to provide an overview of lessons learned from charities' response to previous disasters as well as preliminary observations about the role of charities following the Gulf Coast hurricanes. As part of our ongoing work, GAO will continue to analyze federal and charitable efforts following the hurricanes. Following September 11, 2001, GAO reported lessons learned that could help charities enhance their response to future disasters. These included easing access to aid for eligible individuals, enhancing coordination among charities and between charities and the Federal Emergency Management Agency (FEMA), increasing attention to public education, and planning for future events. GAO also recommended that FEMA convene a working group of charities to coordinate lessons learned following September 11. Following the GAO report, seven disaster response charities partnering with FEMA formed the Coordinated Assistance Network to improve collaboration and facilitate data sharing. Following the Gulf Coast hurricanes, charities raised more than $2.5 billion dollars, according to Indiana University's Center of Philanthropy, with more than half of these funds going to the American Red Cross. GAO's preliminary work shows that these charities have taken steps to improve coordination of relief efforts by sharing information through daily conference calls and electronic databases. Despite these efforts, charities faced some challenges in coordinating service delivery. For example, some charities reported that their volunteers needed additional training to use the databases. GAO teams that visited the Gulf Coast region in October 2005 observed that in areas where the American Red Cross did not provide services, the Salvation Army and smaller organizations--often local churches--were able to meet many of the charitable needs of hard-to-reach communities. The American Red Cross's efforts to protect service providers may have prohibited it from operating in some of the harder-to-reach areas. Additionally, some concerns were raised about smaller charities' abilities to provide adequate disaster relief services. |
Legislation enacted in 1992 authorized a Civil-Military Cooperative Action Program under which DOD was permitted to use the armed forces’ skills and resources to assist civilian efforts to meet domestic needs by participating in projects and activities that would benefit the community.One of the objectives of the program was to enhance individual and unit training and morale in the armed forces through meaningful community involvement. While the statute required DOD to ensure that it provided the assistance in a manner consistent with the military mission of the units involved, the statute did not require an assessment of the training value of providing the assistance. In 1996, legislation repealed the program and replaced it with the current IRT Program. Like the prior statute, the current legislation (10 U.S.C. 2012) authorizes units or members of the armed forces to provide support and services to nondefense organizations. The law also requires that assistance be incidental to military training, not adversely affect the quality of training, and not result in a significant increase in the cost of the training; unit’s assistance meet valid unit training requirements; and individual members’ assistance be directly related to their specific military specialties. Moreover, as was required under the prior program, DOD officials must coordinate with civilian officials to ensure that DOD assistance meets a valid community need and does not duplicate other available public services. Finally, the statute states that assistance may be provided only if it is requested by a responsible official of the organization that needs the assistance and it is not reasonably available from a commercial entity. See appendix I for a complete version of the provisions of 10 U.S.C. 2012. To administer the IRT Program, DOD issued a specific directive to guide military organizations entering into projects with civilian organizations and established specific processes to ensure that projects conform to statutory requirements. Although the Assistant Secretary of Defense for Reserve Affairs is responsible for monitoring the program, military organizations exercise a high degree of autonomy in making decisions to enter into projects. Military organizations use operations and maintenance and pay and allowances appropriations to fund IRT projects and need apply to OSD only if they require supplemental IRT funding. In fiscal year 1997, Congress appropriated $16 million in such funding for the program. We selected six IRT projects of varying sizes and activities to determine their conformance with statutory requirements. These projects consist of three road-building projects (Operation Alaskan Road on Annette Island, Alaska; Navajo Nation Building Project between Sawmill and Fort Defiance, Arizona; and Operation Good Neighbor near Gallup, New Mexico); one medical project (MIRT 97 - Adams County, Ohio); one project to place excess combat vehicles off the shore of New Jersey to build artificial reefs (Operation REEFEX 97), and one project to reconstruct a basketball court (Operation Crescent City 97 in Louisiana). DOD officials do not know the full extent of the IRT Program. Despite OSD’s expectation that military organizations would file after-action reports on each of their civil military projects, these reports have not been consistently filed. Some service and component command officials told us that they did not require after-action reports for IRT projects that did not receive supplemental funding. Officials of organizations that required reporting of all projects stated that even they might not be aware of small projects conducted at a local level. Using available service and OSD records for fiscal year 1997, we found that most of the projects were engineering, infrastructure, or medical in nature. At least 129 IRT projects were conducted in at least 35 states and the District of Columbia, and all active, reserve, and National Guard components of each of the services participated in the projects. The scope of these projects varied from activities conducted in 1 day by a few participants from a single unit to joint multiyear operations with hundreds of participants. Because we were unable to determine the full extent of IRT projects, we could not characterize the nature of all the projects. Although OSD officials told us they had obligated approximately $15.6 million of the $16 million Congress appropriated specifically for the IRT Program in fiscal year 1997, DOD does not capture those costs that the services and their components absorbed from their own pay and allowances and operations and maintenance accounts. As a result, we could not determine total program costs. Supplemental IRT funding spent on the six projects we reviewed amounted to at least $4.6 million. Project officials told us that service and component contributions to these projects were at least $3.6 million. We could not determine their total cost because we had to rely on project participants’ memories of the types of costs incurred and, in many cases, their estimates of the expenses. The projects and their costs are discussed in more detail in appendix II. The legislation requires the Secretary of Defense to prescribe regulations governing the provision of assistance under the IRT Program. In response to this requirement, DOD issued Directive 1100.20, “Support and Services for Eligible Organizations and Activities Outside the Department of Defense.” This directive controls the implementation and administration of the program. Although the directive meets the legislation’s requirements, DOD could improve the directive by addressing how it will implement the statutory requirement that the provision of assistance not result in a significant increase in the cost of training. DOD has implemented the IRT Program through its directive, much of which restates in nearly identical language the statutory provisions governing the program. It provides, in some instances, additional guidance on how DOD is to implement the program, as shown in the following two examples. Under 10 U.S.C. 2012(f), the Secretary of Defense is required to prescribe regulations that include procedures to ensure that assistance is provided along with, rather than separate from, civilian efforts and meets a valid civil or community need. To meet this requirement, the directive encourages the establishment of advisory councils composed of various public, private, business, and civic sector representatives. The directive states that if an advisory council does not exist in the area in which assistance is to be provided, responsible DOD commanders or other officials are to consult and coordinate, to the maximum extent practicable, with the same types of individuals who would serve on the councils. The statute requires that civil military program assistance be provided only if the assistance is not reasonably available from a commercial entity. The directive states that in determining reasonable availability, DOD may also take into account whether the requesting organization or activity would be able, financially or otherwise, to address the specific civic or community need. Additional guidance could help organizations implement the statutory requirement that assistance not result in a significant increase in the cost of training. DOD’s directive repeats the language of the statute but does not explain what constitutes an increase in costs for training or a “significant increase.” DOD currently does not assess whether undertaking an IRT project will significantly increase the cost of training. Guidance on this point would provide a basis for assessing whether participating military organizations were complying with the requirements. The directive calls on the service secretaries to ensure that commanders of units or personnel participating in IRT activities determine that the assistance provided is consistent with valid unit training requirements or related to the specific military specialty of participating personnel. Service officials told us that they were drafting guidelines but did not know when they might be complete. The six projects we reviewed as case studies were generally conducted within the statutory requirements. For example, the benefiting organizations were eligible for the assistance, and the provision of assistance did not interfere with units’ or individuals’ military functions. While the statute requires that individuals providing assistance perform tasks directly related to their military specialties, on two of the projects we reviewed, some individuals’ tasks were not directly related to their specialties. Thus, it appeared that the goal of completing a project sometimes took priority over the goal of providing valid military training. In addition, we were unable to determine whether providing the assistance had resulted in a significant increase in the cost of training for any of the six projects because DOD has established no basis for making such a determination. The extent to which five of the projects conformed with each statutory requirement is summarized in table 1. OSD approved the sixth project (Operation Crescent City), which was sponsored by the Marine Corps Reserve, for supplemental IRT funding and the Marine Corps conducted project planning. Marine Corps officials subsequently canceled the project when they failed to reach an agreement with the community that would allow them to ensure that statutory provisions would be met. For example, according to these officials, there was no written request letter, no agreement on who would provide services the Marine Corps unit did not have the skills to provide, and no agreement on who would pay for those aspects of the project that had no training value. The following paragraphs provide additional information on the conformance of the five projects to statutory requirements. We found that the benefiting organizations for all five projects met the eligibility criteria established in the statute. Furthermore, a written request for assistance existed for four of the five projects. Officials of the fifth project—Operation REEFEX 97—told us that there was no written request for assistance for that project. In addition, officials of Operation Good Neighbor and of Operation REEFEX 97 told us that certifications of noncompetition with the private sector had not been provided for those projects. DOD collects these certifications to establish that assistance is not reasonably available from commercial sources, as required by the statute. The officials from Operation Good Neighbor told us they had attempted to get community officials to provide a certification before starting the project but had been unsuccessful. They said they had contacted OSD officials and were told to continue the project, in spite of not having a certification. Officials of Operation REEFEX 97 told us they did not know why there was no certification for their project. The statute requires that the assistance not interfere with a unit’s or members’ ability to perform their military functions. Officials of each of the five projects told us that no need for them to perform their military functions had arisen during work on the projects. They said that had such a need arisen, performance of their military functions would have been their priority. On the three projects with unit participation, the work of the participating units was directly related to their mission-essential task lists and was therefore considered valid unit training. We found, however, that on two projects, some individuals’ tasks were not directly related to their specialties. For Operation Alaskan Road, Marine Corps officials determined that the assigned combat engineering unit would need to be augmented to accomplish its part of the project in the time allotted. As a result, 25 refuelers from a bulk fuel company were trained in combat engineering skills and used to augment the 125-person combat engineering company. Marine Corps officials acknowledged the bulk refuelers’ duties for this project were not related to their military specialties. Also, Marine Corps officials told us that many tasks the combat engineers were required to perform involved skills not found in the individual training skills manual for the combat engineer (for example, plumbing rough-in work, masonry, quarrying operations, and finished wood frame carpentry). For Operation Good Neighbor, 7 of the 25 Navy Reserve Seabees performing road construction had military specialties unrelated to the tasks they performed. For example, Seabees with the military specialties of construction welder, carpenter/mason, and utilitiesman were used as heavy equipment operators. In addition, three of the five Seabees who built ramps for the handicapped had military specialties unrelated to the tasks they performed. The Seabees’ military specialties were surveyor and heavy equipment operator, but they were used as carpenters/masons. The statute requires that the assistance have no adverse impact on training quality. Most of the individuals involved in each of our five projects were participating in valid training for their units or performing tasks in their military specialties. Officials told us that for the individuals not performing tasks in their military specialties, participation did not interfere with any other training opportunities. The statute requires that the assistance provided not result in a significant increase in the cost of training. This determination was not made for any of the five projects. Also, DOD has provided military organizations neither an explanation of what constitutes an increase in costs for training nor a definition of a “significant increase.” The statute requires that the assistance provided be incidental to training, but on two projects, the assistance provided was not entirely incidental to the training. As discussed previously, some of the individuals used in Operation Alaskan Road and Operation Good Neighbor had military specialties that were unrelated to the tasks needed for the projects. Consequently, it appeared the goal of completing the projects took priority over the goal of providing valid military training. OSD has provided limited and inconsistent oversight of IRT projects and the delivery of support and services under them. For the most part, oversight is limited to those projects that receive supplemental IRT Program funding. Even within those projects, OSD did not always follow its own processes for ensuring the statutory requirements for civil military projects were met and did not have procedures in place to ensure that military organizations were meeting the statutory requirement not to provide assistance that results in a significant increase in training costs. The service secretaries have not established any additional oversight requirements. The process for projects that receive supplemental IRT funding involves an application that the sponsoring service or component submits to OSD, a memorandum of agreement (MOA) between OSD and the sponsor once OSD approves the application, and an after-action report. In its guidance for submission of requests for supplemental funding for 1997 IRT projects, OSD specified a format for application submissions. The information required includes the name of the requesting civilian organization and other contributing organizations, certification of noncompetition, training requirements or objectives to be met, and estimated funding requirements. However, the application does not require a certification that each proposed project does not result in a significant increase in the cost of training. For approved applications, OSD and the sponsor sign an MOA that specifies the amount of supplemental IRT funding allotted to the project and requirements to be met before the funds can be spent. An MOA may cover one or several projects that the same service or component is sponsoring. OSD officials told us that, under their policy, if the sponsor has more than one approved project, the sponsor determines the amount of supplemental IRT funds to distribute to each of its approved projects. The sponsor is responsible for ensuring that the requirements in the MOA are met. The MOA also requires military organizations to submit after-action reports that include, for example, the number of personnel participating in the project and an accounting of funds used to support the project. Copies of after-action reports are to be provided to OSD. Using documentation that OSD provided for fiscal year 1997 projects, we found that the process was not always followed because (1) sometimes applications were not submitted, (2) MOAs were not always executed, and (3) after-action reports were not always prepared. Additionally, we found cases in which MOAs were executed and supplemental IRT funds were used without the sponsor having met the requirements of the MOA. In one case, OSD had funded a project without any part of the process having been followed. OSD officials told us that they funded the project near the end of the fiscal year when it became apparent that not all of the supplemental IRT funding that had been obligated would be spent. They said that to avoid losing the funds at the end of the fiscal year, they had orally directed the transfer of funds from one Marine Corps component to another to fund this project and had not required an application, had not issued an MOA, and had not required an after-action report. The officials told us they had no paperwork relating to the project. Moreover, we found that, in some cases, sponsoring organizations, such as service components or joint organizations, had not determined that IRT projects did not result in significant increases in the cost of training because they believed this was part of OSD’ s process for approving supplemental funding for projects. OSD, on the other hand, told us this determination was the responsibility of the sponsoring organizations. OSD officials told us that they did not require the submission of applications and the issuance of MOAs for projects that required no supplemental IRT funding but that the DOD directive for the program requires submission of after-action reports for all IRT projects. However, the directive provides no designated time frame for providing the reports, and we found that they were not always submitted. Some service and component officials told us that after-action reports were not required if supplemental IRT funding was not used. Given the differing interpretations of the DOD requirement regarding after-action reports, clarifications to the directive could result in more consistent submission of the reports. While Congress authorized the IRT Program to permit the use of the armed forces to meet civilian needs, it established specific requirements to ensure, among other things, that individual projects do not adversely affect military training or significantly increase the cost of training. To ensure that these requirements are met, stronger adherence to oversight procedures already in place, modifications to those procedures, and more specific guidance on determining training cost implications are needed. We therefore recommend that the Secretary of Defense take action to manage the program to comply with the oversight procedures that have been established. Specifically, we recommend that when projects require supplemental IRT funding, sponsors have submitted applications with the required information and OSD and the sponsoring organizations have developed MOAs and DOD’s directive be clarified to explicitly require the preparation and submission of after-action reports within a designated time frame for all projects, not just those requiring supplemental IRT funding. We also recommend that the Secretary of Defense establish guidance for making cost determinations for joint projects and directing the service secretaries to define what constitutes an increase in the cost of training and what represents a “significant increase” in training costs associated with IRT projects. In addition, we recommend that the Secretary of Defense modify OSD program oversight procedures to ensure that a determination has been made as to whether an increase in training costs is significant. In written comments on a draft of this report, DOD partially concurred with our findings and concurred with our recommendations. DOD characterized our position as advocating greater centralized control to improve program performance. DOD also noted that the Fiscal Year 1996 National Defense Authorization Act, Section 574, discouraged centralized DOD management of activities allowed under 10 U.S.C. 2012 and that, in response to that legislation, DOD has gradually reduced the level of centralized oversight and instructed the services to provide instructions to implement the program. Once the services issue these instructions, DOD stated a decentralized approach can work more effectively. While the legislation does not permit centralized direction of activities under the IRT Program, it does not preclude DOD from conducting oversight. We do not advocate greater centralized control but rather better oversight to improve conformance with statutory requirements. For example, we recommended stronger adherence to oversight procedures already in place, modifications to those procedures, and more specific guidance on determining training cost implications. We continue to believe that such oversight is necessary and prudent to ensure compliance with the program’s statutory requirements. DOD also stated that it has fully accounted for resources specifically authorized and appropriated in fiscal year 1997 to fund IRT projects and that the services are responsible for IRT related costs funded from service resources. While DOD stated a separate system may be required to capture total costs, it emphasized that the benefits and costs of implementing such a system should be weighed against the value and size of the IRT Program. We note that the legislation requires DOD to ensure that assistance provided under the IRT Program does not result in a significant increase in the cost of training. Because of this requirement, we believe that maintaining information on project costs is important. To assess the nature, extent, and cost of the support and services DOD has provided under 10 U.S.C. 2012, we interviewed OSD and service officials and examined pertinent documents. We aimed at identifying the organization of the program and the types and scale of projects conducted through the program. To ascertain whether the regulations and procedures were consistent with the requirements of section 2012, we compared available OSD and service regulations to the requirements of section 2012 and examined the procedures used to identify, plan, implement, and report on the projects we used as case studies and compared those procedures with the requirements of section 2012. Because much of the program is decentralized and the universe of projects was not well defined, we used a case study methodology to examine those parts of the program for which no centralized source of information existed. The projects we examined were judgmentally selected from among those projects approved for supplemental funding from the section 2012 program. Our selections included several different types of projects; collectively, these projects included participants from each military service and each of their components. Other project selection factors included scale (size and duration) and geographic location. For each project, we obtained information on the level of support and services provided from OSD, the involved services, and local commanders. We then compared the types of support and services with the project criteria set forth in the law to determine whether the project conformed to statutory requirements, particularly those dealing with military training. Because our case studies do not represent a valid statistical random sample, our findings cannot be projected to the entire program. However, we believe our case studies provide insights into how the program is being carried out and monitored. To evaluate the OSD’s and service secretaries’ oversight of such civil military projects, we interviewed IRT officials within OSD and each of the services and examined pertinent documents to determine how the oversight role was implemented. We also reviewed the legislative history of section 2012 to ascertain where statutory responsibility for overseeing such projects rested. In addition, we examined the available policies and procedures to ascertain how DOD expected the projects to be monitored. We conducted our review between September 1997 and January 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant, Marine Corps; and the Director, Office of Management and Budget. Copies will also be made available to others on request. Please call me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV. The following provisions are stated, verbatim, in 10 U.S.C. 2012. (a) Authority to provide services and support.—Under regulations prescribed by the Secretary of Defense, the Secretary of a military department may in accordance with this section authorize units or individual members of the armed forces under that Secretary’s jurisdiction to provide support and services to non-Department of Defense organizations and activities specified in subsection (e), but only if— (1) such assistance is authorized by a provision of law (other than this section); or (2) the provision of such assistance is incidental to military training. (b) Scope of covered activities subject to section.—This section does not— (1) apply to the provision by the Secretary concerned, under regulations prescribed by the Secretary of Defense, of customary community relations and public affairs activities conducted in accordance with Department of Defense policy; or (2) prohibit the Secretary concerned from encouraging members of the armed forces under the Secretary’s jurisdiction to provide volunteer support for community relations activities under regulations prescribed by the Secretary of Defense. (c) Requirement for specific request.—Assistance under subsection (a) may only be provided if— (1) the assistance is requested by a responsible official of the organization to which the assistance is to be provided; and (2) the assistance is not reasonably available from a commercial entity or (if so available) the official submitting the request for assistance certifies that the commercial entity that would otherwise provide such services has agreed to the provision of such services by the armed forces. (d) Relationship to military training.—(1) Assistance under subsection (a) may only be provided if the following requirements are met: (A) The provision of such assistance— (i) in the case of assistance by a unit, will accomplish valid unit training requirements; and (ii) in the case of assistance by an individual member, will involve tasks directly related to the specific military occupational specialty of the member. (B) The provision of such assistance will not adversely affect the quality of training or otherwise interfere with the ability of a member or unit of the armed forces to perform the military functions of the member or unit. (C) The provision of such assistance will not result in a significant increase in the cost of the training. (2) Subparagraph (A)(i) of paragraph (1) does not apply in a case in which the assistance to be provided consists primarily of military manpower and the total amount of such assistance in the case of a particular project does not exceed 100 man-hours. (e) Eligible entities.—The following organizations and activities are eligible for assistance under this section: (1) Any Federal, regional, State, or local governmental entity. (2) Youth and charitable organizations specified in section 508 of title 32. (3) Any other entity as may be approved by the Secretary of Defense on a case-by-case basis. (f) Regulations.—The Secretary of Defense shall prescribe regulations governing the provision of assistance under this section. The regulations shall include the following: (1) Rules governing the types of assistance that may be provided. (2) Procedures governing the delivery of assistance that ensure, to the maximum extent practicable, that such assistance is provided in conjunction with, rather than separate from, civilian efforts. (3) Procedures for appropriate coordination with civilian officials to ensure that the assistance— (A) meets a valid need; and (B) does not duplicate other available public services. (4) Procedures to ensure that Department of Defense resources are not applied exclusively to the program receiving the assistance. (g) Advisory councils.—(1) The Secretary of Defense shall encourage the establishment of advisory councils at regional, State, and local levels, as appropriate, in order to obtain recommendations and guidance concerning assistance under this section from persons who are knowledgeable about regional, State, and local conditions and needs. (2) The advisory councils should include officials from relevant military organizations, representatives of appropriate local, State, and Federal agencies, representatives of civic and social service organizations, business representatives, and labor representatives. (3) The Federal Advisory Committee Act (5 U.S.C. App.) shall not apply to such councils. (h) Construction of provision.—Nothing in this section shall be construed as authorizing— (1) the use of the armed forces for civilian law enforcement purposes or for response to natural or manmade disasters; or (2) the use of Department of Defense personnel or resources for any program, project, or activity that is prohibited by law. (Added Pub.L. 104-106, Div. A, Title V, § 572(a), Feb. 10, 1996, 110 Stat. 353.) The following provides specific information on each of the six projects we used for case studies. Operation Alaskan Road, requested by the Metlakatla Indian community, is a multiyear engineering project sponsored by the Pacific Command and coordinated by the Alaskan Command. Members of the Missouri and Alaska National Guard were tasked to assist in the planning efforts. Phase one of the project, conducted in fiscal year 1997, involved over 850 members of the active forces of each of the military services. About 70 members of the Army and Air National Guard and the Army and Marine Corps Reserves also participated. During fiscal year 1997, the project was organized and planned and a base camp was constructed. The camp is to be used to house the military personnel who are expected to build a 14-mile road on Annette Island in Alaska over the next 5 years. The road will connect the town of Metlakatla with a remote section of the island that is much closer to the site of a proposed ferry terminal. The community believes that the proposed additional ferry access will allow more medical, educational, and commercial opportunities for the approximately 1,600 residents of Metlakatla. In fiscal year 1997, about 150 Marines spent 57 days on the island constructing a 300-person base camp to be used in the future by U.S. military personnel constructing the road. The base camp consists of 38 buildings, including berthing barracks, a mess hall, and shower and restroom facilities. The Marines invested over 63,000 hours of labor to construct the buildings, which are designed to last about 5 years. Unit officials stated that this project provided their personnel with many training opportunities, such as ship-to-shore landing, horizontal engineering, and vertical construction. Marine Corps officials told us the Alaskan deployment was good training for the engineer support company that participated. We found, however, that some individuals performed tasks unrelated to their military specialties, raising questions about whether the assistance provided was incidental to training. Specifically, because the company did not have enough combat engineers to complete the project in the allotted time, 25 Marines from a bulk fuel company, who were untrained in combat engineering skills, augmented the combat engineers. Therefore, a significant amount of time (about 2 months prior to deployment and more time on-site) was spent teaching basic combat engineering skills to the bulk refuelers. Also, Marine Corps officials told us that many tasks the combat engineers were required to perform involved skills not found in the individual training skills manual for the combat engineer. Some examples included plumbing rough-in work, masonry, quarrying operations, and finished wood frame carpentry. Two Navy troop transport ships carried the Marines on two separate trips from San Diego, California, to Annette Island. The trips took a total of 23 days and involved more than 650 Navy personnel. In Alaska, a Navy landing craft utility (LCU) transported personnel and supplies between the island and the mainland. Twenty five LCU personnel were assigned in support of this project. This project fit the unit’s mission of ship-to-shore movement of combat troops and equipment and provided the unit the opportunity to train for and prove the capability of LCUs to perform operations for extended periods while unsupported by a ship or parent command. During the 8-week operation, the craft made daily trips to Annette Island and surrounding areas. The total Department of Defense (DOD) cost for Operation Alaskan Road in fiscal year 1997 is not known, but it was at least $5.1 million. Innovative Readiness Training (IRT) funds spent on the project were about $2.1 million and paid for such expenses as supplies and equipment, some of the fuel (ground and ship), building materials, and commercial transportation. Additional service and component contributions were at least $3 million. These included pay and allowances for most personnel working on the project, some travel and per diem costs, and some contracting costs. Project officials were not able to determine all costs, however. For example, the amount did not include payments for staff management oversight and some flights for personnel and supplies. In addition to DOD, many organizations have been involved in the project, including the Metlakatla Indian community, the Bureau of Indian Affairs, the Coast Guard, the Federal Highway Administration, and the Alaska Department of Transportation and Public Facilities. The Navajo Nation Building Project, conducted for the benefit of the Navajo Nation, is a multiyear engineering project that began in fiscal year 1995 and is sponsored by the Army National Guard. During fiscal year 1997, participants began reconstructing Blue Canyon Road between Sawmill, Arizona, and Fort Defiance, Arizona. About 420 Army National Guard members from several states participated in the project, expending about 32,400 days (about 2,400 days for engineers and about 30,000 days for administrative and logistical support). Most of these participated with their units during their annual training. The units provided administrative and logistical support; conducted rock quarry operations; regraded 9 miles of road; installed shoulders, ditches, and drainage structures; applied a gravel surface along 6 miles of road; and provided security. The Navajo Nation Council reported that the reconstructed Blue Canyon Road will provide people residing in the area with an all-weather road that is passable during inclement weather. The total DOD cost to fund this project is not known, but it was at least $2.3 million. This amount included about $1.9 million in supplemental IRT funds that paid for expenses exceeding the amounts units budgeted for annual training. These expenses included pay and allowances and travel and per diem for some participants, transportation of soldiers and equipment, and the rental of equipment at the project site. Service and component contributions of at least $423,000 were used for pay and allowances and some per diem for participants on annual training. Service officials were unable to provide the amount spent for military airlift used to transport some soldiers to the project site. In addition to DOD, the communities of Sawmill and Fort Defiance, the Navajo Nation, the Bureau of Indian Affairs, Indian Health Services, the U.S. Forest Service, the Environmental Protection Agency, and the Arizona and New Mexico State Historic Preservation Offices made contributions to the project. Operation Good Neighbor was an engineering project sponsored by the Air Force Reserve for the benefit of the Navajo Nation. During fiscal year 1997, the project to reconstruct roads near Gallup, New Mexico, was planned and reconstruction activities begun. About 38 Air Force and Navy reservists and active duty Air Force personnel participated. Project officials told us that the certification of noncompetition with the private sector had not been provided for this project. They said that they had been unsuccessful in their attempts to get community officials to meet the requirement before starting the project. As a result, they had contacted Office of the Secretary of Defense (OSD) officials and were told to continue the project, without the certification. The Naval Reserve Seabees tasked to do the reconstruction over a 30-day period were able to work on only 2 of the 35 miles of originally planned road reconstruction due to delays in obtaining environmental clearances. They completed the 2 miles in 2 days. The project was then shifted to the partially reconstructed Blue Canyon Road project between Sawmill, Arizona, and Fort Defiance, Arizona. The Army National Guard had started this road reconstruction as an IRT project earlier in the summer and had obtained all the required clearances. The Seabees regraded 11 miles of road, graveled 1.5 miles, and installed culverts where needed. The Navajo Nation Council reported that the reconstructed Blue Canyon Road will provide people residing in the area with an all-weather road that is passable during inclement weather. Because additional IRT funds were available, the project was expanded to include building handicap ramps. Air Force Reserve officials told us they had been aware of the need for ramps and took advantage of the available funding to build them. Five Navy Reserve Seabees spent 10 days to construct 14 ramps at the homes of disabled Native Americans. They were supported by three Air Force personnel (two active duty and one reservist). Four of the eight participants (all of the Air Force personnel and one Seabee) had been involved in the road construction effort and stayed on to build the ramps. The other four participants were additional Seabees who joined the effort. On this project, 25 Seabees from several Naval Reserve units reconstructed the road. Seven of them had military specialties unrelated to the road construction tasks they performed. In addition, three of the five Seabees who constructed the ramps for the handicapped had military specialties unrelated to their tasks. The total DOD cost for Operation Good Neighbor in fiscal year 1997 is not known, but it was at least $230,000 (over $28,000 of which was spent during the ramp-building portion of the project). Supplemental IRT funds spent on the project were at least $203,000 and were used for such expenses as military pay and allowances, equipment rental, supplies, and fuel. Additional service contributions were at least $27,000 and included some pay and allowances. The officials were not able to determine all costs, however. For example, the amount did not include the cost of military airlift. In addition to DOD, many organizations have contributed to the project, including the Navajo Nation, the Bureau of Indian Affairs, the Southwest Indian Foundation, and the Western Health Foundation. MIRT 97 - Adams County was a medical project conducted over a 4-day period in fiscal year 1997 by approximately 120 medical personnel from the Ohio Army National Guard. The National Guard Bureau sponsored the project, and the Ohio Army National Guard planned and coordinated it. This project involved providing medical services such as immunizations, pediatric wellness clinics, dental evaluations, vision and blood testing, physical examinations, and referrals to about 500 people from a medically underserved community located in the Appalachian region of Ohio. Adams County, which was designated by the U.S. Department of Health and Human Services in the Federal Register as having a primary medical care health professional shortage in 1997, was selected as the participating county by the Ohio Department of Health. This project was completed over 2 weekends, with approximately 60 medical personnel participating each weekend. Medical personnel screened about 165 people the first weekend and about 335 the second weekend. Unit and individual training tasks were accomplished, either partially or totally, during this project. Unit training tasks accomplished included deploying a medical company to a new operating site, establishing an area of operations, performing health service support operations, and redeploying to the units’ home stations. Individual tasks accomplished included taking vital signs, administering medication, collecting specimens, and providing dental care. The total DOD cost of this project is not known, but it was at least $41,400. Supplemental IRT funds used on the project were approximately $8,800 and were used to pay for meals, lodging, supplies, and equipment rental. Ohio Army National Guard contributions were at least $32,600. This amount included fuel and some pay and allowances for project participants. Project officials were unable to provide all costs. For example, the amount does not include the cost of some of the initial project planning meetings. In addition to DOD, a number of state and local organizations were involved in the project, including the Ohio Department of Health, the Ohio Family and Children First Initiative - Office of the Governor of Ohio, and the Adams County Family and Children First Council. Operation REEFEX is a multiyear engineering/infrastructure project that has been ongoing since the early 1990s. Project officials told us the 1997 project, conducted for New Jersey, involved creating artificial reefs by placing excess and obsolete combat vehicles, which were demilitarized and cleaned, at designated offshore areas. In fiscal year 1997, the Army National Guard sponsored the project and dropped 85 obsolete combat vehicles off the coast of New Jersey over a 7-day period. There was no documentation of a request or a certification of noncompetition for this project. The New Jersey Army National Guard coordinated the project and hired a civilian to manage it. About 100 military personnel from the New Jersey Army National Guard (about 45 participants), the Navy Reserve (about 37 participants), the Air Force Reserve (6 participants), and the Coast Guard (about 18 participants) carried out the project. Most of these participants were in inactive duty training status. In addition, the Guard hired seven civilians to demilitarize the vehicles. New Jersey Army National Guard truck operators used military vehicles to transport the demilitarized vehicles to a holding area for temporary storage and subsequently transported the vehicles to the barge loading site. Once the vehicles were aboard a commercial barge, military personnel from the New Jersey Army National Guard, Navy Reserve cargo handling personnel, and Air Force Reserve air transportation specialists secured the vehicles to the barge. A commercial tug then moved the barge to the designated locations and the vehicles were released into the ocean. Coast Guard crews and personnel from a Navy Reserve inshore boat unit provided water transportation to and from the reef site for the work crews and provided security during the water transportation of the vehicles. Unit officials stated that participation in this project provided their personnel with valuable hands-on training in, for example, transporting vehicles, on- and off-loading vehicles, and securing vehicles for movement. The total DOD cost for Operation REEFEX 97 is not known, but it is at least $584,000. Supplemental IRT funds spent for the project in fiscal year 1997 were approximately $399,000. These funds were used to pay the eight civilians hired in support of the project and to pay for supplies and equipment needed to demilitarize vehicles; contracted services such as meals, hotels, and equipment repairs; building rental and maintenance; and some costs for commercial tug and barge rental, fuel, and military pay and allowances. Service and component contributions were at least $185,000 and primarily consisted of pay and allowances for some of the personnel working on the project. Program officials were not able to provide the total cost of service and component contributions. For example, the amount did not include the cost of some fuel and of operating some military vehicles and boats. In addition to DOD, many organizations were involved in the project, including the U.S. Environmental Protection Agency, the New Jersey Department of Environmental Protection, the New Jersey State Fish and Game Office, and the Artificial Reef Association. The Marine Corps Reserve sponsored and planned Operation Crescent City 97, which was to have involved the demolition and reconstruction of a basketball court. The Reserve planned the project, and OSD approved supplemental IRT funding for it. However, according to Reserve officials the project was canceled the day before work was to have begun because they and the community failed to reach an agreement that would allow them to meet some of the statutory requirements. For example, there was no written request letter; no agreement on who would provide services unrelated to the Marine Corps unit’s mission-essential tasks, such as security of the construction equipment; and no agreement on who would pay for certain aspects of the project that had no training value, such as the removal and disposal of the demolished materials. Had this project proceeded as planned, 13 Marines from an engineering support battalion would have participated on the project for a period of 15 days. Their participation was expected to fulfill annual training requirements. When the project was canceled, alternate training was arranged at a military base, where the Marines accomplished a variety of construction projects in support of base facilities, such as concrete pad construction, wood frame construction, and roofing work. The total cost of planning this project is not known. A total of about $4,400 in supplemental IRT funds was spent, but Marine Corps Reserve officials said they could not provide the service contribution. Janet Keller, Evaluator in Charge Sharon Reid, Site Senior Henry Arzadon, Evaluator Linda Koetter, 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 requirement, GAO reviewed the Department of Defense's (DOD) training projects that support nondefense activities, focusing on the: (1) extent, nature, and cost of civil military projects; (2) consistency of DOD's guidance on the Innovative Readiness Training (IRT) Program with statutory requirements; (3) conformity of selected projects to statutory requirements, especially those dealing with military training; and (4) effectiveness of the Office of the Secretary of Defense's (OSD) and service secretaries' oversight of such projects. GAO noted that: (1) DOD does not know the full extent and nature of the IRT program because some project information is not consistently compiled and reported; (2) furthermore, although DOD knows the amount of supplemental funds spent on the program, it does not know the full cost of the program because the services and components do not capture those costs, which are absorbed from their own appropriations; (3) available records indicate that at least 129 projects were conducted in fiscal year (FY) 1997 and that most of these were engineering, infrastructure, or medical projects; (4) the DOD directive for civil military projects is consistent with the statutory requirements for such projects; (5) specifically, it reiterates the statutory requirements and provides further delineation of how the projects are to be selected and implemented; (6) the directive does not, however, provide any additional guidance for military organizations to use in meeting the statutory requirement that the provision of assistance not result in a significant increase in the cost of training; (7) the six projects GAO reviewed generally met the statutory requirements; (8) for example, the benefitting organizations were eligible for the assistance and the provision of assistance did not interfere with units' or individuals' military functions; (9) however, while the statute requires that individuals providing assistance perform tasks directly related to their military specialties, GAO found that in two cases some individuals' tasks were not directly related to their specialties; (10) thus, it appeared that the goal of completing a project took priority over the goal of providing valid military training; (11) in addition, GAO could not determine whether the assistance had resulted in a significant increase in the cost of training for any of the six projects because DOD has established no basis for making such a determination; (12) OSD has provided limited and inconsistent oversight of IRT projects and the delivery of support and services under them; (13) for the most part, OSD limited oversight to those projects that received supplemental program funding; (14) even for those projects, OSD did not always follow its own processes for ensuring that statutory requirements for civil military projects were met and did not have procedures in place to ensure that military organizations were not providing assistance that significantly increased training costs; and (15) the service secretaries have not established any additional formal oversight procedures. |
Within broad federal requirements, each state administers and operates its Medicaid program in accordance with a Medicaid state plan, which must be approved by CMS. A state plan describes the groups of individuals to be covered; the methods for calculating payments to providers, including which types of providers are eligible to receive payments; and the categories of services covered. Federal law identifies broad categories of services that states must cover, such as inpatient hospital services, nursing facility services, and physician services, and also many categories of services that states can cover at their own option, such as home- and community-based long-term care services, physical therapy, or optometry. Any changes a state wishes to make in its Medicaid plan, such as establishing new Medicaid payments (including supplemental payments) to providers or changing methodologies for payment rates for services, must be submitted to CMS for review and approval as a state plan amendment. In reviewing state plan amendments to ensure that state provisions are consistent with federal Medicaid requirements, CMS reviews and approves payment methodologies and does not review actual payments for individual providers. CMS communicates Medicaid program requirements to states through federal regulations, a published State Medicaid Manual, standard letters issued to all state Medicaid directors, and technical guidance on particular topics. Under federal Medicaid requirements, federal Medicaid matching funds are available for state payments made for Medicaid-covered services provided to Medicaid beneficiaries. While payments are not limited to the costs of providing services, payments made to a provider under a state plan must be economical and efficient and within the Medicaid UPL, which is the ceiling on the amount of federal matching funds a state can claim for certain services. The UPL is based on an estimate of what Medicare would have paid for comparable services. Because states’ regular Medicaid payments are often lower than what Medicare would pay for similar services, states are able to make UPL supplemental payments, and the federal government shares in the payments to the maximum amount allowed under the UPL (see figure 1). The UPL is not a provider-specific limit but instead is applied on an aggregate basis for certain provider ownership types and categories of services. Each state must calculate a separate UPL for each combination of provider ownership type and category of service to determine the maximum amount of UPL payments that it can make for each ownership-service type combination. States may establish multiple UPL supplemental payment programs and hospitals may receive UPL supplemental payments from more than one of these programs. Approval to make new payments and apply other eligibility criteria is obtained through the state plan amendment process, which requires CMS review and approval. CMS’s review and approval role does not extend to reviewing the specific manner in which states distribute payments, including which individual providers receive payments, the amount of the payments, or how providers spend the payments they receive. Under the flexibility of the Medicaid UPL, some states have targeted UPL supplemental payments to a small number of hospitals within a particular category. For example, in 2012, we reported that a large share of UPL supplemental payments were concentrated on a small number of hospitals and in many cases resulted in Medicaid surpluses. We concluded that payments that greatly exceeded Medicaid costs raised questions about the purpose of the payments, including how they related to Medicaid services and if they are economical and efficient. In 2015, we reported that CMS lacked a policy and process to determine if payments to individual providers are economical and efficient, and we recommended that CMS develop criteria to assess payments to individual providers and develop a process to identify and review them. HHS agreed and reported that the agency is taking action to respond to our recommendation. States may also administer parts of their Medicaid programs under the authority of section 1115 of the Social Security Act, which authorizes the Secretary to waive certain federal Medicaid requirements and allow costs that would not otherwise be eligible for federal matching funds for experimental, pilot, or demonstration projects that, in the Secretary’s judgment, are likely to assist in promoting Medicaid objectives. In recent years an increasing number of states have received permission from HHS to make supplemental payments under Medicaid demonstrations. Supplemental payments under a Medicaid demonstration are made according to the terms and conditions approved by HHS for the demonstration and may include reporting or other requirements that do not apply to UPL supplemental payments authorized under the Medicaid state plan. States and the federal government share in the financing of Medicaid payments according to a formula established in law. States finance the nonfederal share of their Medicaid programs primarily with state funds, particularly state general funds appropriated to the state Medicaid agency. Within certain limits, however, states may also use other sources of funds—including funds from local government providers, such as county-owned or county-operated hospitals, or from local governments on behalf of government providers. For example, local government providers and local governments can provide Medicaid funding to the state via fund transfers, known as intergovernmental transfers. Federal law allows states to finance up to 60 percent of the nonfederal share from local government funds. This limit is applied in the aggregate—that is, across each state’s entire Medicaid program—and not for individual payments or categories of service. Under federal law, states cannot lower the amount, duration, scope, or quality of Medicaid services provided due to a lack of funds from local sources. We recently reported that states have increasingly relied on local governments to fund the nonfederal share of state Medicaid payments, particularly for supplemental payments. Selected hospitals that received large UPL supplemental payments under state plans in three of four selected states did not account specifically for the use of revenue from these payments in their financial systems, as they were not required to do so. But hospital officials described various uses of the revenue, such as defraying the costs of treating the uninsured and the costs of capital purchases. Selected hospitals that received large Medicaid payments in two of four selected states were required to track spending and allowed to use payments for purposes such as uninsured costs. Officials from all nine of our selected hospitals that received large UPL supplemental payments under state plans in three of the four states in our review reported that they did not track how they used the excess revenue from the UPL payments they received, nor were they required to do so. These surpluses reflect the amount that total Medicaid payments, which include regular Medicaid and supplemental payments, exceeded Medicaid costs and were significant for the selected hospitals. For example, in 2009, the Medicaid surpluses for the nine hospitals ranged from $400,000 to more than $77 million, with average Medicaid surpluses of about $39 million. Although supplemental payments to these hospitals amounted to tens or hundreds of millions annually and are generally paid on a lump sum, quarterly, or annual basis, officials told us that their financial systems do not separately identify the supplemental payment revenues or track the costs to which supplemental payments are applied. Rather, these officials said the UPL supplemental payments are treated as revenue along with other payments the hospital receives, and revenues are not segregated for specific purposes. Although hospitals did not track the UPL supplemental payment revenues, hospital officials were able to describe some of the general purposes for which the revenues, including the Medicaid surpluses resulting from the large payments, were used. Hospital officials described purposes such as defraying the costs of treating uninsured patients, contributing to specific capital purchases, and making general improvements to community access to care and services. Officials from several hospitals described more than one purpose for which the UPL supplemental payments and resulting Medicaid surpluses were used. (See table 1.) Hospital officials from seven of nine selected hospitals in these three states said they used the revenues from the large UPL supplemental payments they received in part to cover the costs of providing services to uninsured patients. Federal Medicaid law explicitly authorizes one type of Medicaid supplemental payment—Medicaid DSH supplemental payments—for which states can claim federal matching funds for the costs of treating uninsured patients. The amount of federal funding each state may claim for DSH supplemental payments is limited by federal law, as each state is subject to a federal DSH allotment that establishes the maximum federal funding available for DSH payments. These limits, however, do not restrict hospitals from using available revenues to cover the costs of providing services to uninsured patients. While officials with the seven hospitals were unable to specify how much of their UPL supplemental payments, including their Medicaid surpluses, were used to cover the costs of uninsured patients, the amount of federal funds above the states’ federal DSH allotments that were available to the hospitals for spending on the uninsured could be significant. For example, for New Mexico, Oklahoma, and Texas, statewide Medicaid surpluses due to UPL supplemental payments exceeded $400 million in federal funds in 2009, which is significant compared to these states’ DSH allotments of just over $1 billion in the same year. In New Mexico and Oklahoma, the federal share of Medicaid surpluses due to UPL payments actually exceeded the states’ federal DSH allotments. (See table 2.) Several hospital officials described other uses of revenues from UPL supplemental payments, including funding general hospital operations and maintenance; capital projects, such as new facilities; and equipment purchases, such as new imaging equipment. Although hospital officials were able to describe multiple purposes for which they used revenues from Medicaid surpluses resulting from large UPL supplemental payments, they were unable to specify how much was used for each purpose they described. Examples of specific expenses cited by hospital officials include the following: A New Mexico hospital official described a variety of capital expenses for which revenues from UPL payments, in part, were used. Examples included constructing new medical office buildings, constructing a new cancer treatment center, opening a new health clinic, purchasing a new CT scanner, purchasing a new X-ray imaging system, and purchasing a new helicopter to transport patients. Although hospital officials could not estimate how much of the Medicaid surplus was devoted to capital investment, the surplus was significant compared to the amount of its capital investments. For example, in 2009 this hospital had a Medicaid surplus of about $16 million. The budget for its capital investments totaled $24.6 million that year. The hospital reported an overall profit exceeding $5 million each in 2009 and 2012. Officials with a Texas hospital described the establishment of new outpatient clinics for both primary care and some specialty services, extension of clinic hours, and capital expenses as the types of services and projects that it would not have been able to provide or complete without the supplemental payments it received. Although hospital officials could not estimate how much of the Medicaid surplus was devoted to capital investment, the surplus was significant compared to its capital investments. For example, in 2009, this hospital had a Medicaid surplus of nearly $78 million. That same year the hospital spent $100 million for construction of a new patient tower that included new operating rooms, emergency rooms, examination rooms, isolation rooms, three floors of patient rooms, administration offices, and waiting rooms. Under Medicaid demonstrations, states were approved to make Medicaid supplemental payments to hospitals for costs and activities not otherwise covered under Medicaid to promote Medicaid objectives, and hospitals were required to track how they used these payments. Specifically, the two states in our review that operated under demonstrations, Florida and Texas, were authorized to make new types of supplemental payments to hospitals for hospitals’ uncompensated care costs associated with Medicaid-enrolled and uninsured patients, and Texas was also authorized to make incentive payments for broadly targeted improvements to hospitals’ health care delivery systems. Florida began its Medicaid demonstration in fiscal year 2006 and Texas began its demonstration in fiscal year 2012. When the states began making demonstration supplemental payments to hospitals, they ended the hospitals’ UPL supplemental payments, although they continued to make DSH payments. Hospitals in both states receiving demonstration supplemental payments for uncompensated care costs were subject to certain payment limits and reporting requirements, and overall spending approved for uncompensated care costs was higher than the federal limits would have been without the demonstration. In addition, the terms of the demonstrations allowed the states to include costs not otherwise eligible for Medicaid reimbursement under the demonstration. The terms and conditions of the demonstrations established a facility-specific limit on hospital payments. In particular, hospitals could not receive more in payments than their actual uncompensated care costs, including new costs allowed under the demonstration. The Texas demonstration allowed hospitals to include uncompensated care costs beyond those that the state could have covered without the demonstration, including uncompensated costs for physician services, clinic services, and prescription drugs. Further, the Florida demonstration allowed hospitals to include uncompensated care costs for underinsured individuals with private insurance as well as for the cost of operating poison control centers, costs that the state could not have covered without the demonstration. Hospitals were required to report their estimated Medicaid and uninsured costs and payments to the state, using an approved methodology, as a condition of receiving payment, so that the amount of uncompensated care costs could be determined. Hospitals are subject to a verification of actual costs and payments when final data for the year become available, and any payments above costs are required to be returned to the state. The federal spending levels approved by HHS under demonstrations in Florida and Texas for 2012 allowed additional uncompensated care spending that was more than double the amount of each state’s DSH allotment—the statutory limit on the amount of federal funds a state may receive for hospital uncompensated care that would have applied had the demonstration not been approved. Hospitals in Texas receiving incentive payments for health care delivery system improvements under that state’s Medicaid demonstration were required to develop an implementation plan and report their progress in meeting designated milestones. To receive the incentive payments, referred to as Delivery System Reform Incentive Payments (Incentive Payments), participating hospitals must develop a plan, subject to CMS and state approval, that identifies the specific projects that they plan to implement, from a menu of options, along with data-driven milestones that hospitals must reach in order to receive full payment. Incentive payments could be made for various projects, such as improving care for patients with certain conditions or increasing delivery system capacity. The terms and conditions of the demonstration included specific reporting requirements to track incentive payments—for example, reports to CMS that include both hospital-specific incentive payment amounts and summary information about the delivery system improvements the payments incentivized. A March 2015 report conducted for the Medicaid and CHIP Payment and Access Commission found that: comprehensive data was lacking to evaluate the outcomes from state spending on incentive payments, states have pursued incentive payment programs to preserve the federal matching funds from their UPL supplemental payment programs, and supplemental payment spending under demonstrations on incentive payments has exceeded prior levels of spending on UPL supplemental payments in some states. The bulk of supplemental payments in three of four selected states we reviewed were distributed to hospitals based on the availability of funding from hospital or local government contributions toward the nonfederal share of the payments, rather than the volume of services each hospital provided. We also identified instances in which actual payments to providers were contingent on the availability of such funding. However, CMS has not issued written guidance to articulate and broadly communicate its policy regarding the appropriate basis for states’ distribution of supplemental payments or regarding the practice of making payments contingent on the availability of local financing. Our review of state documentation shows that in three of four selected states—New Mexico, Texas, and Florida—the bulk of the supplemental payments to hospitals were made contingent on these hospitals or the relevant local governments providing funds to finance the nonfederal share of the payments the hospitals received, rather than Medicaid services they provided. Each of these states had multiple supplemental payment programs—that is, separate payments for different ownership types and categories of service—and the rules regarding which hospitals would receive payments and the amounts of the payments were established through a combination of Medicaid state plan provisions, state administrative code provisions, other state requirements, or, in the case of states operating under Medicaid demonstrations, through the funding protocols approved for the demonstration. Specifically: In New Mexico, the amount of a hospital’s UPL supplemental payment from two of the five supplemental payment programs in the state was determined by the amount of local government funds provided to finance the nonfederal share. The New Mexico state plan established that, to be eligible for the payments, hospitals must provide a “valid request” to the state Medicaid agency. To be valid, this request had to include a letter from the local government authority indicating its level of financial support, up to a maximum limit, which determined the amount of each hospital’s supplemental payment. The state plan section for New Mexico’s largest supplemental payment program stated that if the hospital does not submit a valid request, then the hospital is not eligible for a supplemental payment even if the hospital was otherwise eligible. In 2009, a total of about $207 million of the state’s supplemental payments was distributed based on the availability of local funding, and, in 2012, $233 million in supplemental payments was distributed based on these requirements. In contrast, the state distributed about $39 and $38 million in supplemental payments in 2009 and 2012 through three other supplemental payment programs for which the nonfederal share was funded by state revenue, according to state officials. These payment programs distributed payments based on measures related to the purpose of the payments, such as the number of medical residents. In Texas, the state’s administrative code specified that payments from the state’s three largest UPL supplemental payment programs in 2009 were to be distributed based on the amount of local funding provided. Specifically, the Texas Administrative Code specified that for these supplemental payments the nonfederal share of the payments will be obtained through intergovernmental transfer of public funds and the amount of the payment to the hospital will be calculated in proportion to the amount of the funds transferred by the hospital to the state. In 2009, about $2.3 billion in supplemental payments was distributed under these three programs. The remaining $100 million in supplemental payments that year was distributed through two smaller, state-funded supplemental payment programs based in part on each hospital’s level of Medicaid services provided. In 2012, Texas made two types of supplemental payments under a Medicaid demonstration—uncompensated care payments and incentive payments for health care delivery system improvements—and the terms and conditions of the demonstration established that the nonfederal share for both types of payments would be financed by funds from local government hospitals or local governments, such as counties or hospital districts. The terms established that hospitals receiving payments for uncompensated care costs or incentive payments must be part of an organization called a Regional Healthcare Partnership, which is led by a public hospital or a local governmental entity that provides local funding of the nonfederal share. The local government hospitals or entities were required to submit a plan showing how much funding they could provide, with payment amounts determined by the amount of funds contributed for the nonfederal share. In Florida, for most hospitals receiving supplemental payments under its demonstration in 2009 and 2012, supplemental payments were largely distributed based on the availability of funding for the nonfederal share from the local government hospitals or local governments on their behalf. The terms and conditions of the state’s Medicaid demonstration established that local government funding was an allowed source of funds for the nonfederal share of the supplemental payments but did not specify how hospitals’ payment amounts would be determined. Florida created a complex funding relationship between large public hospitals that funded the entire nonfederal portion of estimated payments (for all hospitals, including those that are not required to fund the nonfederal share) and other hospitals that might receive payments, according to state officials. Based on 2012 payment data provided by the state, we found that hospitals that provided intergovernmental transfers of funds for their nonfederal share received significantly more, on average, in total payments than hospitals that were not required to finance the payments. The hospitals providing intergovernmental transfers of funds received supplemental payments equal to the nonfederal share plus a small percentage of the federal share. The state used the remaining portion of the federal share to fund the nonfederal share of demonstration supplemental payments for other hospitals—usually smaller, private, or rural hospitals, according to state officials. These other payments were distributed to the hospitals based on factors other than the availability of local funding, such as Medicaid patient volume. In 2009, a total of about $712 million of the state’s supplemental payments was distributed based on the availability of local funding, and, in 2012, $823 million in supplemental payments was distributed based on these requirements. In contrast, the state distributed about $140 million and $96 million in supplemental payments in 2009 and 2012, respectively, to hospitals that were not required to provide the nonfederal share of the payments. In contrast to these three states, the fourth state we reviewed, Oklahoma, did not base hospital payment amounts on the availability of local government funds to finance the nonfederal share, according to state officials. The state had multiple supplemental payment programs in which payments were based on hospitals’ Medicaid workload or other factors. According to state officials, state general funds were used to finance the nonfederal share for all but one of the state’s supplemental payment programs. For the remaining supplemental payment program, the nonfederal share was financed by revenue from a hospital provider tax, and each hospital’s supplemental payment was based on its relative Medicaid workload. In the three states that based supplemental payments on the availability of local funds—Florida, New Mexico, and Texas—we found that over 90 percent of the total amount of supplemental payments in 2009 and 2012 was made based on the availability of local funds to finance the nonfederal share. Specifically, based on our review of state documents governing the distribution of supplemental payments, we found that in 2009, over $3.2 billion, or 92 percent of the total $3.5 billion in supplemental payments the three states made that year, was based on the contribution of local funds; in 2012, $4.9 billion, or 97 percent of the total $5.0 billion in supplemental payments, was based on the contribution of local funds. The amount and proportion of supplemental payments made by states that were distributed to hospitals based on the availability of local funds varied among the three states, although in each state the large majority of payments was distributed in this manner. (See table 3.) Distributing payments only to hospitals that are capable of financing the nonfederal share of the payment can result in payments that are not made to otherwise eligible hospitals that lack the ability to finance the expected nonfederal share of the payment, or to obtain local government support for such financing. Because most of the supplemental payments to hospitals in the three states were made to hospitals only if there was local funding to support the nonfederal share of the payment, some hospitals that would otherwise have been eligible for the payments did not receive them. We found examples in New Mexico and Texas of hospitals that did not receive a payment, or received a smaller payment, because the hospital or local government did not provide an intergovernmental transfer of funds, or provided a smaller contribution to the nonfederal share than expected. For example, several hospitals in New Mexico received no UPL supplemental payment, or smaller supplemental payments than usual, from the state in 2012 because of the inability of certain local counties to provide the nonfederal share. In Texas, there have been several hospitals each year that did not receive a payment, or received a partial payment, due to their lack of local funds to provide a contribution to the nonfederal share, according to Texas Medicaid officials. In 2009, when Texas was still making UPL supplemental payments to rural hospitals, there were 18 rural hospitals that were otherwise eligible for the payments but that did not receive a payment because, according to state officials, local funding was not provided for the nonfederal share. In 2012, after Texas converted its supplemental payments to a demonstration, there were 7 hospitals for which the state did not make a demonstration supplemental payment for uncompensated care because, according to state officials, these hospitals did not provide local funding for the nonfederal share. This method of distributing payments may also result in payments that are not necessarily aligned with the level of hospitals’ low-income patient workloads, as measured by their hospitals’ patient volume or costs associated with serving low-income or uninsured individuals. In the case of demonstration supplemental payments for hospitals’ Medicaid and uninsured uncompensated care costs, some hospitals with large uncompensated costs associated with serving the Medicaid and low- income population received relatively little in demonstration supplemental payments for uncompensated care. Other hospitals with relatively low uncompensated care costs received large supplemental payments relative to those costs. Still others received uncompensated care payments under the Medicaid demonstration even though they had no uncompensated care costs before receiving the payment. For example: In 2012, one hospital in Florida had about $352 million in uncompensated care costs and received $384 million in demonstration supplemental payments for those costs, for which local funding of the nonfederal share was provided on the hospital’s behalf, in addition to $77 million in DSH payments. In contrast, another hospital with about $121 million in uncompensated care costs—which was the fourth-highest amount of uncompensated care costs among hospitals that year—had no local funding provided on its behalf and received no such payments. In 2012, among Texas hospitals that had uncompensated Medicaid and uninsured costs and were eligible to receive a demonstration supplemental payment for uncompensated care, the extent to which the hospitals’ uncompensated care costs were covered by the payments varied widely based on the availability of local funding, from 0 percent for the 7 hospitals that were otherwise eligible but did not receive a payment, to more than 100 percent for 44 other hospitals, based on data provided by the state. CMS guidance regarding the basis on which states can distribute both demonstration and UPL supplemental payments is lacking. CMS has not issued written guidance articulating its policy regarding appropriate bases for making such payments to ensure they are linked to Medicaid purposes. While CMS has recently acted to curtail one state’s demonstration supplemental payments because the state based the payments on the availability of local financing, it has not taken steps to clarify and broadly communicate to all states guidance regarding appropriate payment distribution methodologies. Specifically, in April of 2015, CMS sent a letter to Florida raising concerns about the state’s demonstration supplemental payments, including concerns that the state’s supplemental payments were being distributed based on access to local government funds and not distributed based on services provided to Medicaid patients. In a May 2015 letter, CMS stated that it will work with the state to develop a distribution methodology for demonstration supplemental payments that more closely aligns with providers’ roles in serving the Medicaid population and in providing other uncompensated care authorized under the demonstration. Florida officials told us that CMS officials worked closely with the state to develop a distribution methodology that ensured the payments were not contingent on local financing and were made only for covered demonstration services, including raising regular payment rates for all hospitals and reducing the size of the supplemental payments that were targeted to those hospitals financing the nonfederal share. According to CMS officials, the May 2015 letter represents a developing national policy regarding demonstration supplemental payments—that is, that they should be based on the provision of services to Medicaid and uninsured individuals rather than on the availability of local funding. CMS stated that it had contacted affected states with demonstrations that include supplemental payments for uncompensated care to articulate the policy principles the agency would use when reviewing the states’ demonstrations for potential renewal. CMS also said it articulated the types of independently conducted impact analyses and information that a state would need to provide, as part of any request to renew the demonstration, in order for CMS to assess the role supplemental payments had in promoting Medicaid objectives. Apart from communicating directly with these states, CMS’s communication of its policy at a national level has consisted of posting the Florida letter on its website. CMS officials have not said whether they plan to issue guidance more broadly that would provide clarity around its policy and how it is applied for all states, including states that may be contemplating seeking demonstration authority for similar arrangements. For UPL supplemental payments made under state Medicaid plans rather than demonstrations, CMS officials also told us that the agency has not issued guidance on how states should distribute these payments. Although CMS has not issued guidance to the states, CMS officials told us that, when approving state plan provisions, they expect states to include a Medicaid metric, such as Medicaid volume, in their supplemental payment distribution methodology. CMS officials told us the agency plans to issue a proposed rule later in the spring of 2016 to specify appropriate methodologies for state distribution of UPL supplemental payments to ensure the payments are consistent with economy and efficiency. Because the proposed rule was under development as of December 2015, details regarding the payment distribution methodologies that will be articulated in the rule were not available at the time of our review. CMS also lacks guidance regarding how states demonstrate that supplemental payments are not contingent on the availability of local financing. CMS officials told us that the agency interprets federal law and regulation as prohibiting states from making payments contingent on the availability of local funding. In particular, federal law requires a state plan to provide assurances that a lack of funds from local sources to finance the nonfederal share will not result in lowering the amount, duration, scope, or quality of Medicaid services provided under the plan in any part of the state. Officials told us that in reviewing state plan amendments, they require states to remove language that would make providers’ receipt of a payment contingent on local funding of the nonfederal share. However, as shown by our review, there are instances in which supplemental payments to providers under state plans are being made contingent on the availability of local financing, suggesting that states lack a common understanding of CMS’s interpretation of the law as prohibiting this practice. According to CMS officials, the agency has not issued written guidance articulating to states that payments should not be contingent on the availability of local funds. Officials said the agency instead instructs states to remove contingent financing language from their state plans. CMS officials stated that they would expect providers to alert them if payments are not sufficient to ensure access and providers have generally not done so. The absence of written guidance to states is inconsistent with federal standards for internal control. Specifically, federal information and communications standards state that for an entity to run and control its operations, it must have relevant, reliable, and timely communications relating to internal as well as external events. Information is needed throughout the agency to achieve all of its objectives, and effective communication should occur in a broad sense, with information flowing down, across, and up the organization. In addition to internal communications, management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders who may have a significant impact on the agency achieving its goals. The lack of guidance may result in inconsistent application of CMS’s policy among states with overpayments to some providers and underpayments to others due to the unavailability of local funding. Under broad federal requirements, Medicaid payments are to be made for Medicaid-covered services delivered to Medicaid beneficiaries and should be economical and efficient and sufficient to ensure beneficiaries’ access to care. States are not required to limit their hospital payments to hospitals’ costs, and we have previously found that CMS lacks criteria to determine when payments to individual providers, such as hospitals, are economical and efficient. This review illustrates further concerns with CMS oversight, as states have made extremely large supplemental payments that resulted in total Medicaid payments well in excess of Medicaid costs and allowed for significant hospital spending on equipment, construction projects, and services not directly related to Medicaid. This can be partly attributed to the fact that CMS has not issued guidance to clearly articulate its policy for states on how they should be distributing supplemental payments or that payments should not be contingent on the availability of financing for the nonfederal share. As a result, CMS cannot ensure that states’ payments are based on the provision of Medicaid services or for demonstration purposes, and not based on the availability of provider and local government financing. Lacking guidance from CMS, states have distributed supplemental payments to hospitals based on the availability of hospital and local government contributions and, in some cases, have reduced or not made payments to providers that were unable to provide the expected nonfederal share. The absence of CMS guidance around how to distribute Medicaid supplemental payments may be leading to inconsistent application among states and the distribution of supplemental payments that are counter to agency policies, resulting in some providers for which local financing was provided being overpaid while others for which local financing was not available being underpaid relative to the Medicaid services they provide. To promote consistency in the distribution of supplemental payments among states and with CMS policy, we recommend that the Administrator of CMS take the following two actions: (1) issue written guidance clarifying its policy that requires a link between the distribution of supplemental payments and the provision of Medicaid-covered services, and (2) issue written guidance clarifying its policy that payments should not be made contingent on the availability of local funding. We received written comments on a draft of this report from HHS, which are reprinted in appendix I. In its comments, HHS concurred with the first recommendation and agreed with our concerns regarding the second recommendation. HHS concurred with our recommendation to clarify in written guidance the agency’s current policy that supplemental payments support the provision of services to Medicaid and low-income uninsured individuals. HHS cited the rule it plans to propose in the spring of 2016 that would set forth additional requirements to ensure that supplemental payments are consistent with the statutory principles of economy, efficiency, and quality of care. HHS also noted that it has begun an effort to apply its demonstration supplemental payment policy principles to the approval of demonstrations that contain such payments for uncompensated care, which it has communicated to Florida and other affected states. CMS did not comment that it planned to more broadly communicate guidance regarding its policy to all states. In responding to the second recommendation, HHS agreed that the issue of Medicaid supplemental payments being contingent on the availability of local funding is a concern. HHS also referenced its plans to issue a proposed rule in spring of 2016 and indicated that the rule will highlight the issue. Although HHS did not explicitly concur with the recommendation, HHS did state it is considering additional options to address the issue. We encourage HHS, in light of our report findings and recommendations, to issue explicit guidance on these two issues. HHS also provided technical comments, which we incorporated as appropriate. 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 Secretary of Health and Human Services and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of the report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Tim Bushfield, Assistant Director; Christine Davis; Iola D’Souza; Sandra George; Laurie Pachter; Ashley Nurhussein; and Perry Parsons made key contributions to this report. Medicaid Demonstrations: Approval Criteria and Documentation Need to Show How Spending Furthers Medicaid Objectives. GAO-15-239. Washington, D.C.: April 13, 2015. Medicaid: CMS Oversight of Provider Payments is Hampered by Limited Data and Unclear Policy. GAO-15-322. Washington, D.C.: April 10, 2015. Medicaid Financing: States Increased Reliance on Funds from Health Care Providers and Local Governments Warrants Improved CMS Data Collection. GAO-14-627. Washington, D.C.: July 29, 2014. Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency. GAO-13-348. Washington, D.C.: June 25, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. Medicaid: More Transparency of and Accountability for Supplemental Payments Are Needed. GAO-13-48. Washington, D.C.: November 26, 2012. Medicaid: States Made Multiple Program Changes, and Beneficiaries Generally Reported Access Comparable to Private Insurance. GAO-13-55. Washington, D.C.: November 15, 2012. Medicaid: States Reported Billions More in Supplemental Payments in Recent Years. GAO-12-694. Washington, D.C.: July 20, 2012. 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. Medicaid: Ongoing Federal Oversight of Payments to Offset Uncompensated Hospital Care Costs Is Warranted. GAO-10-69. Washington, D.C.: November 20, 2009. Medicaid: CMS Needs More Information on the Billions of Dollars Spent on Supplemental Payments. GAO-08-614. Washington, D.C.: May 30, 2008. Medicaid Financing: Long-standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-650T. Washington, D.C.: April 3, 2008. Medicaid Financing: Long-Standing Concerns about Inappropriate State Arrangements Support Need for Improved Federal Oversight. GAO-08-255T. Washington, D.C.: November 1, 2007. Medicaid Financing: Federal Oversight Initiative Is Consistent with Medicaid Payment Principles but Needs Greater Transparency. GAO-07-214. Washington, D.C.: March 30, 2007. Medicaid: Improved Federal Oversight of State Financing Schemes is Needed. GAO-04-228. Washington, D.C.: February 13, 2004. | In 2012, GAO reported that 505 hospitals received Medicaid payments that resulted in Medicaid payment surpluses—that is, payments that exceeded the costs of providing services—of about $2.7 billion. These surpluses were due in part to the lump-sum supplemental payments hospitals received that were above their regular payments for individual services. States made them under broad Medicaid payment authorities that allow federal matching on payments up to an upper payment limit or under Medicaid demonstrations. These types of supplemental payments are authorized, but not required, by law. GAO was asked to examine how hospitals used revenues from large supplemental payments and the states' basis for distributing the payments. For four selected states making large payments and 12 hospitals receiving them, GAO examined (1) how these hospitals used revenues from the payments and (2) the basis on which the states distributed the payments. GAO reviewed documents authorizing payments and interviewed hospital, state and federal officials. GAO also obtained payment data for 2009, the year hospitals were identified as having large payments, and for 2012, the most recent year available. Not all selected hospitals in the four states GAO reviewed tracked their use of revenues from the large supplemental payments they received and tracking of revenues is generally not required. Based on information obtained from hospital officials and a review of demonstration approval documents, GAO determined that the revenues were used for a broad range of purposes. For example, Officials from nine selected hospitals that received large supplemental payments under three states' traditional state Medicaid programs reported using revenues—which resulted in average surpluses of about $39 million—to cover the costs of uninsured patients as well as funding general hospital operations, maintenance, and capital purchases, such as a helicopter. Hospitals in two selected states that GAO reviewed that were approved to make supplemental payments under Medicaid demonstrations were subject to certain tracking requirements to ensure payment revenues were used for approved demonstration purposes. Documentation for one state showed that approved uses of revenues included hospitals' uncompensated costs of serving underinsured or uninsured individuals and operating poison control centers. In the other state, which moved during the study timeframe from making supplemental payments under a traditional Medicaid program to under a demonstration, payments were allowed for purposes such as incentivizing health care delivery system improvements and for uncompensated costs for physician and clinic services, and drugs. Three selected states distributed Medicaid supplemental payments largely based on the availability of local government funds to finance the nonfederal share of the payments, rather than on the services the hospitals provided. Medicaid payments should be made for Medicaid services or, if under demonstrations, for demonstration purposes and be economical and efficient. GAO found that three states made supplemental payments based on the ability of hospitals, or their local governments, to finance the nonfederal share. Consequently, hospitals otherwise eligible for payments but whose local government could not finance them did not receive them. The Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, communicated in writing to one state two key principles regarding payment distribution: (1) payments should be distributed based on Medicaid or demonstration purposes, and (2) payments should not be made based on the availability of local financing. However, CMS has not provided written guidance to articulate or broadly communicate these requirements to all states. Federal internal controls standards stress the need for effective communications with external stakeholders that have a significant impact on the agency achieving its goals. The absence of written guidance may result in inconsistent application of CMS's policies among states, the distribution of supplemental payments that are counter to the agency's policies and not aligned with the program's purposes, and the potential for states to overpay or underpay providers depending on the availability of local government financing. In commenting on a draft of this report, HHS concurred with the first recommendation and agreed with GAO's concerns regarding the second recommendation but did not explicitly concur with it. GAO recommends that CMS issue written guidance clarifying its policies that (1) supplemental payments should be linked to the provision of Medicaid services and (2) payments should not be contingent on the availability of local financing. |
FSA has overall responsibility for administering crop disaster programs, including ensuring that recipients meet eligibility requirements and do not receive payments that exceed program limitations. FSA guidance directs the agency to annually notify every farming operation—whether an individual farmer or an entity, such as a corporation or a partnership—that it must file documents, including a farm operating plan and an acreage report, with its local FSA county office if the operation is seeking farm program payments. These documents record farming information, such as which crops are planted on each field, the farming practices used, and the name of each individual with an interest in the farming operation. FSA uses this information to determine farm program payments, including payments for various agriculture disaster assistance programs. According to USDA documents, agriculture-related disasters are common: one-half to two-thirds of the counties in the United States have been designated as disaster areas in each of the past several years. As shown in figure 1, many counties received disaster designations for multiple years from 2001 through 2007. In order for a county to qualify for a USDA secretarial disaster designation, a disaster must have caused a minimum loss of 30 percent of production of at least one crop in the county. The secretarial disaster designation process begins when an eligible disaster event, such as hail or drought, occurs in a county. After monitoring and recording the disaster conditions, local officials, including FSA county officials, contact their governor to request a disaster designation for the county. Next, the governor submits a written disaster designation request to the Secretary of Agriculture. As a result of this request, FSA directs its county officials to complete a damage assessment report to show whether the minimum loss requirement was met. A state emergency board reviews the report, and if the report is approved, it is forwarded to FSA’s national headquarters for the Secretary of Agriculture’s approval or disapproval of the request. The approved counties are designated as disaster counties. RMA has overall responsibility for administering the federal crop insurance program, through the Federal Crop Insurance Corporation, and in partnership with private insurance companies that share a percentage of the risk of loss or opportunity for gain associated with each insurance policy written. RMA is also to address program compliance issues, including protecting the program against fraud, waste, and abuse. Under the Agricultural Risk Protection Act of 2000, RMA uses information technologies, such as data mining, to identify anomalous patterns of crop insurance claims payments that are consistent with actions farmers could take to obtain personal benefit through fraud or abuse of the crop insurance program. RMA has identified 45 patterns of crop insurance payments that it defines as anomalous, such as receiving payments while experiencing high frequency of losses or high severity of losses in comparison with surrounding farming operations; using poor farming practices; or exhibiting irregular behavior with insurance agents or adjusters that suggests collusion. RMA’s data mining does not identify specific instances of fraud or abuse of the crop insurance program; rather, it identifies anomalous patterns of crop insurance claims payments that are consistent with the potential for fraud and abuse and considers these payments as “suspicious.” RMA places farmers who exhibit such patterns on an annual list, after the year in which the crop insurance claims payments are made, to monitor their current or future farming practices. Farmers may be on the list for multiple anomalous patterns in 1 year. RMA provides its annual list to the appropriate FSA state offices for distribution to FSA county offices, as well as to the insurance company selling the policy to the farmer. Staff in FSA county offices advise the selected farmers that they have been identified for an inspection as a result of data mining and conduct field inspections during the growing season. In conducting these inspections, FSA inspectors are to determine, among other things, the tillage method used; weed control practices; type and amount of fertilizer applied; weather conditions; and how the inspected crop compares with others in the area. As a result of these inspections and other information, RMA reported total cost savings from 2001 through 2007 of $564 million, primarily in the form of estimated claims payments avoided: $140 million in 2005, $27 million in 2006, and $85 million in 2007. RMA has the authority to impose sanctions against farmers, agents, loss adjusters, and insurance companies that willfully and intentionally provide false or inaccurate information to RMA or to insurance companies. RMA also has the authority to disqualify farmers who have committed a violation not only from the insurance program but also from most other farm programs for up to 5 years. RMA also can refer suspicious crop insurance claims payments to USDA’s Office of Inspector General, which can open investigations and, when warranted, refer cases to the Department of Justice for prosecution. Through supplemental appropriations, Congress authorized three multiyear crop disaster programs for 2001 through 2007. The first program provided financial assistance for crop losses that occurred in crop year 2001 or 2002. The second program provided assistance for losses in 2003 or 2004 or for losses in 2005 that resulted from a hurricane or tropical storm during the 2004 hurricane season. The third program provided assistance for crop losses in 2005, 2006, or 2007. Generally, under each program, crop losses were eligible for crop disaster payments if the losses resulted from any of the following: (1) damaging weather, such as drought, excessive moisture, hail, freeze, tornado, or hurricane; (2) an adverse natural occurrence, such as an earthquake; or (3) a condition related to damaging weather or an adverse natural occurrence such as saltwater intrusion, rationing of irrigation water, disease, or insect infestation. The authorizing statutes and program regulations established payment limitations and eligibility requirements for the three crop disaster programs. For example, the statutes prohibited producers—who we refer to as farmers in this report—from receiving a payment for more than 1 year for each of the multiyear disaster programs. In addition, USDA regulations prohibited an individual farmer or member of a farming operation from receiving a crop disaster payment greater than $80,000. Regarding eligibility requirements, the statutes provided that farmers were only eligible to receive crop disaster payments if they had previously obtained federal crop insurance or coverage through FSA’s Noninsured Crop Disaster Assistance Program for the crop that suffered weather- related damage. Specifically, for crops covered by the federal crop insurance program (insured crops), farmers must have obtained crop insurance coverage through that program. For crops for which insurance was not available in the county where the crops were farmed (noninsurable crops), farmers must have obtained coverage through the Noninsured Crop Disaster Assistance Program. “Uninsured crops,” for the purposes of this report, refers to crops for which coverage was available in the county under either the federal crop insurance program or the Noninsured Crop Disaster Assistance Program, but the farmer did not purchase it. Not all uninsured crops were eligible for payment under the crop disaster programs. Furthermore, a statutory payment cap prohibited USDA from paying an individual or a farming operation for more than 95 percent of what the value of the crop would have been in the absence of the loss (expected value). Specifically, the sum of the disaster payment, the value of the salvageable crops, and any crop insurance payments could not exceed 95 percent of the crop’s expected value in the absence of a disaster. The 2008 farm bill authorized and funded a new disaster program for losses in crop years 2008 through 2011. This new program provides funds that will be available to assist farmers when disasters occur, without the need for further congressional action. While the past crop disaster programs separately considered each individual field, the new disaster program considers aggregate losses on an entire farming operation, which includes all land in all counties where a farmer planted or intended to plant crops for harvest. To be eligible under the new program, a farming operation must be located in or contiguous to counties that received a USDA secretarial disaster designation and have lost at least 10 percent of production on at least one crop of economic significance; or incur eligible total crop losses of greater than 50 percent of the normal production, including a loss of at least 10 percent of production on at least one crop of economic significance. Furthermore, farmers must have purchased either federal crop insurance coverage or be covered under the Noninsured Crop Disaster Assistance Program for all crops of economic significance on their farming operation in order to qualify for a disaster payment. In addition, the 2008 farm bill prohibits any individual or member of a farming operation from receiving more than $100,000 per year in combined payments from the new crop disaster program and other disaster programs for livestock and specialty crops. See appendix II for additional information on the Supplemental Revenue Assistance Payments Program. USDA’s Office of Inspector General identified problems under the past crop disaster programs. For example, in 2006, the Office of Inspector General reported reviewing three FSA county offices, one of which issued $103,065 in crop disaster payments to farmers who did not meet program eligibility requirements under the 2001 through 2002 crop disaster program. The Office of Inspector General found that in that county office, FSA relied on verbal statements from some farmers to determine their eligibility for crop disaster program payments. The Office of Inspector General also found weaknesses in FSA’s management controls for the crop disaster programs in all three FSA county offices in its review. For example, the Office of Inspector General found that the three FSA county offices were not following the program guidance for verifying the accuracy of crop disaster payments—which states that FSA county offices are to perform three types of reviews to ensure the accuracy of payments—nor consistently interpreting or using data from RMA’s crop insurance program when calculating crop disaster payments. The Office of Inspector General recommended that FSA improve its training of county office employees. In addition, we and others have long raised concerns about the potential for waste and abuse in the federal crop insurance program. For example, in 2005, we reported that while RMA strengthened procedures for preventing questionable crop insurance claims, the federal crop insurance program remains vulnerable to abuse. We recommended that RMA inform FSA’s inspectors on the details of claims that they are to investigate, including the type of suspected fraudulent behavior. RMA concurred with this recommendation and in 2006 took actions to implement it. Specifically, RMA now provides detailed information to FSA’s inspectors on the nature of each suspicious claim. In 2008, we also identified strengthening the integrity and efficiency of federal farm programs, including the crop insurance program, as a major cost-saving opportunity for Congress and the administration. More recently, USDA’s Office of Inspector General reported that RMA needs to strengthen its quality assurance and compliance activities under the federal crop insurance program to ensure compliance with program requirements. FSA largely used RMA crop insurance payment data to calculate nearly $7 billion in crop disaster payments under the three crop disaster programs from 2001 through 2007. Of these crop disaster payments, about $395 million (almost 6 percent) were issued by FSA to individuals or entities that RMA had identified as having received suspicious crop insurance claims payments from 2001 through 2007. Under the three crop disaster programs from 2001 through 2007, FSA calculated and issued crop disaster payments largely based on crop insurance data from RMA for these years, but also information on farm operating plans and production records from the farmers requesting payment. According to the program guidelines, each FSA county office received information from RMA that listed all individuals and entities who had purchased insurance on a crop in that county. For the insured crops, the disaster payment system used RMA data to prefill information on the damaged crops, including the crop name, amount of damaged acres, and value of any salvageable crops. For noninsurable crops and uninsured crops, FSA employees used the farm operating plans and production records to manually enter data into the system. Using the prefilled RMA data or the manually entered data, the system in each county office calculated an estimated crop disaster payment for each applicant. Specifically, the system determined the amount of the lost or damaged crops on each of the payment applicant’s fields; multiplied the amount of the lost or damaged crops on each field by a payment rate—determined by whether the damaged crops were insured, noninsurable, or uninsured—to calculate the maximum payment for each field; compared this maximum payment for each field with the statutory percentage cap to ensure that the payment complied with this cap; and combined all payments for each field and compared this maximum allowable crop disaster payment with the $80,000 payment limit to ensure payments complied with this limitation. Once the FSA county office system determined the estimated maximum allowable payment, the system transmitted the payment information to FSA’s Application Development Center. According to staff at this center, systems at the center then verified the payment amount by performing a series of checks that ensured the payment did not exceed the statutory payment cap and complied with applicable eligibility requirements and payment limitations. If errors were found in the payment calculation or if the payment did not comply with applicable eligibility requirements or payment limitations, FSA Application Development Center staff said that the payment amount was adjusted accordingly before FSA issued the final payment. Table 1 shows the number of recipients and the amount of payments for each of the three programs. We found that FSA data about the farming structure of the 2001 through 2007 crop disaster program payment recipients shows that the majority of recipients were individuals. According to our analysis, individuals received a total of about $4.9 billion in payments while entities received about $2.1 billion under the three crop disaster programs. See appendix III for additional information on the distribution of payments under the 2001 through 2007 crop disaster programs. Of the nearly $7 billion in payments made under the 2001 through 2007 crop disaster assistance programs, we found that FSA made about $395 million in crop disaster payments to farmers or entities that were identified by RMA’s data mining as having received suspicious crop insurance claims payments during that same period of time. In addition, our review of hard copy files found that payments to 75 farmers in the five selected states we reviewed complied with the statutory cap of 95 percent of the expected crop value. For crop losses from 2001 through 2007, FSA made about $395 million in crop disaster payments to 8,463 individuals and entities that RMA identified, through data mining, as having received payments for suspicious crop insurance claims during the same time period. However, in a 2005 report, we found that few suspicious claims payments resulted in a conviction for fraud. We reported that while the number of USDA Office of Inspector General referrals to the Department of Justice on suspicious crop insurance claims payments had increased, the Department of Justice declined more cases than it had accepted since 2000. According to Department of Justice officials, the factors considered when accepting a case include sufficiency of the evidence, complexity of the case, whether the fraudulent activity is part of a pattern or scheme, and workload and resources that would be needed to investigate and prosecute the case. We also reported that insurance agents and company officials we contacted believed that RMA needs to more aggressively penalize those who abuse the program. Table 2 shows the five states with the largest dollar amounts of crop disaster payments for recipients listed as having suspicious crop insurance claims payments from 2001 through 2007. These five states represent about 47 percent of the crop disaster payments to farmers that RMA identified as receiving suspicious crop insurance payments from 2001 through 2007. By comparing RMA’s crop insurance data on suspicious payments with FSA’s crop disaster payments, we identified payments made under the crop disaster programs to farmers RMA identified as having received suspicious crop insurance payments. The following are examples of farmers who received crop disaster payments from 2001 through 2007 and were identified by RMA as receiving suspicious crop insurance claims payments: In South Dakota, a farmer received almost $900,000 in crop disaster payments that were based on suspicious crop insurance claims payments. RMA put this farmer’s operation on its annual list because the farmer received crop insurance payments while exhibiting such anomalous patterns as (1) having at least 2 consecutive years of crop insurance claims larger than those of similar farmers in the area and (2) frequently filing prevented planting claims when compared with similar farmers in the area. A North Carolina farmer received about $720,000 in crop disaster payments that were based on suspicious crop insurance claims payments. RMA put this farmer’s operation on its annual list because the farmer received crop insurance payments while exhibiting such anomalous patterns as (1) having unusually large yields on some land while experiencing severe losses on other land for the same crop during the same year and (2) filing insurance claims for 2 consecutive years that were significantly larger claims than those filed by similar farmers in the area. One farmer who operated farms in Kansas received over $635,000 in crop disaster payments that were based on suspicious crop insurance claims payments. RMA put this farmer’s operation on its annual list because the farmer received crop insurance payments while exhibiting such anomalous patterns as (1) having a loss ratio 150 percent greater than other farmers within the area and (2) experiencing abnormally large crop insurance claims in comparison with similar farming operations in the county and repeating this behavior for multiple years. Similarly, the FSA county officials we interviewed identified some farmers in their counties who received crop disaster payments that the FSA county officials believed were based on suspicious crop insurance claims payments. These FSA county officials told us that they were familiar with the farmers in their county and could identify those who may have received suspicious crop insurance payments, but because the county officials received the crop insurance claim information several years after the crop losses occurred, they could not verify the farmers’ crop losses and relied on RMA data to issue the crop disaster payments. The FSA county officials provided the following as examples: One farmer in North Dakota received over $85,000 in disaster payments under the 2001 through 2007 crop disaster programs, claiming that disaster conditions caused losses to his crops. According to an FSA county official, the farmer’s crop losses were likely due to poor farming practices because this farmer did not fertilize his crops. A farmer in North Carolina received almost $160,000 in disaster payments from 2001 through 2007, including about $60,000 for tobacco that he claimed was damaged or could not be harvested. According to an FSA county official, although this farmer received crop insurance payments, he did not have the required barn space to dry and cure the total amount of tobacco planted and had not obtained contracts necessary to sell the tobacco crop. The county official added that area farmers informed the FSA county office that this farmer experienced crop losses as a result of poor farming practices. In commenting on crop disaster payments that they believed were based on suspicious crop insurance claims payments, some FSA county officials stated that they did not challenge or deny the applications for these crop disaster payments because they expected the applicants would appeal any challenge to USDA’s National Appeals Division. These officials added that in their past experience with appeals, USDA rarely upheld FSA county office decisions to deny payments. One official said that USDA generally approved appeals related to crop disaster applications unless the FSA county office produced evidence that the payment applicant did not meet program eligibility requirements. The official added that he did not collect such evidence because, at the time of the crop loss, he did not anticipate that a disaster program would provide assistance for those crop losses. However, according to our analysis of data from USDA’s National Appeals Division, FSA was more likely to be favored in an appeal related to the 2001 through 2007 crop disaster programs than were the farmers. We found the National Appeals Division upheld FSA’s denial of crop disaster payment applications for about 72 percent of the appeals, and the division overturned FSA’s denial, deciding that the farmer should have received a crop disaster payment, for the remaining 28 percent. Under the crop disaster programs from 2001 through 2007, a statutory payment cap allowed FSA to provide a farmer up to 95 percent of the expected value of the crop in the absence of a disaster. We found certain weaknesses in FSA’s data systems, which precluded us from determining whether FSA’s electronic data files are reliable for the purpose of assessing whether a crop disaster payment complied with this statutory cap. For example, FSA’s data systems (1) could not be reliably merged using program year, tax identification number, tax identification number type, FSA state code, and FSA county code to determine whether payments complied with the statutory cap and (2) were not sufficiently documented. However, we assessed hard copy payment files for 75 selected farmers in the five states and found that the payments made to these farmers complied with the statutory payment cap. We found that FSA could not provide documentation on how its systems captured and processed data in order to calculate disaster payments for crop losses from 2001 through 2007. Specifically, FSA officials could not provide us with business rules, system specifications, or processing algorithms associated with the payment calculations executed at FSA’s Application Development Center in Kansas City, Missouri. Such documentation is important because it typically translates policies and procedures into specific, unambiguous rules that govern how data are entered, validated, stored, processed, and reported. As such, the documentation facilitates accurate and consistent implementation of policies and procedures. Although FSA officials provided copies of program guidance and described actions FSA has taken to ensure the quality of the data it generates, they could not provide sufficient documentation for us to verify the agency’s stated actions. For example, FSA could not provide design specifications about the functional requirements of the data systems it used to capture information about disaster payments for crop losses from 2001 through 2007. Detailed design specifications are important because they are used for developing thorough test plans, maintaining the system, and ensuring that risks associated with building and operating the system are adequately controlled. Furthermore, FSA’s documentation of the crop disaster program data systems does not meet Office of Management and Budget documentation guidelines. These guidelines require federal agencies, among other things, to identify and document business rules; information relationships; and the functional requirements, capabilities, and interconnections of the computer systems. FSA officials could not provide documentation describing how its systems operated. Also, for the purpose of assessing whether crop disaster payments complied with the statutory cap, we performed a detailed review of hard copy crop disaster payment files for 75 selected farmers who received payments under all three crop disaster programs from the five counties receiving the largest amount of crop disaster payments in each of five selected states. According to our analysis, these 75 selected farmers received payments that complied with the 95 percent statutory percentage cap on all of their 2,263 fields that sustained crop losses from 2001 through 2007. Overall, as shown in table 3, 328 of these fields qualified for a disaster payment that allowed the farmers to receive 95 percent of the expected value of their crops for these fields. We also found that the total payment received by the 75 selected farmers for the three programs varied from $61,592 to $2,256,386. According to our analysis of the hard copy files, 24 percent of the fields we reviewed qualified for payments because disaster conditions prevented farmers from harvesting any crops from the fields; 69 percent because disaster conditions reduced the amount of crops produced on the fields; and 7 percent because disasters prevented farmers from planting crops on the fields. Forty-nine of the 75 selected farmers received payments for at least one field they were unable to harvest. Furthermore, although not exceeding the 95 percent cap, the crop disaster programs provided 37 of these 49 farmers—who grew crops such as corn, cotton, soybeans, and wheat—90 percent or more of the expected value of the crops. However, these farmers did not incur harvesting costs for these fields. Based on our review of two academic studies, about 15 percent of the cost of producing such crops can be associated with harvesting the crops. Thus, although these 37 farmers may have incurred about 85 percent of the cost of producing these crops, crop disaster program payments allowed these farmers to receive 90 percent or more of the expected value of the crops, even though FSA offices reduced farmers’ crop disaster payments by a certain percentage—known as the “unharvested” payment factor—to reflect the fact that the farmers had not harvested these crops. FSA’s experience with ad hoc crop disaster programs provides lessons that could benefit the agency’s implementation of the new program. First, under the past programs, FSA county officials could not verify the cause of a crop loss because of the lag—as much as 4 years—between the occurrence of a disaster-related crop loss and the application for a disaster payment for that loss. Under the new program, FSA officials will still face a lag time, and without more timely eligibility determinations, FSA county officials will be unable to verify that applicants experienced losses due to an eligible cause. Second, the lack of documentation in FSA’s data systems for calculating and issuing payments under the ad hoc programs makes it difficult to validate the accuracy of those payments. A similar lack of documentation under the new program could hamper FSA officials’ efforts to track payments and ensure the payments adhere to statutes, regulations, and FSA guidelines. Under the ad hoc crop disaster programs from 2001 through 2007, USDA regulations and program guidance specified disaster conditions—such as hail, drought, or excessive rainfall—that qualified as eligible causes of crop loss. As such, FSA county officials reviewed each payment application to determine whether the crop loss was eligible for payment. However, because the programs were enacted on an ad hoc basis after the disaster-related crop losses, these application reviews took place as many as 4 years after the losses occurred. With such a lag, we found that FSA county officials could not take actions, such as conducting field inspections, to validate whether the crops suffered damage as a result of a qualifying disaster condition. Instead, the FSA county officials relied on information farmers supplied on their disaster payment applications and information from RMA, such as crop insurance payment records, to determine if an eligible disaster condition caused a farmer’s crop losses. Fourteen of the 27 FSA county officials we spoke with identified the absence of making timely cause of loss eligibility determinations as a concern under the 2001 through 2007 crop disaster programs, and many of these county officials said that having the opportunity to determine the eligibility of losses soon after the disaster would increase assurance that crop disaster program payments are proper. This opportunity could exist under the new Supplemental Revenue Assistance Payments Program. Determining the cause of crop losses for each farmer will remain critically important under the Supplemental Revenue Assistance Payments Program because a farming operation must have lost at least 10 percent of production on at least one crop of economic significance as a result of an eligible disaster condition to qualify for a payment. Under the program, FSA county officials are to determine crop loss eligibility at least 1 year after crop losses occur because, under the new program guidelines, FSA officials are to make this determination using annual market prices for each crop to calculate payments, which are generally established at the end of the crop year. As a result, crop disaster payment applicants can submit their applications several months after their crop loss occurs, and FSA officials will continue to depend on information from farmers and RMA crop insurance data to determine whether applicants experienced crop losses due to an eligible disaster condition. For example, a farmer who planted corn in the spring of 2010 would not harvest that crop until fall. Therefore, if a disaster destroyed the corn during the summer, the farmer may wait until the fall of 2011—after the crop year for corn ended and when FSA could determine the market prices needed to calculate a payment and process a claim—before filing a loss claim. Without more timely eligibility determinations, FSA county officials will not have the opportunity to verify that payment applicants experienced crop losses due to an eligible disaster condition. Because farmers know that, under the new program, FSA cannot make determinations until the annual market prices for each crop are available to calculate payments, there is no incentive to file crop disaster claims when a crop loss occurs. In contrast, under the federal crop insurance program, if farmers incur crop losses and file a claim with their insurance agent or company, the company assigns an adjuster who visits the farm at the time of the disaster-related loss and, using RMA guidance, determines the percentage of loss for the acres planted. The adjuster forwards the claim to the insurance company, which verifies and recalculates the claim. If all company and RMA requirements are met, the company pays the claim to the farmer. According to RMA guidance, a farmer may destroy any of the damaged crops or replant a new crop after the insurance adjuster has inspected the farmer’s crop loss and provided written consent that the farmer may take such actions. However, we have previously raised concerns of fraud and abuse of the crop insurance program’s claims adjustment process. For example, in 2005, we reported that crop insurance fraud cases, investigated by USDA’s Office of Inspector General and resulting in criminal prosecutions between June 2003 and April 2005, show how farmers, sometimes in collusion with insurance agents and others, falsely claim prevented planting, weather damage, and low production. In addition, we found that several of these cases demonstrated the importance of having FSA and RMA work together to identify and share information on questionable farming practices and activities. Under the Supplemental Revenue Assistance Payments Program, as under the 2001 through 2007 crop disaster programs, FSA county officials receive information about crop losses at the time the farmer submits an application for payment. As a result, FSA officials may become aware of crop losses after the claims adjustment process and after farmers have planted a new crop on their fields that suffered disaster-related damage. Without notification of the crop losses closer to the time of the disaster, FSA county officials will not have the opportunity to verify the eligibility of crop losses. Under past crop disaster programs, FSA’s automated payment system used information in multiple data systems to calculate and issue payments. However, we identified limitations in this payment system that prevented us from making a determination about the reliability of FSA’s data files for the purpose of assessing the extent to which payments for the 2001 through 2007 crop disaster programs complied with the statutory payment cap that limited payments to no more than 95 percent of the expected value of the crop in the absence of a disaster. These limitations included a lack of sufficient documentation and our determination that FSA’s data systems could not be reliably merged using program year, tax identification number, tax identification number type, FSA state code, and FSA county code for this purpose. For additional information, see appendix I. We and others have previously reported on concerns with FSA’s information technology systems. As we reported in 2008, FSA’s information technology systems, which date to the 1980s, do not fully meet the agency’s business needs or readily share data. In August 2009, USDA’s Office of Inspector General reported that integration of USDA’s information management systems, including FSA and RMA systems, could improve the integrity of farm programs, such as the new crop disaster program. In the context of these information technology issues, in early 2010, FSA began issuing payments for the new crop disaster program using an interim payment system that has weaknesses. According to FSA documents, because of the significant amount of data required to calculate payments under the new crop disaster program, FSA does not expect to complete the development of a fully automated payment system that will allow the agency to issue timely payments to farmers who sustained crop losses in 2008. As a result, FSA developed an interim payment system that requires FSA county office staff to use a manual process to complete applications and calculate payments for 2008 crop losses, storing each application in a single spreadsheet maintained in FSA county offices. FSA staff at each county office manually enter applicant data into this spreadsheet to calculate applicants’ payments, and an independent official verifies the accuracy of the data entry. According to program guidelines, once the payment calculations are complete, the FSA county office staff are to record the payment amounts in a Web-based system that automatically issues the payments. FSA officials said that once the agency fully develops the automated payment system, it plans to validate and make any necessary adjustments to the payments calculated and issued using the interim payment system. However, according to the FSA officials responsible for implementing the new crop disaster program, the agency did not develop a mechanism to link the final payment amounts in the Web-based system to the application data in the spreadsheets maintained in each FSA county office. Therefore, if USDA or an independent entity sought to audit the payments under the new crop disaster program to ensure they are proper, the auditor would have to manually review the files in each of about 2,300 FSA county offices. Also, the program and the auditors would not have the benefit of electronic edit checks to ensure the accuracy of payments. Furthermore, according to FSA officials, the agency is still in early development stages of the final automated payment system and has not developed documentation of the data systems or written business rules that describe how the final automated system will calculate and issue payments. However, according to FSA officials responsible for developing the final payment system for the Supplemental Revenue Assistance Payments Program, FSA plans to issue the necessary documentation, including design specifications and functional requirements, and perform system testing. As of March 2010, FSA officials were uncertain when this documentation would be issued. FSA helps the nation’s farmers recover financially from natural disasters. For the three former ad hoc crop disaster programs, owing to the time between when a disaster occurred and applications for disaster payments were filed, FSA officials did not have the opportunity to verify whether an eligible disaster condition caused farmers’ crop losses. Instead, FSA officials relied largely on information from farmers and RMA to determine the cause of crop losses. The Supplemental Revenue Assistance Payments Program provides an opportunity to eliminate this problem. Under this program, however, FSA county officials will not receive information about crop losses until the time the farmer submits an application for payment, which may occur after farmers have planted a new crop on their fields that suffered disaster-related damage. Without notification of the crop losses closer to the time of the disaster, FSA county officials will not have an opportunity to make timely loss eligibility determinations. Such determinations would reduce reliance on crop insurance information and the potential for disaster payments for suspicious crop losses. Because of limitations in FSA’s data systems, including insufficient systems documentation and the inability to reliably merge files from these systems using program year, tax identification number, tax identification number type, FSA state code, and FSA county code, the reliability of FSA’s electronic data files for the purpose of assessing whether payments under the past crop disaster programs complied with relevant statutes and regulations is undetermined. Many of the limitations in FSA’s data systems will most likely continue under the new crop disaster program because FSA county office staff are using a manual process to enter application data into spreadsheets and payment data into a Web-based system, and FSA does not plan to develop a mechanism to electronically link the final payments to the supporting spreadsheets. Without such a mechanism to link the Web-based system and the spreadsheets FSA uses to calculate and issue payments under the new crop disaster program in an integrated way, it will be difficult for USDA or audit organizations to evaluate the new program and to ensure that payments are properly made. We are making the following three recommendations to the Secretary of Agriculture: To better ensure that payments under the Supplemental Revenue Assistance Payments Program compensate farmers who experienced eligible crop losses, we recommend that the Secretary of Agriculture implement procedures so that FSA county officials are notified at the time of crop insurance claims for disaster-related losses so those officials have an opportunity to verify that crop disaster payment applicants experienced losses because of an eligible cause. To ensure that crop disaster payments under the Supplemental Revenue Assistance Payments Program can be assessed as to whether they comply with relevant statutes and regulations, we recommend that the Secretary of Agriculture direct the Administrator of the Farm Service Agency to develop and maintain data system documentation, including written business rules, of the interim payment system and the final automated payment system that are used to calculate and issue crop disaster payments; and develop and implement a mechanism to link Web-based payments to the application data in the spreadsheets maintained in the FSA county offices that would result in an integrated interim payment system. We provided the Secretary of Agriculture with a draft of this report for review and comment. We received written comments from the USDA Under Secretary for Farm and Foreign Agricultural Services. In his comments, the Under Secretary addresses only the first recommendation and those findings with which USDA does not agree. With respect to the recommendation that FSA county officials be notified at the time of crop insurance claims for disaster-related losses, the comment letter states that the Administrator of FSA does not have the authority to establish such a notification process. Instead, the Under Secretary points out that the Administrator of RMA would be the party responsible for alerting FSA when crop insurance claims are filed. As a result of this comment, we redirected the recommendation to the Secretary of Agriculture, who has the authority to direct RMA to provide this information to FSA. USDA disagreed with two statements in the draft report. First, USDA disagreed with our statement that FSA officials did not provide systems documentation, such as specifications and business rules on how FSA used data in its systems to calculate crop disaster payments. While we appreciated FSA officials’ cooperation in discussing the agency’s data systems with us, these officials could not provide 7 of the 10 items we requested in order to understand how FSA’s data systems operate. Instead, FSA referred us to handbooks for each of the crop disaster programs, but these handbooks are standard operating procedures for county office staff to implement each program and do not take the place of systems documentation. Second, USDA also did not agree with our statement that, under the 2001 through 2007 crop disaster programs, FSA made payments that are questionable because they were made to individuals and entities identified by RMA’s data mining as having received suspicious crop insurance claims payments during that same period of time. We modified this text to be consistent with our characterization of FSA payments in the rest of the report. USDA also provided technical comments, which we incorporated into the report as appropriate. USDA’s written comments and our responses are presented in appendix IV. We are sending copies of this report to appropriate congressional committees; the Secretary of Agriculture; the Director, Office of Management and Budget; 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) 512-3841 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 V. Our objectives were to determine (1) how the U.S. Department of Agriculture’s (USDA) Farm Service Agency (FSA) administered its crop disaster programs for losses from 2001 through 2007 and the results of payments under these programs and (2) what lessons FSA can learn from its experience with the previous crop disaster programs for managing its new crop disaster program. To determine how FSA administered its crop disaster programs for crop losses from 2001 through 2007, we reviewed statutes, regulations, and guidance, such as the FSA Handbook on the Crop Disaster Program, 5- DAP (Revision 2), as well as relevant studies prepared by the USDA’s Office of Inspector General and the Congressional Research Service and our own past reports. In addition, we spoke with relevant USDA officials in headquarters and in FSA’s Application Development Center in Kansas City, Missouri. Because FSA bases its disaster assistance payments largely on USDA’s Risk Management Agency (RMA) data, we also obtained information on suspicious crop insurance claims payments identified by RMA, which is responsible for administering the crop insurance program, and the Center for Agribusiness Excellence, which is an independent organization that conducts data mining on crop insurance and farm program data. Specifically, RMA uses data mining to identify patterns in crop insurance claims payments that are consistent with the potential for fraud and abuse. For example, these patterns include farmers, agents, and adjusters linked in irregular behavior that suggests collusion; farmers who for several consecutive years received most of their crop insurance payments from prevented planting claims; farmers who appear to have claimed the production amounts for multiple fields as only one field’s yield, thereby creating an artificial loss on their other fields; and farmers who, in comparison with their peers, have excessive harvested losses over many years. We compared RMA information with FSA records of crop disaster payments to identify payments to farmers that RMA identified as receiving suspicious crop insurance claims payments from 2001 through 2007. Specifically, we identified crop disaster payments made to farmers who RMA identified as receiving suspicious crop insurance payments for at least 1 year of the crop disaster program under which the farmer received a disaster payment. We interviewed agency officials and reviewed relevant documentation to assess the reliability of the RMA data and determined the data to be sufficiently reliable for the purposes of our report. We also obtained and analyzed data files from FSA to determine how FSA applied legal requirements and policy directives articulated in the statutes, regulations, and guidance in administering the programs. Specifically, we obtained the following data files: Producer Payment Reporting System file, which contains summary information on farm program payments made to individuals and entities; crop disaster program payment history file, which contains information on the dollar amount of crop disaster program payments; crop disaster program crop loss application file, which contains information from the applications that farmers submit when applying for crop disaster program payments; crop disaster program crop prices file, which contains the crop prices used to calculate payments under the crop disaster programs; USDA National Agricultural Statistics Service crop prices file, which contains crop prices used to calculate payments under multiple federal farm programs; and permitted entity file, which contains information on individuals and entities receiving farm program payments. We used these data to determine the distribution of crop disaster program payments to recipients. To assess the reliability of these data, we obtained and reviewed the available documentation about the data elements in the data files; performed electronic testing on the data elements that we used; reconciled the two sources of crop disaster program payment data— Producer Payment Reporting System and crop disaster program payment history records—by matching common data elements including FSA state code, FSA county code, and tax identification number; worked with FSA Application Development Center staff to determine how to merge all of the data files because FSA did not have written business rules or overall system documentation; discussed our results from merging these data files with officials in FSA’s Production, Emergency, and Compliance Division and in FSA’s Application Development Center, which administers and oversees the crop disaster program payments; and compared the results of merging all data files to FSA county office hard copy payment records that contain the calculations for the statutory payment cap. We also attempted to use FSA’s data files to determine if any payments exceeded the statutory payment cap of no more than 95 percent of the crop’s expected value in the absence of a disaster. More specifically, the sum of the disaster payment, the value of the salvageable crops, and any crop insurance payments cannot exceed 95 percent of the crop’s expected value. In attempting to determine whether payments exceeded the statutory cap of 95 percent of the crop’s expected value in the absence of a disaster, we merged the crop disaster program crop loss records and crop disaster program payment history records. We found that the crop disaster payment crop loss application records could not be reliably merged with the crop disaster program payment history records using the following data elements—program year, tax identification number, tax identification number type, FSA state code, and FSA county code. We also found discrepancies between the data that resulted from merging the data files and the hard copy payment records that we obtained for selected farmers. Specifically, we found discrepancies in some of the data elements— insurance payments and expected values of production from the crop disaster program crop loss application records, as well as crop prices that FSA uses to calculate the statutory payment cap. A potential complex alternative method for using FSA’s data systems to compare crop disaster payments to statutory payment caps might have permitted a comparison of estimated disaster payments with statutory payment caps. Even if this alternative method were viable, additional research would have been necessary to reach a different conclusion about the reliability of FSA’s data systems for the purpose of determining the extent to which actual disaster payments met statutory payment caps. This additional research would have required data reliability assessments of additional specific data elements, an examination of the differences between estimated and actual disaster payments at the detail and summary levels, and validating calculated fields not saved or recorded by FSA. We did not fully pursue this alternative method owing to insufficient documentation of FSA’s data systems and a consideration of the large amount of time and effort it would have required. Therefore, the reliability of FSA’s electronic data files for the purpose of assessing whether a crop disaster payment complied with a statutory cap is undetermined. In summary, (1) the payment data from the reconciled crop disaster program payment data—Producer Payment Reporting System and crop disaster program payment history records—were sufficiently reliable for determining the distribution of crop disaster payments by state, program, and type of recipient and (2) the reliability of FSA’s electronic data files for the purpose of assessing whether payments under the past crop disaster programs complied with relevant statutes and regulations is undetermined. In addition, we identified the four states with the highest dollar amount of total crop disaster program payments: Kansas, North Dakota, South Dakota, and Texas. We also selected North Carolina, another state with high payment levels, to expand geographic dispersion. We identified the 27 counties representing the top 20 percent of the crop disaster payments FSA administered in each of those five states. We interviewed FSA officials in each of these 27 counties about their experiences administering crop disaster programs. Within each of these 27 counties, we identified the farmers representing the top 10 percent of total crop disaster payments and randomly selected 15 of these farmers in each county that received disaster payments under all three programs, and we collected their payment records from the FSA county office that administered their payments. Although these farmers were selected randomly from the top 27 counties in these five states, because this selection does not constitute a probability sample of farmers receiving crop disaster payments, it is not generalizable to a larger population. Because we could not reliably merge the data files to determine whether payments complied with the statutory payment cap, we reviewed the hard copy payment records for 75 farmers. To select these 75 farmers, we identified the county administering the largest dollar amount of disaster payments within each of our five selected states and analyzed the payment records we collected for 15 farmers in each of these five counties to determine the total payments each of the 75 farmers received through crop insurance payments, sales of salvageable crops, and crop disaster payments. We then compared this total with the farmer’s expected value of production in the absence of a disaster to arrive at the total value as a percent of expected production. We analyzed field-level disaster payment data for these selected farmers. A field, in this report, refers to the lowest, detailed level at which a crop loss is defined and includes RMA- and FSA- defined crop characteristics such as the crop price, farming practices, insurance coverage, and planting period for units and subunits that describe contractual relationships or different crop yields associated with the acreage or producer share. For example, a field might be a farmer’s 20 acres (not necessarily contiguous) devoted to a corn crop—but it would only be classified as a “field” if that farmer filed a claim and received a disaster payment for that specific corn crop. To determine what lessons FSA can learn from its experience with past crop disaster programs for managing the new crop disaster program, we reviewed relevant statutes, regulations, and guidance, including the FSA Handbook on the Supplemental Revenue Assistance Payments Program, SURE-1. We also interviewed FSA officials from the agency’s Production, Emergency, and Compliance Division; FSA’s Application Development Center in Kansas City, Missouri; and the counties in the five states we examined. We asked these officials to identify challenges, if any, they faced in administering past programs and spoke with them about their plans for administering the new program. We analyzed this information to determine how FSA could use lessons learned to manage the new program. We conducted this performance audit from November 2008 through June 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. The Food, Conservation, and Energy Act of 2008 (the 2008 farm bill) created the Supplemental Revenue Assistance Payments Program to assist farmers for crop losses incurred on or before September 30, 2011. Under the program, USDA provides crop disaster payments based on a farmer’s revenue from all crops in all counties. That is, the program considers the impact of a disaster on a farmer’s entire operation, including revenue losses from crops that sustained damage, as well as revenue gains from crops that were successfully grown and harvested. In general, if the farmer’s revenue is less than a guaranteed level of revenue, which is based on the farmer’s production history, the farmer receives a payment. In contrast, if the farmer’s revenue is equal to or greater than the guaranteed level of revenue (i.e., revenue losses are offset by revenue gains) the farmer does not receive a payment. To be eligible under the new program, a farming operation must be located in or contiguous to counties that received a USDA secretarial disaster designation (see fig. 2 for the counties that met this requirement in 2008), and have lost at least 10 percent of production on at least one crop of economic significance. Eligible disaster conditions include damaging weather, weather-related disease, and weather-related insect infestation. Alternatively, a farming operation must incur eligible total crop losses of greater than 50 percent of the normal production, including a loss of at least 10 percent of production on at least one crop of economic significance. Furthermore, farmers must have purchased either federal crop insurance coverage or be covered under the Noninsured Crop Disaster Assistance Program for all crops of economic significance on their farming operation in order to qualify for a disaster payment. The Supplemental Revenue Assistance Payments Program considers revenue losses or gains from crops that are eligible for coverage through crop insurance or the Noninsured Crop Disaster Assistance Program. However, an amendment to the 2008 farm bill extended the date by which the federal crop insurance program and the Noninsured Crop Disaster Assistance Program required farmers to purchase coverage for their 2009 crops to be eligible for payment. Also, the Supplemental Revenue Assistance Payments Program includes an income eligibility requirement that prohibits any individual or a farming operation with an average adjusted gross income that exceeds $2.5 million, over the previous 3 tax years immediately preceding the applicable crop year, from receiving program payments, unless 75 percent or more of their income is from farming. For 2009 and subsequent crop years, individuals and entities with an average adjusted gross income of $500,000 or more, excluding income from farming, are not eligible to receive payments. In addition, there are two basic payment limitations under the Supplemental Revenue Assistance Payments Program. First, the 2008 farm bill prohibits any person from receiving more than $100,000 in combined payments from the Supplemental Revenue Assistance Payments Program; the Livestock Forage Program; the Livestock Indemnity Program; and Emergency Assistance for Livestock, Honeybees, and Farm-raised Fish. Second, the 2008 farm bill limits payments by prohibiting a farmer’s guaranteed revenue level from exceeding 90 percent of the farmer’s expected revenue in the absence of a disaster. USDA calculates payments under the Supplemental Revenue Assistance Payments Program by comparing a farmer’s total revenue with the farmer’s guaranteed level of revenue. If the farmer’s total revenue is less than the guaranteed level of revenue, the payment is equal to 60 percent of the difference between the two. In order to calculate the payment amount, USDA must determine the total revenue and the guaranteed level of revenue. A farmer’s total revenue includes the actual value of all crops, crop insurance payments, and other farm program payments, including other disaster payments and some farm subsidy payments. A farmer’s guaranteed level of revenue equals the sum of the guaranteed revenue the farmer will receive from each crop. For insured crops, the guaranteed revenue is based on the level of crop insurance coverage the farmer purchased for each crop. Higher levels of crop insurance coverage result in higher guaranteed revenue for that crop. For crops covered by the Noninsured Crop Disaster Assistance Program, the guaranteed revenue is based on the crop price, the number of acres the farmer planted or intended to plant, and the amount of harvested crops. The American Recovery and Reinvestment Act of 2009 expanded eligibility and increased the benefits farmers could receive for the 2008 crop year. The act created an extension of the date by which farmers must have purchased crop insurance coverage or coverage through the Noninsured Crop Disaster Assistance Program for their 2008 crops to be eligible for payment. Regarding increased benefits, the statute allowed farmers to receive potentially larger payments by altering the method for calculating a farmer’s guaranteed revenue. FSA administered a total of $6.9 billion in payments for the three crop disaster programs from 2001 through 2007. The state receiving the largest dollar amount in payments under the three programs was Texas, which received a total of $867.5 million in crop disaster payments under the 2001 through 2007 programs. Table 4 shows the dollar amount of crop disaster payments that states received under each of the three programs and as a combined total for all three programs from 2001 through 2007. More recipients of 2001 through 2007 crop disaster program payments (80,129 recipients) received a total of $1,001 to $2,000 under the three programs combined than any other payment level. In addition, the recipients of total crop disaster payments from 2001 through 2007 that were larger than $1 million received an average payment of $1.3 million. Table 5 shows the number of recipients and their total payments under the 2001 through 2007 crop disaster programs, distributed by total payment size. Finally, when reviewing the farming structure of the 2001 through 2007 crop disaster program payment recipients, we found that the majority of recipients were individuals. Individuals received a total of about $4.9 billion in payments, while entities received about $2 billion under the crop disaster programs from 2001 through 2007. Table 6 shows the number of recipients and the payments they received under each crop disaster program and for all three programs combined, distributed by type of recipient. The following are GAO’s comments on the U.S. Department of Agriculture’s letter, dated May 18, 2010. 1. We appreciate FSA officials’ cooperation in discussing the agency’s data systems with us. In April 2009, we visited USDA’s Application Development Center in Kansas City, Missouri; interviewed officials responsible for each program file; and requested documentation for all files used in determining payments under each of the crop disaster programs. Specifically, in order to understand how FSA’s data systems operate, we requested 10 items: (1) descriptions of all data elements, (2) code values for each variable, (3) key required to join the files, (4) system documentation required to use the data field both within and between files, (5) business rules, (6) tables showing the relationships between the various files, (7) data descriptions, (8) state and county codes, (9) information on how each file is related to the other files, and (10) process flow charts that should provide system details. FSA provided the first three items requested but not the remaining seven. Instead, FSA referred us to handbooks for each of the crop disaster programs, but these handbooks are standard operating procedures for county office staff to implement each program and do not take the place of systems documentation. As late as March 5, 2010, we asked FSA officials about systems specifications and user requirements for the ad hoc crop disaster programs and the Supplemental Revenue Assistance Payments Program. These officials stated that they may not have provided these documents, but even if they had, the documents for the ad hoc disaster assistance programs would not be usable for our purposes since they were not official, and the documents for Supplemental Revenue Assistance Payments Program are in the initial phases of development. Under these circumstances, we stand by our statement that FSA officials could not provide systems documentation, such as specifications and business rules on how FSA used data in its systems to calculate crop disaster payments. 2. We made these technical changes as appropriate. 3. We recognize that FSA received claims for disaster-related crop losses, and the funds to pay for these losses, years after these crop losses occurred. We modified the text to be consistent with our characterization of FSA payments in the rest of the report. 4. We revised this report to note that FSA inspects fields for practices in addition to those we discussed in a draft of this report. 5. We do not question FSA’s approval of crop disaster payments. Instead, we recommend that FSA county officials be notified at the time of crop insurance claims for these losses so these officials have an opportunity to verify that crop disaster payment applicants experienced losses because of an eligible cause. In general, we did not seek to validate individual applications for crop disaster payments. 6. In this report, we focused on FSA’s crop disaster payments and not on RMA’s crop insurance claims payments. FSA bases its crop disaster payments primarily on RMA’s crop insurance data. As we noted in this report, we found that about 6 percent of FSA’s crop disaster payments went to farmers who were identified by RMA’s data mining as having received suspicious crop insurance claims payments during that same period. We did not follow up on whether farmers had acted fraudulently or whether RMA took any actions to obtain refunds of crop insurance claims payments because these issues were not the focus of this report. 7. We acknowledge that the data systems for the ad hoc crop disaster programs are complex and include numerous data files. Nonetheless, reconciling the information in farmers’ disaster applications and their payments was important in addressing part of our first objective: how FSA administered its three ad hoc crop disaster programs for crop losses from 2001 through 2007. To this end, in February 2009, we met with FSA Wharton County, Texas, officials to understand how, within a county office, the estimated disaster payments were calculated. In April 2009, we visited USDA’s Application Development Center to discuss the files we needed, and how the files should be linked to determine how the actual payments were calculated. At that time, center officials explained that the system—files and their linkages—was not well documented. On several occasions, we requested information on the formulas and variables used to recreate the actual payments, but center officials did not respond to our requests. Because center officials could not provide us with documentation for business rules and file specifications (see response to comment 1), we asked these officials if we could use specific variables— tax identification number, tax identification type, FSA state code, and FSA county code—maintained in the history file to determine whether payments complied with the statutory cap that payments not exceed 95 percent of the crop’s expected value in the absence of the disaster. These officials noted that this approach should provide the information we needed. From July 2009 through December 2009, we found discrepancies in this approach and contacted center officials to gain additional clarification on this approach. In each case, center officials continued to confirm that this approach seemed reasonable. In October 2009, we provided center officials with a list of farmers whose payments appeared to exceed the statutory cap, resulting in overpayments, but FSA did not provide comments. In December 2009, we provided FSA headquarters officials with a more refined list of farmers who appeared to have been paid in excess of the statutory cap. FSA headquarters officials responded that they would investigate the farmers on this list. In December 2009, these officials examined the apparent overpayments, found that the payments were made correctly, and informed us that the originally agreed upon approach would not provide us with accurate calculations. Because we had already invested significant time and resources on the approach FSA had told us represented a reasonable approach, and because we still lacked adequate documentation of the system, we used hard copy payment files for 75 selected farmers in five states to determine if these farmers’ payments complied with the statutory payment cap. For these 75 farmers, we found that the payments complied with the cap. As USDA observes, the system, and its internal coding, used to calculate payments (and determine compliance with the payment cap) is very difficult to understand. Although these systems are difficult to understand, delays in and lack of responses to our questions further complicated our analyses. We also agree with USDA that eligibility conditions that are not well documented are very difficult to discern. Finally, although we requested that all files cover the same time periods, FSA did not provide us with consistent files. 8. We revised this report to reflect the use of the unharvested payment factor. As we note, however, even with the use of this factor, farmers may still have received payments that exceeded their costs of producing these crops. 9. In response to USDA’s comment that FSA has limited resources for developing the automated payment system for 2008, we revised this report to more clearly acknowledge that FSA verifies the data entries. Furthermore, as we state in this report, FSA officials said that once the agency fully develops the automated payment system, it plans to validate and make any necessary adjustments to the payments it calculates and issues using the interim payment system. 10. We revised this report to recommend that the Secretary of Agriculture implement procedures so that FSA county officials have timely notice of crop insurance claims for disaster-related losses. In addition to the individual named above, Thomas Cook, Assistant Director; Kevin Bray; Richard Brown; Arturo Cornejo; Kristin Hughes; Paula Moore; Carol Herrnstadt Shulman; Kiki Theodoropoulos; and James W. Turkett made key contributions to this report. Crop Insurance: Opportunities Exist to Reduce the Costs of Administering the Program. GAO-09-445. Washington, D.C.: April 29, 2009. Information Technology: Agriculture Needs to Strengthen Management Practices for Stabilizing and Modernizing Its Farm Program Delivery Systems. GAO-08-657. Washington, D.C.: May 16, 2008. Supplemental Appropriations: Opportunities Exist to Increase Transparency and Provide Additional Controls. GAO-08-314. Washington, D.C.: January 31, 2008. Agricultural Conservation: Farm Program Payments Are an Important Factor in Landowners’ Decisions to Convert Grassland to Cropland. GAO-07-1054. Washington, D.C.: September 10, 2007. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 2005. Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies and Develop a Policy to Address Any Future Insolvencies. GAO-04-517. Washington, D.C.: June 1, 2004. Agricultural Conservation: USDA Needs to Better Ensure Protection of Highly Erodible Cropland and Wetlands. GAO-03-418. Washington, D.C.: April 21, 2003. | The U.S. Department of Agriculture's (USDA) Farm Service Agency (FSA) provides programs to help farmers recover financially from natural disasters. Congress has historically supplemented these programs with ad hoc programs that pay farmers who experienced crop losses. The 2008 farm bill established a program through 2011 to pay farmers who lose crops. To receive these payments, farmers must purchase coverage under federal crop insurance or the Noninsured Crop Disaster Assistance Program, and receive claims payments for losses. GAO was asked to evaluate (1) how FSA administered the crop disaster programs for losses from 2001 through 2007 and the results of payments under these programs and (2) what lessons FSA can learn from the previous crop disaster programs to manage its new crop disaster program. GAO reviewed statutes, regulations, and guidance; analyzed USDA data; and interviewed USDA officials. FSA largely used crop insurance data from USDA's Risk Management Agency (RMA) to calculate nearly $7 billion in crop disaster payments under the 2001 through 2007 ad hoc crop disaster programs. FSA made about $395 million in payments under these programs to 8,463 farmers who RMA identified as having received suspicious crop insurance claims payments in those same years. Almost half of crop disaster payments for farmers RMA identified as having suspicious crop insurance claims payments were in five states. RMA provides its annual list of suspicious claims payments to FSA state and county offices and to the insurance company selling the policy to the farmer for appropriate follow-up action. However, GAO previously reported that few suspicious claims payments resulted in a conviction for fraud. As reported, the factors considered when accepting a case for investigation and prosecution include sufficiency of the evidence, complexity of the case, whether the fraudulent activity is part of a pattern or scheme, and workload and resources that would be needed to investigate and prosecute the case. For 2001 through 2007, GAO could not use FSA's electronic data files to determine whether crop disaster payments complied with a statutory cap because the reliability of these files is undetermined for the purpose of assessing whether a crop disaster payment was in compliance with the cap. However, in using hard copy files to determine compliance with the cap, GAO found that payments to selected farmers were in compliance. Furthermore, FSA officials did not provide systems documentation, such as specifications and business rules on how FSA used data in its systems to calculate crop disaster payments. FSA's experience with ad hoc crop disaster programs shows that a lag--as much as 4 years--between the occurrence of a disaster-related crop loss and the application for a disaster payment for that loss prevented FSA county officials from verifying the cause of the loss. Under the new program, there will still be a lag before farmers can apply for a payment; in contrast, farmers have to file a crop insurance claim immediately after a loss and be subject to insurance verification. Without more timely eligibility determinations for the new crop disaster program, FSA county officials will be unable to verify that applicants experienced losses due to an eligible cause. In addition, insufficient documentation of the data systems FSA used for calculating and issuing payments under the ad hoc programs makes it difficult to validate the accuracy of those payments. A similar lack of documentation under the new program could hamper FSA officials' efforts to track payments and ensure the payments adhere to statutes, regulations, and FSA guidelines. |
Introduced in 1993, the AV-8B aircraft with night attack and radar capabilities enhances pilots’ abilities to locate and destroy targets under conditions of marginal weather, limited visibility (smoke, dust, or haze), and darkness. The two previously produced models had significant limitations. The day attack model, the first version of the aircraft procured by the U.S. Marines in 1982, has limited capability during the hours of darkness because the pilots cannot refer to the terrain and horizon to assist in maneuver, navigation, and attack. The night attack version, introduced into the fleet in 1989, has increased capabilities over the day attack version but still has limitations. Its Angle Rate Bombing System, used by the day and night attack models for weapons aiming and delivery, is not effective at night or during adverse weather conditions. In addition, the night attack version’s forward looking infrared system, which assists in navigation during hours of darkness, is degraded by air moisture. All the prior upgrades to the AV-8B—from day to night attack models and then to models with the improved radar configuration—have been made by producing new models. Aircraft have not been rebuilt or modified. The Marines plan to deviate from this practice with REMAN. Under REMAN, the Marines plan to award single-year contracts to remanufacture 72 of the day attack model aircraft and convert them to aircraft with night attack and radar capabilities over a 10-year period. The day attack aircraft are to be transported to the Naval Aviation Depot (NADEP) in Cherry Point, North Carolina. There, the aircraft are to be tested for flight worthiness and then disassembled. About $6 million worth of parts from each aircraft are to be returned to the supply system and about $11.3 million of designated components and assemblies from each aircraft are to be either used in their current condition, refurbished, or modified for reuse in the REMAN program. The components and assemblies are to be sent to the contractor, McDonnell Douglas Aerospace Company in St. Louis, Missouri. The contractor is to integrate these used components and assemblies, along with a new fuselage, a new engine, and an APG-65 radar system, to produce the final REMAN aircraft. The first REMAN aircraft is scheduled for delivery in February 1996. Considering the costs associated with inducting an aircraft into the REMAN program, disassembling, refurbishing, and modifying components and assemblies; the value of components and assemblies furnished to the contractor; and economies available through multiyear procurement, our review indicated that the REMAN program is not the most cost-effective procurement approach. It would be feasible for the Navy to revise its acquisition strategy because the contractor’s production line and facilities are still in place and ready for continued production of radar model AV-8B aircraft. During our review, we compared past procurement cost figures (adjusted for inflation) with current REMAN program cost estimates. We also assessed the impact of multiyear procurement on new production cost estimates due to recommendations by the Department of Defense (DOD) Inspector General and recent congressional interest. Twenty-one radar aircraft were procured in 1991 at an average unit flyaway cost of $22.4 million. Six more were procured in 1992 to replace aircraft lost during Desert Storm at an average unit flyaway cost of $31.9 million—a 42-percent increase that the program office explained was due to the small quantity procured. Table 1 shows the procurement history of the AV-8B program. The AV-8B program office does not have a current cost estimate for producing additional radar aircraft. Therefore, to facilitate a comparison of REMAN and probable new production costs, we used the fiscal year 1991 flyaway cost as a baseline because of its more efficient production rate (21 aircraft). Using Navy indexes, we escalated the average unit cost of fiscal year 1991 procurement ($22.4 million) by 7.5 percent ($24.1 million) to account for inflation. Then, using DOD data on potential savings from a multiyear procurement strategy for engines, we determined that the cost of new aircraft would be about $23.6 million per aircraft, without having provided the contractor the additional $11.3 million worth of reused, government-furnished components and assemblies. We discussed this methodology with DOD officials and they did not disagree. According to program documents, under the REMAN acquisition strategy, the Navy expects to pay between $23 million and $29.5 million for each aircraft, exclusive of the value of reused government-furnished equipment. “The remanufacture program commenced in fiscal year 1994 and has not completed a full manufacturing cycle. Therefore, process performance is not yet fully validated and extrapolation of cost savings are estimates based on the prime contractor’s manufacturing process used in past production of new AV-8B aircraft of the same configuration. While total quantities appear firm and the requirement remains valid, a more appropriate time to consider a multi-year procurement acquisition strategy would be after the remanufacturing costs are substantiated, and we are comfortable that no system degradation has occurred as a result of remanufacture. We will then be in a position to make a recommendation with regards to a multiyear procurement plan for fiscal year 1998.” If the program continues as planned, by 1998, procurement contracts will have been initiated to remanufacture 50 percent of the 72 aircraft planned for the REMAN program. Further, our review of the Navy’s procurement history for this aircraft (see table 1) showed that the contractor has demonstrated the capability to produce new AV-8B aircraft at a more efficient rate than the procurement schedule for the REMAN program shown in table 2. Accelerated production to the fiscal year 1991 level would be a more cost-effective approach than the low rate being requested by the Navy, and would provide the Marine Corps with increased combat capability at a more efficient production rate. On the other hand, NADEP does not have the ability to disassemble the aircraft or refurbish and modify components and assemblies for reuse by the contractor under the REMAN program at the rate needed to support a production rate comparable to that available under new production. The NADEP at Cherry Point, North Carolina, has been tasked to disassemble the day attack aircraft removed from the fleet, ensure that the components and assemblies to be reused in the process of producing the radar version are in ready-for-use condition, and deliver these parts to the contractor. Each of the reused components and assemblies has a defined delivery schedule, which if not met will delay production at the contractor’s facility and increase program costs. The Navy’s ability to deliver the components and assemblies on schedule is questionable. According to NADEP officials, since the remanufacture program was not prototyped, the depot is experiencing many unanticipated problems. Each aircraft has some unique differences that must be resolved in terms of modification, replacement, or repair before a particular component is sent to the contractor for integration in the REMAN aircraft. If the depot does not have a replacement part on hand or the capability to modify or fabricate particular parts and assemblies, it must contract out for the capability or purchase the necessary new parts. All of these options would lead to delays and increased costs. The depot has experience in disassembling the AV-8B aircraft from its Age Exploration Program, which evaluates the structural integrity of the aircraft. However, the Age Exploration Program does not require the detailed level of dismantling that is required for the REMAN program. Additionally, unlike in the Age Exploration Program, under the REMAN program the depot is required to make over 30 new modifications to components that it has no previous experience making. In planning support to the REMAN program, the depot budgeted 2,879 staff hours per aircraft for the disassembly functions. However, the process has taken up to 5,100 staff hours for the first aircraft inducted into the program, and the next three aircraft are expected to consume about the same level of effort. Officials at the depot told us that the increase in the time required for the disassembly process was due to the fact that there had not been an opportunity to prototype the process, including the handling of various modifications. This increase in staff hours causes increases in costs and delays in schedule for the program. The fiscal year 1994 depot labor rate was $47.05 per hour. With the increase in required staff hours, the cost per aircraft inducted into the program will increase by about $104,000. Officials at the depot anticipate that the other three aircraft inducted into the REMAN program during fiscal year 1994 will also take about the same level of effort. As the depot technicians and mechanics gain more experience with the disassembly, refurbish, and modification operations, they expect the process to level off at about 4,000 staff hours per aircraft. Due to an increase in the Defense Business Operating Fund rates, the depot labor rate for fiscal year 1995 was much higher ($91.59 per hour) than fiscal year 1994 rates. Officials at the depot are optimistic that the rate for fiscal year 1996 will drop to about $66 per hour. If the labor rates drop to $66 per hour and stay constant for the remainder of the REMAN program and the depot achieves the estimated level of 4,000 staff hours per aircraft for disassembly, rework, and modification before shipping the kits to McDonnell Douglas, the results would still be an added cost to the program of about $74,000 per aircraft. To begin the disassembly process, four aircraft were inducted into the REMAN program between June and November 1994. The disassembled, modified, and reused-as-is components were scheduled for delivery to the contractor between July 1995 and May 1996, to meet a production delivery schedule of February through November 1996. As of August 1995, a complete set of components for one of the four aircraft inducted in fiscal year 1994 had been delivered to the contractor. Component sets for the other three aircraft, while not yet behind in their delivery schedules, were experiencing delays in their modification and preparation at the depot. Depot officials told us that these delays have occurred because of the inability to obtain parts and materials necessary to modify the day attack aircraft components in a timely fashion. Components from each disassembled aircraft are divided into 22 kits. Several of the components in each kit require some work or modification to be made ready for use before they are included in the respective kits. Each of the NADEP maintenance shops responsible for the modification to these components and assemblies have schedules to maintain, so as not to cause schedule delays in delivering the kits to the contractor. Delays in the receipt of materials required to make components ready for use put the depot at risk for not being able to deliver the components and assemblies to the contractor on schedule. During our visit to the depot in August 1995, we were told by various shop foremen that modification schedules were not being maintained because parts and modification kits they require to make the necessary modifications were not being delivered to the depot on schedule. The lack of parts and materials needed to make the necessary modifications to upgrade day attack aircraft components to the REMAN program specifications negatively affects the depot’s ability to deliver the remanufacture kits to the contractor as scheduled. Some of these delays result from the contractor and NADEP vendors’ failure to deliver as scheduled. While we were at the depot in August 1995, we noted a 50-day delay in the receipt of wing modification kits from McDonnell Douglas. According to depot officials, to minimize delays in providing the remanufacture kits to the contractor, arrangements have been made to borrow components and parts from the Aviation Supply Office in Philadelphia. Altimeters ordered from the vendor for the first four REMAN aircraft are a case in point. NADEP and the Aviation Supply Office agreed that when the parts are received from the vendor, the depot will forward them to the Aviation Supply Office as replacements for those borrowed. Costs associated with this innovative depot work-around to avoid schedule delays are increases charged to the REMAN program as an over-and-above cost. A new production strategy would mitigate this cost because the contractor would be furnishing new parts and assemblies as opposed to reused components from the disassembled day attack models being furnished by the government. According to Navy officials, over $130 million will be saved by using excess APG-65 radar assets from the F-18 aircraft in the AV-8B aircraft. In a March 11, 1994, Acquisition Decision Memorandum, the Principal Deputy Under Secretary of Defense for Acquisition and Technology concurred with the Navy’s approach to accelerate the F-18 radar upgrade from APG-65 to APG-73 radars in order to provide the resulting excess APG-65 radar assets for the REMAN program. Three of the six basic components that make up the APG-65 radar system are common to the F-18’s APG-73 radar and will remain in use in the F-18 aircraft. The remaining three components (the radar receiver/exciter, target data processor, and computer power supply) will become excess assets available to the REMAN program. In a 1995 classified report, we noted that the APG-73 radar had problems that needed to be resolved before entering the production phase. Responding to our report, DOD said that a procurement decision would be made sometime in 1996, after an operational evaluation of the system is completed. If problems continue and the APG-65 components are not available to the AV-8B REMAN program as planned, it is possible the program could be delayed. If the assets are not available at all, the AV-8B program office would then have to procure all new radar components. Program officials told us the assets would be provided by the F-18 program as planned either from spares stock or from F-18 fleet assets. They also mentioned the possibility that an older, less capable version of the APG-65 radar could be tested and used, if necessary. According to program officials, the 150-series APG-65 radar is the version required by the AV-8B aircraft. One of these officials also told us that the schedule for removal of the 150-series APG-65 radar assets from the F-18 aircraft is not in sync with the requirements of the AV-8B remanufacture program for radar assets. The AV-8B REMAN program will need radar assets before their scheduled removal from F-18 aircraft. Not only is the removal of radar assets from F-18s a schedule risk to the AV-8B program, the program officials stated that there is also a shortage of 17 sets for the remanufacture program. To compensate for this shortfall, the Navy is modifying 17 of the older 140-series APG-65 radar assets to 150-series configuration to meet REMAN schedule requirements. This work-around is being funded with monies from the AV-8B remanufacture and other Navy programs. In our discussions with contractor personnel about the impact of possible delays, we were told that if the radar components, which are to be furnished by the government, are not made available to the contractor on schedule, the aircraft could be provisionally delivered without radar. If this is the case, the aircraft would not be mission capable until the radar sets were made available. Under a new production strategy, the contractor would be responsible for providing new radar, mitigating this risk. In light of the availability of a more cost-effective strategy to buy new radar AV-8B aircraft, instead of modifying the day attack AV-8B, we recommend that you direct the Secretary of the Navy to develop a current cost estimate for producing new radar model aircraft and (1) revise the acquisition strategy for acquiring upgraded AV-8B aircraft for the Marine Corps so that after the existing annual contract expires, the Marine Corps acquires new radar models rather than remanufactured models and (2) take advantage of the savings available through multiyear procurement. In commenting on a draft of this report, DOD agreed that a multiyear procurement strategy is generally preferable and advantageous, but only partially concurred with our recommendation that the Navy be required to take advantage of savings available through multiyear procurement. DOD stated that it is policy to reevaluate program acquisition strategies as changes in fiscal resources or operational requirements justify. We believe that since the radar model AV-8B aircraft is a valid and stable Marine Corps requirement, now is the appropriate time for the Navy to take advantage of savings that could be realized through multiyear procurement. DOD disagreed with our recommendation to require the Secretary of the Navy to revise the acquisition strategy for acquiring upgraded AV-8B aircraft so that after the existing annual contract expires, the Marine Corps acquires new radar model aircraft rather than remanufactured aircraft. DOD based its disagreement on current fiscal constraints and cost analyses performed by the Naval Air Systems Command and the Office of the Secretary of Defense’s Cost Analysis Improvement Group prior to the 1994 Milestone IV Defense Acquisition Board Review. According to DOD, these analyses, which projected that it would cost $29.7 million per aircraft to produce a new radar model AV-8B, confirmed that the REMAN program is the more cost-effective way to upgrade the AV-8B fleet. The information the Naval Air Systems Command and the Cost Analysis Improvement Group used in comparing the costs of the REMAN program with continued or new production is based on out-of-date historical cost data from the procurement of night attack model AV-8B aircraft that were last procured in fiscal year 1990. On the basis of those data, which were the best available at the time the REMAN program was considered, remanufacture of current assets might have been the best solution to modernize the AV-8B fleet. However, new data, based on the procurement of new radar model AV-8Bs, are now available. We used those data to arrive at our $23.6-million estimate for producing a new radar model AV-8B. During a meeting with DOD officials to discuss their comments on a draft of this report, DOD did not disagree with our methodology. Therefore, in our view, the data we used provides a more accurate cost indicator than an estimate of the night attack AV-8B aircraft modified for radar because our data come from actual procurement of radar model AV-8B aircraft. DOD also stated in its comments that the REMAN program will provide aircraft with the same operational capabilities that new production provides. This is an inaccurate characterization of the operational capabilities that will be provided under the REMAN program. In fact, aircraft to be produced under the REMAN program will have less operational capability because they will have less weapon-carrying capacity than the radar model AV-8B aircraft procured in fiscal year 1991. Specifically, because the REMAN aircraft will have reused wings from the day attack model aircraft, these aircraft will have only five external weapon stations, whereas the new production radar models have seven external stations. DOD’s comments are presented in their entirety in appendix I. We obtained information on the project contract and management of the AV-8B Harrier Program by reviewing program documentation and interviewing officials at the following DOD locations: U.S. Navy Headquarters, Washington, D.C.; U.S. Marine Headquarters, Arlington, Virginia; Office of the Chief of Naval Operations, Washington, D.C.; AV-8B Program Office, Crystal City, Virginia; and Naval Aviation Depot, Cherry Point, North Carolina. We also visited contractor facilities at McDonnell Douglas Aircraft Division in St. Louis, Missouri. We conducted our review between October 1994 and November 1995 in accordance with generally accepted government auditing standards. This report contains recommendations to you. The head of a federal agency is required under 31 U.S.C. 720 to submit a written statement on actions taken on our recommendations to the Senate Committee on Government Affairs and the House Committee on Government Reform and Oversight no later than 60 days after the date of the report and to the Senate and House Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of the report. We are sending copies of this report to appropriate congressional committees; the Secretary of the Navy; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Steven F. Kuhta, Assistant Director; Samuel N. Cox, Evaluator-in-Charge; and Brian Mullins, Evaluator. The following is GAO’s comment on the Department of Defense’s (DOD) letter dated December 20, 1995. 1. According to DOD’s response to a draft of this report, the radar model aircraft procured in 1991, that we used as our basis for comparing Remanufacture Program (REMAN) and new production cost, was the last year of a 3-year multiyear procurement buy. We determined that multiyear procurement for the 1991 buy was applicable only to the airframe. Therefore, we recalculated our estimate so as not to apply a multiyear cost saving factor for the airframe. This recalculation increased our estimate for new aircraft procurement but did not cause us to change our conclusions and recommendation in the final report. Our adjusted estimate is reflected in the body of the report. 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 Marine Corps' AV-8B Harrier Remanufacture program, focusing on whether it would be more cost-effective to rebuild older aircraft or procure new aircraft with increased capabilities. GAO found that the: (1) Navy estimates that it would cost between $23 million and $29.5 million to rebuild each AV-8B aircraft using refurbished parts; (2) Marines could procure new AV-8B radar attack aircraft for about $23.6 million each; (3) Navy does not have the ability to rebuild AV-8B aircraft as quickly as new aircraft can be produced; (4) Navy could revise its procurement strategy to procure new radar aircraft, since the remanufacture program is conducted under single-year contracts; (5) Navy is having difficulty disassembling older aircraft and acquiring replacement components in a timely and cost-effective manner; and (6) surplus radar equipment intended for use in rebuilding the aircraft may not be available as soon as anticipated, which could cause delays in the remanufacture program. |
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193) replaced the entitlement program, Aid to Families with Dependent Children (AFDC), with Temporary Assistance for Needy Families (TANF). TANF provides $16.5 billion annually to the states in the form of block grants through 2002. Under TANF, recipients are required to work and can receive federal cash assistance for only a limited period of time. TANF’s requirements vary from state to state because the 1996 act gave the states more control over the design of their own programs. While TANF is generally administered at the state level, the Department of Health and Human Services (HHS) is the primary federal agency providing oversight of states’ welfare programs. Through its public housing and Section 8 programs, HUD provides housing assistance to about 4.3 million low-income households. In fiscal year 1997, HUD’s outlays for Section 8 subsidies and for public housing modernization, development, and operating subsidies amounted to about $22.6 billion. About $7.5 billion of this amount was allocated through the tenant-based Section 8 certificate and voucher programs, under which housing agencies provide rent subsidies to private landlords. About $7.9 billion went directly to private landlords as part of the project-based Section 8 program, and about $7.2 billion went for the modernization, development, and operation of Public and Indian Housing. Included in this latter amount is $2.6 billion in appropriations that was distributed through HUD’s formula-based performance funding system to state, county, and local housing agencies for the operation of public housing. In 1996, approximately a quarter of the households receiving HUD subsidies also received cash assistance. In general, families receiving housing assistance are required to pay 30 percent of their cash income (adjusted for certain items, such as child care and medical expenses) in rent, while HUD provides subsidies to housing agencies and private landlords to make up the difference between tenants’ rental payments and the cost of operating public housing units or the rents charged by the landlords. Because rental payments are linked to household income, rental revenues will fall if families receiving assistance are unable to replace lost welfare benefits with wage income, and additional HUD subsidies will then be needed. But if assisted families’ employment and earnings increase under welfare reform, then the amount of the required rental payments may rise, reducing the need for subsidies. For subsidy needs to decline, residents would have to earn more than they formerly received in cash assistance, and working residents would need to either remain in public and assisted housing after gaining employment or be replaced with employed residents. These conditions are less likely to hold in areas where cash benefit levels are high and nonsubsidized housing is available and affordable. HUD has established policies that can influence the impact of welfare reform on housing programs. For example, housing agencies and HUD can set minimum rents of up to $50 for tenants who live in public housing or have Section 8 certificates or vouchers, while owners of project-based Section 8 properties are required to charge minimum rents of $25. In addition, recent legislation has expanded housing agencies’ authority to exclude some wage earnings from rental payment calculations in an effort to retain working families in public housing units. Similarly, while housing agencies and subsidized private landlords were formerly required to give preference in admission to very poor families, they are now allowed to give some preference to working families with wage income. In addition to these rent and admission policies, HUD provides programs, some of which originated in the mid-1980s, to deliver employment-related services to the tenants of public and assisted housing. These programs have provided job training, counseling, and placement services; child care; and transportation. We identified five studies estimating welfare reform’s financial impact on housing programs nationally, one estimating the impact for eight housing agencies, and another seven estimating the impact for a single housing agency. While some of the studies suggest that welfare reform will likely cause only modest changes in the amounts of the HUD subsidies needed, some of the studies indicate more substantial effects. For example, one national study indicated that HUD would need to increase its annual subsidies to housing agencies by almost 42 percent to offset expected decreases in public housing rents, while another study indicated that HUD could decrease its annual subsidies to a particular housing agency by almost 20 percent. Differences in the studies’ focus and assumptions help explain the widely varying estimates. While some researchers focused on a single feature of a state’s welfare reform plan, others examined the national impact of a broad range of state plans; while some studies used “worst-case” assumptions about the employment and earnings prospects of welfare recipients, others used “best-guess” assumptions. Moreover, because certain welfare and housing policies have changed since the estimates were developed, the economy has been stronger than anticipated, and the effects of welfare reform on welfare recipients’ behavior are difficult to predict, some of the authors of the studies we reviewed expressed uncertainty about their estimates. Five studies we identified estimated the financial impact of welfare reform nationally (see table 1). Three of these five studies suggest that welfare reform will have a relatively modest effect on the need for HUD subsidies, ranging from a 0.4-percent annual decrease to a 3.3-percent increase in the amount needed. The two remaining studies anticipate a greater effect. For example, the Council of Large Public Housing Authorities indicated, in the fall of 1996, that the annual amount needed for HUD subsidies could increase by 19 percent. Of the other eight studies we reviewed, seven estimated welfare reform’s impact on individual housing agencies in different parts of the country, and one, by HUD’s Office of Policy Development and Research, covered eight individual housing agencies. The estimates for these eight studies, which are summarized in table 2, varied widely, both from one housing agency to another and from one scenario to another for a single housing agency. In particular, under assumptions that the authors characterize as unlikely—that the state would adopt a harsh welfare reform plan and the housing authority would not provide employment assistance to affected residents—the Seattle housing authority’s findings indicate that the agency could need an annual increase of as much as 37 percent of its fiscal year 1997 HUD subsidy to offset welfare reform’s impact. Conversely, using optimistic assumptions, HUD predicted that rental revenues at the Dallas housing authority could rise by enough to warrant as much as a 20-percent reduction in the amount of the HUD subsidy needed. In addition to differences in geographic scope, the studies we reviewed differed in other key aspects of their focus, and these differences often dictated the assumptions used in the studies. Some of these studies took a worst-case approach to welfare reform, imposing very conservative assumptions about the employment and earnings prospects of welfare recipients with housing assistance. Generally, these analyses were designed to heighten the awareness of the welfare and housing assistance communities to the worst possible implications of some aspects of welfare reform and to prompt these communities to take appropriate action. For example, at the national level, the Council of Large Public Housing Authorities used a worst-case approach in the summer and early fall of 1996 to look at what would happen if all residents receiving cash assistance lost that assistance 5 years after the implementation of welfare reform (the federally mandated time limit) and if none of the affected families were able to replace any of these benefits with wage earnings. This analysis, which was designed to motivate the public housing community to take action, estimated that required rental payments could fall by 30 percent (the percentage of income that residents generally pay in rent) of the total amount of cash assistance lost. At the local level, the Minneapolis and St. Paul housing authorities designed studies to show the maximum potential effect of Minnesota’s decision to reduce by $100 the monthly cash benefits for TANF recipients with housing assistance. To estimate the maximum impact of the $100 reduction on the housing agency and HUD, these studies ignored any possibility that residents receiving TANF benefits might have additional earnings to offset some of the $100 loss in benefits. Thus, the monthly rental payments of subsidized households would be $30 ($100 times 30 percent) less than they otherwise would have been. Under this scenario, the rental payments of public housing residents and Section 8 certificate and voucher holders would decline annually by $817,000 for Minneapolis and over $1 million for St. Paul. Other studies, designed to forecast HUD’s actual budget needs, attempted to make best-guess estimates of the financial impact of welfare reform on HUD and housing agencies. HUD’s national study and one by the Congressional Budget Office (CBO) used more elaborate methods to predict the employment and earnings prospects of welfare recipients. For example, relying on various studies of the earnings of former welfare recipients, CBO assumed that households with Section 8 assistance would be able to replace two-thirds of their lost welfare benefits with earnings when time limits take effect. These studies generally found that welfare reform would have a more modest impact than studies designed to look at the worst-case outcomes of imposing time limits. Still other studies, including the Johns Hopkins study, HUD’s multisite study, and the Los Angeles study, were designed to determine a range of likely effects of welfare reform on HUD and housing agencies and to identify the factors that might influence the extent of these effects. Most of these studies focused on the potential impact of a broad range of factors—including welfare policies (e.g., time limits and employment sanctions), housing policies (e.g., minimum rents and exclusions of earned income from rental payment calculations), and local and national economic conditions—to determine which factors would have the largest impact on the subsidies needed. The studies used varying assumptions and models to estimate welfare reform’s impact under different scenarios. For example, HUD’s multisite study and the Los Angeles study estimated the impact of welfare reform under both optimistic and conservative assumptions about the employment and earnings prospects of welfare recipients with housing assistance. Additionally, both HUD’s multisite study and the Johns Hopkins study varied their assumptions about welfare reform’s rules by examining the potential effects of different state welfare programs. Some of the studies discussed above focused on the impact of certain housing policies. For example, HUD’s multisite study found that because rental payments do not fall to zero when tenants lose their cash income but are required to pay minimum rents, the imposition of such minimum rents could offset much of the potential decline in rental revenues resulting from welfare reform. The Los Angeles study attempted to measure how much of the potential increases in rental payments the housing agencies would forgo because of policies excluding new income from rental payment calculations. Finally, studies designed by David Griffiths & Associates, Ltd. (DMG), focused on the impact of significant involvement by housing agency managers in helping tenants move into the labor market. DMG assumed, in its studies for both the District of Columbia and the Public Housing Authorities Directors Association, that a high level of involvement by housing agency managers would significantly improve the income prospects of welfare recipients. The varied assumptions underlying the studies we reviewed reflect researchers’ uncertainties about changes in welfare and housing policies over time, the future of the economy, and the behavioral responses of welfare recipients. The authors of several of the studies described their estimates as outdated because events (such as the final version of a state’s welfare reform law or the condition of the national economy) had not played out as the authors had anticipated when they conducted their studies. For example, the representative of DMG who developed the estimates for the Public Housing Authorities Directors Association and the District of Columbia told us that if he were developing the estimates today, he would revise the results of his pessimistic scenario significantly to take account of (1) modifications to the welfare reform law that have reduced the cuts in Supplemental Security Income he initially anticipated, (2) the significant emphasis HUD has placed on programs to help move people from welfare to work, and (3) the surprisingly strong economy. Similarly, the authors of HUD’s multisite study told us that their estimates for Los Angeles are probably too pessimistic because they assumed a more restrictive welfare program than the one California actually adopted in August 1997. Other authors were also concerned about the general difficulty of predicting the future behavior of TANF recipients. For example, officials at CBO stated that because of uncertainties about how welfare reform would be implemented and how recipients would respond, they recognized that their estimates could be substantially different from actual outcomes. And, as we reported in January 1998, HUD is no longer standing behind its initial assessment of welfare reform’s nationwide impact, in part, because of difficulties it identified in predicting how states will implement welfare reform plans and how welfare recipients will respond to welfare reform. The experts with whom we spoke generally agree that several methodological and data issues complicate efforts to forecast welfare reform’s financial impact on HUD’s housing subsidy programs. Some issues, such as differences in state welfare policies and plans for implementing welfare reform and uncertainty about the strength of the economy and the behavior of welfare recipients, make it difficult to predict the impact of welfare reform itself. Housing researchers generally agree, however, that estimating welfare reform’s financial impact on housing programs is more complex than estimating welfare reform’s impact overall because the characteristics of welfare recipients with housing assistance may be different from those of other welfare recipients, and housing agencies and landlords may adopt a broad range of housing philosophies and policies. Finally, the lack of consistent and reliable data further hampers researchers’ efforts to predict welfare reform’s financial impact on HUD’s housing programs with any certainty. Differences in state welfare policies have always been important in evaluating the federal welfare program. Under AFDC, states paid different levels of benefits to entitled recipients, and HHS researchers reported that recipients were more likely to leave the welfare rolls in states with lower benefits than in states with higher benefits. Because welfare reform gave the states greater discretion in setting welfare policy, state policies now differ across a multitude of dimensions. For example, the states can now determine who is eligible for cash assistance and for how long. In addition, they can set specific work requirements and establish sanctions for recipients who violate their state welfare policies. Differences in the implementation of welfare plans at the state and local levels may exacerbate interstate differences in the impact of welfare reform. In particular, the manner in which caseworkers relay information to and interact with recipients affects outcomes under welfare reform. For example, in evaluating welfare reform in several states, the Manpower Demonstration Research Corporation (MDRC) found that differences in what caseworkers told clients in Florida and Minnesota help to explain differences in the timing of caseload reductions in those states. MDRC found that in Florida, where recipients could receive cash benefits for a maximum of 2 years, recipients tended to exhaust their benefits before getting jobs and therefore caseloads did not decline quickly, while in Minnesota, where recipients could receive federal cash benefits for 5 years, caseloads dropped quickly. MDRC told us that this difference in behavior seemed to occur, at least in part, because Florida caseworkers encouraged recipients to remain on TANF and spend their 2 years investing in job skills, while Minnesota caseworkers advised their clients to become employed as soon as possible and save their limited benefits for possible future needs. The studies we identified varied widely in the assumptions they used to predict welfare recipients’ potential employment prospects and earnings. Experts with whom we spoke generally agree that welfare recipients’ employment prospects and earnings depend on the market for low-skilled workers. The demand for these workers generally depends on the overall health of the national and local economy, while the supply depends on recipients’ responses to the level of wages they could earn and the level of welfare benefits they could receive. In general, some issues make it difficult to predict the demand for low-skilled workers. First, because welfare reform has thus far occurred during a period of strong national job growth, researchers have little sense of how the demand for low-skilled labor will hold up during an economic slowdown. For example, experts have been unable to agree on how much of the recent decline in the number of families receiving cash assistance is the result of the very robust economy in recent years and how much is the result of welfare reform. In order to shed light on the degree to which economic conditions affect the impact of welfare reform, HUD researchers, in their multisite analysis, studied at least two cities with different economic conditions in each of three states. Welfare recipients in the same state were generally subject to the same welfare laws. While HUD found that welfare recipients in all three states had more success in entering labor markets in cities with more robust local economies, the difference was not consistent across the states. Second, some researchers have noted that while it may be possible to measure the number of low-skilled jobs available at a given point in time, this type of analysis will not necessarily reveal how many people can find employment over a period of time because of constant turnover in employment and other changes in labor market conditions over time. The supply of low-skilled workers will depend, in part, on how welfare recipients respond to changes in their state’s welfare program. While some researchers believe that past studies of the impact of changing wages and benefit levels on welfare recipients’ desire to work could help answer this question, other researchers believe that the 1996 welfare reforms constitute such a dramatic shift from earlier welfare policies that past behavior may not be a good predictor of future behavior. Thus, there is little consensus among experts about the future behavior of welfare recipients. Housing experts with whom we spoke generally agree that estimates of the effect of welfare reform on the general welfare population may not apply to the subset of welfare recipients in public and assisted housing. As we reported in June 1998, welfare recipients living in public housing are more likely to have been on welfare longer than those without housing assistance, and longer spells on welfare have been associated with less success in obtaining employment. In addition, experts suggest that welfare recipients with housing assistance may be less likely to go to work for several reasons: Welfare recipients with housing assistance will be able to retain a smaller portion of their new earnings because they will generally be required to pay 30 percent of those earnings in rent. Because housing assistance provides a “cushion,” welfare recipients with public or assisted housing may have less incentive to work than other welfare recipients with the same job prospects but no housing assistance. Recent evidence suggests that job growth is occurring in the suburbs while welfare recipients are likely to live in urban centers or rural areas. In particular, welfare recipients with project-based housing assistance (including both public housing and project-based Section 8 assistance) may face higher relocation costs than other welfare recipients because they may have to give up their housing assistance to move to locations with better job prospects. The combination of longer periods on welfare and less incentive to work may help explain why some researchers have found that welfare recipients with housing assistance are less successful in moving from government-sponsored job training programs into long-term private sector employment. A recent study by MDRC researchers in Atlanta showed that of the participants in certain federal job training programs, those with no housing assistance were most likely, those with certificates and vouchers slightly less likely, and those in public housing least likely, to find employment after completing their training. Because of recent housing policy changes and uncertainty about the degree to which housing agencies will adopt these changes, researchers will have difficulty separating the effects of welfare reform from those of changes in housing policy, just as they have had difficulty separating the effects of welfare reform from those of overall economic conditions. Many of the studies we reviewed, as well as experts we consulted, recognized the importance of recent changes in rent and admission policies and programs to move welfare recipients to work. For example, the director of the housing authority in Athens, Georgia, told us that the types of admission preferences, the effect of management’s involvement in helping tenants obtain employment, and the level of minimum rents could determine whether his agency’s rental revenues rise or fall with welfare reform. However, recent legislation may limit the degree to which housing agencies will be able to use minimum rents to offset potential declines in rental payments under welfare reform. Welfare and housing researchers have used a combination of government administrative data—data collected by federal, state, or local officials on a host of factors associated with the recipients of welfare and housing assistance—and survey data to study the behavior of those who receive welfare and housing assistance. Administrative databases generally provide information over time on the participants in a program, while survey data generally conform more closely to research objectives but cover a smaller number of households. Because the states have more flexibility to design their own systems under welfare reform, data elements in administrative and survey databases may be less consistently defined than in the past. Although state welfare agencies have reported administrative data under HHS’ emergency rules, which were phased in over a period of 9 months beginning in July 1997, some states have submitted data that are not fully consistent with HHS’ specifications. HHS will be issuing final TANF reporting rules that better define terms, but according to an HHS official, the states will continue to have significant flexibility in how they define their programs, making data assessment more difficult. Similarly, according to an official in the Census Bureau’s Housing and Household Economic Statistics Division, the increased interstate variation promoted by the 1996 welfare reforms has placed a significant burden on national organizations that collect survey data. For example, obtaining consistent data across states about the level of cash benefits may be difficult because the states have given their TANF benefits a variety of names. For example, Minnesota calls TANF the Minnesota Family Investment Plan, while California refers to TANF as CalWORKS. In addition, questioners and respondents may not know how to classify the increasingly common “one-time diversion” payments, which states use to provide one-time assistance to families in lieu of placing them on the welfare rolls. We and others have questioned the reliability of the existing national administrative and survey data on the residents of public and assisted housing. HUD collects administrative data on the residents of public and tenant-based assisted housing in its Multifamily Tenant Characteristics System database. Housing agencies are supposed to provide information for this database to HUD electronically in a specified format, but some agencies, especially the larger ones, do not report data for all of their residents, and the data contain errors as well. A HUD official told us that in recent years, HUD has concentrated on improving the response rate for these data, but the greater response has been accompanied by an increase in the number of data entry errors. HUD collects similar data on the residents of properties with project-based Section 8 assistance in the Tenant Rental Assistance Certification System database. According to HUD officials, this database suffers, on a smaller scale, from reporting problems and data errors such as those affecting the multifamily database. The reliability of survey data on housing assistance is also questionable because respondents to surveys with questions about this assistance often misreport their status. HUD has documented probable misreporting in the Current Population Survey and the American Housing Survey. For example, in a paper presented in May 1996, HUD economists reported that the majority of those receiving housing assistance who said they lived in public housing actually do not. Furthermore, they reported that the majority of the families receiving other housing assistance do not accurately identify the way they are assisted, and perhaps one-fifth of those who report receiving a housing subsidy do not actually receive one. In addition, the interim director of the Johns Hopkins University’s Center for Policy Studies has noted similar reporting discrepancies in survey responses and administrative data and has suggested methods for improving the reliability of the survey responses. Although the Census Bureau and others are developing and testing questions to improve survey responses on welfare benefits and housing subsidies and HUD has worked to improve its data as well, it is still too early to obtain adequate data to test assumptions about the outcomes of recent welfare and housing reforms. We provided a draft of this report to HUD for review and comment. HUD stated that the report is fair and straightforward and provided some technical corrections. HUD’s comments appear in appendix III. In addition, we provided excerpts of a draft of this report to the authors of each of the studies we reviewed. Several of the researchers and housing agencies provided us with comments that we incorporated as appropriate. To identify studies that estimated welfare reform’s financial impact on housing assistance programs, we contacted known experts and officials from a variety of organizations and government agencies. In particular, we spoke with experts in housing and welfare research, representatives of major trade associations and advocacy groups, officials at 30 of the largest local housing authorities and 10 of the largest state housing agencies, and officials from 10 private management companies of various sizes that are managing properties with Section 8 subsidies. Although we attempted to identify as many studies as possible, we recognize that the 13 studies we identified (see app. I) may not include all such studies that were performed. It should also be noted that it was beyond the scope of this review to assess the quality of the research underlying the individual estimates we reviewed. To consistently present the different studies’ estimates of dollar changes in rental revenues, costs, and subsidies, we presented each study’s findings as the percentage change in the subsidy relative to the total performance fund and/or housing assistance payments HUD says the agency received in 1997. We ignored the facts that HUD does not always provide 100 percent of the subsidy needed for public housing, as calculated under the performance funding system formula, and that HUD’s outlays may lag behind changes in rental revenues by 2 to 3 years. In addition, although the results presented here are based on the assumption that HUD will provide 100 percent of the needed subsidy, the studies we reviewed made different assumptions about the percentage of the needed subsidy that HUD would be likely to provide. These assumptions ranged from 85 percent to 100 percent. To the extent that the subsidy is funded at less than 100 percent, more of the cost of welfare reform will be borne by local housing agencies and less will be borne by HUD. See appendix I for a list of the individual studies we reviewed. To better understand the methodological and data issues that arise when estimating welfare reform’s financial impact on HUD’s housing programs, we also contacted known experts in welfare and housing who represented a broad range of views. We questioned them about the importance of specific methodological and data concerns using a semistructured questionnaire. We also gathered their research and analyzed the information collected from the interviews and research documents to develop common themes. Appendix II lists the experts with whom we spoke about methodological and data issues. We conducted our work from May 1998 through November 1998 in accordance with generally accepted government auditing standards. If you or your staff have any questions about this report, please contact me at (202) 512-7631. Major contributors to this report were Amy Abramowitz, Nancy Barry, DuEwa Kamara, and Lara Landeck. “Background Materials for Baseline Projections of Spending Under Current Law.” Congressional Budget Office, Washington, D.C.: Mar. 1998. “The Fiscal Impacts of Welfare Reform: An Early Assessment.” Council of Large Public Housing Authorities. Issue brief. Fall 1996. “Impact of Welfare Reform in Public Housing.” David M. Griffith & Associates, Ltd. Sponsored by the Public Housing Authorities Directors Association. Unpublished. Spring 1997. Newman, Sandra and Joseph Harkness. “The Effects of Welfare Reform on Housing: A National Analysis.” Presented at the Policy Research Roundtable on the Implications of Welfare Reform for Housing, sponsored by the Fannie Mae Foundation in collaboration with the Institute for Policy Studies at The Johns Hopkins University (work in progress). July 22, 1997. For updated information, see “The Effects of Welfare Reform on Housing: A National Analysis” in Newman, Sandra J. (ed.) The Home Front: Implications of Welfare Reform for Housing Policy, Washington, D.C.: The Urban Institute Press, forthcoming. “Technical Paper: Welfare Reform Budgeting.” U.S. Department of Housing and Urban Development (HUD). Washington, D.C.: Oct. 4, 1996. “Estimated PHA Income Loss Due to Proposed AFDC Cuts.” St. Paul Public Housing Agency, Unpublished. Feb. 28, 1997. “Impact of Welfare Reform on Program Costs.” New Jersey Department of Community Affairs’ Section 8 Housing Program. Unpublished. Jan. 1998. Nguyen, Mai, Charles Kastner, and Ashley Lommers-Johnson. “Welfare Reform: Status of Washington State’s Welfare Reform Plan; Effects on Residents, the Seattle Housing Authority, and Neighborhoods; and Prospects for Employment and Rent Income.” Presented at HUD headquarters, Washington, D.C. Dec. 17, 1996. “Potential Impact of CalWORKS.” Housing Authority of the City of Los Angeles. Unpublished. Nov. 1997. “Welfare Act Impact Analysis: District of Columbia Housing Authority (DCHA)—Final Report.” David M. Griffith & Associates, Ltd. Apr. 1997. “Welfare Reform Impact Study.” Minneapolis Public Housing Authority. Unpublished. Spring 1997. Welfare Reform Impacts on the Public Housing Program: A Preliminary Forecast. U.S. Department of Housing and Urban Development. Office of Policy Studies and Research. Rockville, MD., Mar. 1998. “Welfare Reform Program and Financial Analysis.” Miami-Dade Housing Agency. Unpublished. Oct. 1997. Paul Cullinan, Chief, Human Resources Cost Estimate Unit, Congressional Budget Office (CBO) Shelia Dacey, Analyst, CBO Debra Devine, Social Science Analyst, Office of Policy Development and Research, U. S. Department of Housing and Urban Development (HUD) Katherine L. Meredith, Program Examiner, Housing Branch, Executive Office of the President, Office of Management and Budget (OMB) Charles Nelson, Assistant Division Chief for Income and Poverty, Housing and Economic Household Statistics Division, Bureau of the Census, U. S. Department of Commerce Don Oellerich, Acting Deputy Chief Economist, Office of the Assistant Secretary of Planning and Evaluation, U. S. Department of Health and Human Services (HHS) Jim Brigle, Director of Government Affairs, Public Housing Authorities Directors Association George C. Caruso, Acting Executive Director, National Affordable Housing Mangement Association Connie Campos, Policy Analyst for Housing, National Association of Housing and Redevelopment Officials Major Galloway, Policy Analyst for Housing, National Association of Housing and Redevelopment Officials Debra Gross, Research Director, Council of Large Public Housing Authorities John Hiscox, Executive Director, Macon Housing Authority Walter Huelsman, Vice President and National Director of Housing Consulting, DMG-Maximus, Inc. 1. After additional discussions with HUD to clarify the information provided in comment 1, we included the data from HUD’s suggested paragraph with certain appropriate modifications. 2. We deleted the footnote as suggested. 3. We changed the reference as requested. 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 provided information on welfare reform's financial impact on the Department of Housing and Urban Development's (HUD) budget, focusing on what: (1) studies have been done on welfare reform's financial impact on public and assisted housing; and (2) methodological and data issues, if any, arise when researchers estimate welfare reform's financial impact on low-income housing. GAO noted that: (1) officials at housing agencies and researchers at government agencies, universities, trade associations, and a consulting firm have estimated welfare reform's financial impact on some components of HUD's housing subsidy programs; (2) GAO identified 13 studies that estimated this impact; (3) these studies of welfare reform's financial impact on HUD's housing subsidy programs varied in their geographic scope, focus and assumptions, methods, and findings; (4) some studies also estimated welfare reform's impact under alternative scenarios and therefore developed a range of estimates of welfare reform's cost for HUD and housing agencies; (5) the estimates in the studies GAO reviewed generally varied with the issues on which they focused and the assumptions on which they were based; (6) some of the authors of the studies GAO reviewed told it that their estimates might not hold up over time because some federal and state welfare laws have changed since the estimates were first developed and the economy has been more robust than anticipated; (7) experts with whom GAO spoke generally agree that several issues complicate efforts to forecast welfare reform's financial impact on HUD's housing subsidy programs; (8) these issues include not only those encountered in predicting welfare reform's impact on the recipients and providers of public assistance, but also those specific to estimating welfare reform's financial impact on the residents of assisted housing, providers of subsidized housing, and HUD; (9) in general, wide variations in state welfare plans and their implementation complicate the estimation of welfare reform's impact; (10) the employment and wage prospects for welfare recipients depend, in part, on future local and national economic health and on recipients' behavior; (11) housing experts generally agree that estimating welfare reform's impact on housing programs is more complex than estimating welfare reform's impact overall because of possible differences in the behavior of welfare recipients with and without housing assistance, as well as variations in policies adopted by housing agencies and landlords; and (12) a lack of reliable data further hampers researchers' efforts to predict welfare reform's financial impact on HUD's housing programs. |
Corporate income tax is levied on business entities that organize and operate as corporations, as defined by each individual country’s tax rules and laws. Generally, corporations are individual business entities that issue shares and can make distributions to shareholders, such as dividend payments. Corporations can be shareholders in other corporations, both domestic and foreign. The amount of control the corporate shareholder has over the other corporation can vary depending on the percentage of shares owned and other factors. At the low range of corporate ownership, portfolio shareholding allows a corporate shareholder to invest in a business but does not involve maintaining a controlling stake in the firm. At greater levels of ownership, corporations can own a sufficient percentage of shares to gain partial or total control of major business decisions, such as the level and timing of dividend distributions and investment and pricing strategies. For this report, we will call the controlling firm a parent corporation and the controlled firm a subsidiary. Parent-subsidiary relationships can be complicated, involving a corporation owning multiple subsidiaries, subsidiaries being controlled by multiple parents, or tiered arrangements with subsidiaries owning subsidiaries of their own. When these relationships involve entities in more than one country, these corporations are referred to as multinational corporations (MNC). MNCs are groups of separate legal entities, which can include corporations, partnerships, trusts, and other legal entities, that operate and generate income in multiple countries, and different parts of an MNC may have different domestic jurisdictions. MNCs may also have branches—domestic, foreign, or both—as part of a corporation’s internal organizational structure. In general, each corporate entity that is part of the MNC is taxed as an individual taxable entity by the relevant governments, unless the corporation is allowed to and chooses to file a consolidated return. Corporations can earn a variety of different types of income from foreign sources. This income can be generated from transactions with either unrelated parties, such as retail customers located abroad, or related parties, such as foreign subsidiaries or other parts of the same MNC. Corporations can earn foreign-source income from active and passive activities with foreign parties. While countries vary somewhat in their definitions of active and passive income, generally speaking, active income is considered to be the income generated through the primary business activities of the corporation. Passive income, in contrast, is income that is not earned through primary business activities. Interest earned, rental income, and royalty payments from foreign sources are generally considered passive income. However, for some companies, such as financial services companies, these types of income may constitute the primary business and be considered active income under the tax laws of some countries. Additionally, corporations can purchase shares of foreign companies and receive dividend distributions based on the earnings of those companies. Table 1 below lists some general examples of different types of income that can be generated from foreign-sources. In practice, countries combine elements of worldwide and territorial approaches to taxing foreign-source income. One approach, generally referred to as deferral, deviates from the worldwide model and taxes the domestic corporation on all of its income, including income and dividends received from foreign subsidiaries, but defers taxation until the income is repatriated. Another approach, generally referred to as dividend exemption, is closer to the territorial model and permits the tax-exempt repatriation of the dividends distributed by foreign subsidiaries, but may limit the extent to which some income is exempt. In either system, foreign- source income is taxed first in the source country; under a deferral system, a residual tax is then imposed only when the income is repatriated. Figure 1 shows a continuum of tax treatments for foreign-source corporate income with hybrid systems ranging between the pure worldwide and territorial models. The current tax system in the United States is an example of a worldwide system with deferral, which taxes domestic corporations on their worldwide income, regardless of where the income is earned and gives credits for foreign income taxes paid. Income unrelated to a U.S. trade or business earned by foreign corporations is not taxed domestically until it is distributed to a domestic shareholder, such as a domestic parent corporation, which allows deferral of taxation on income of foreign subsidiaries. Special rules may exist that tax certain shareholders, such as a parent corporation, currently on the income of certain subsidiaries in order to protect the domestic tax base. To reduce the double taxation of income, corporate taxpayers can offset, in whole or in part, the domestic tax owed on the foreign-source income through a FTC. In certain circumstances, a parent corporation may claim FTCs for foreign taxes paid by a subsidiary. Figure 2 shows how a dividend payment is generally taxed under a worldwide tax approach that permits deferral. Many OECD countries exempt some types of foreign-source corporate income from domestic tax. Exemptions are commonly granted in these countries for dividends paid by a foreign subsidiary. As shown in figure 3, which is a simplified example of an exemption system, the domestic corporation does not incur a tax liability by receiving the dividend income from its foreign subsidiary. However, similar to the worldwide systems with deferral that were described earlier, exemption systems may disallow the tax advantages of foreign-source income under certain circumstances to protect the domestic tax base. Our study countries—Australia, Canada, France, Germany, and the Netherlands—have hybrid tax systems that exempt some types of foreign- source income and tax others. All of the study countries tax domestic corporations on income earned through rental payments and royalties. Such payments may be made by unrelated parties or by subsidiaries and are generally expenses of the payee in the foreign country but are received as income by the domestic corporation. Subject to an extensive list of exceptions, the study countries generally exempt, but to varying extents, income of domestic corporations received as foreign-source dividends from foreign subsidiaries, sales by foreign branches, and the gains from the sale of shares in foreign subsidiaries. For example, all of the study countries permit domestic corporations to receive dividends that meet certain qualifications as tax-exempt income, but differ in the rules they use in determining which dividends are qualified. In addition, Canada does not allow domestic corporations to earn tax-exempt, foreign-source income through foreign branches and taxes up to half of the capital gains on the sale of foreign subsidiary shares while the other study countries generally exempt income from these sources. In addition to the rules above covering income payments received by domestic corporations, all study countries also have rules that tax domestic corporations on some income at the time it is earned by foreign subsidiaries, regardless of when or if the foreign subsidiary distributes a dividend. These rules, generally referred to as anti-avoidance rules, attribute certain earnings of related foreign entities to domestic corporations in order to limit the tax benefits of holding certain types of income offshore. Table 2 presents a brief overview of the tax treatment for different types of foreign-source income in our study countries. All rows except the last show the tax treatment of income payments received by a domestic corporation. The last row shows the tax treatment of income at the time it is earned by a foreign subsidiary that is subject to certain anti-avoidance rules regardless of whether the income was distributed as a dividend. While data was not available for most of our study countries, in Canada, at least 76 percent of foreign-source dividends received by Canadian taxpayers from foreign affiliates from 2000 to 2005 were qualified foreign- source dividends and, therefore, were tax exempt. Our study countries all have certain criteria that, when met, allow domestic corporations to receive tax-exempt income in the form of dividend payments, called qualified foreign-source dividends in table 2. In each of the countries, all of the criteria must be met for the domestic corporation to receive the foreign-source dividend tax-exempt. If any of the conditions are not met, then the dividend does not qualify for the tax exemption and is, therefore, taxable. Our study countries applied up to three criteria when determining which income is tax-exempt: domestic ownership type and level of foreign subsidiaries; the type of income (active versus passive) distributed as a dividend; and the presence of a tax treaty or similar agreement between the domestic and foreign government where the subsidiary is located and income is earned. All of our study countries except Germany require the domestic corporation to have a minimum ownership stake in a foreign subsidiary in order to qualify for the benefits of exemption. In general, these minimum ownership level stakes mean that income from portfolio or portfolio-like investment is not exempt. Each country takes a different approach in determining the type of shares that qualify dividend income for exemption with distinctions made on the type of shares and the length of time the shares are held. For example, while Canada requires domestic corporations to own 10 percent or more of any class of shares in the foreign subsidiary, France requires its corporations to own at least 5 percent of a foreign subsidiary’s shares. The requirements for each country are summarized in table 3. In addition to the criteria above, Canada also makes a distinction between dividends distributed from active and passive income, while the other study countries do not, as shown in table 4. Of all our study countries, currently only Canada requires that the foreign subsidiary be located and earn active income in a designated treaty country in order to qualify for the dividend tax exemption that was shown in table 2. For Canada, a designated treaty country is a country with which Canada either has a tax treaty or a tax information exchange agreement (TIEA). As was noted earlier, at least 76 percent of dividends received by Canadian taxpayers from foreign affiliates between 2000 and 2005 were tax exempt. As was shown in the last row of table 2, all study countries have anti- avoidance rules that limit the tax advantages of earning certain types of income abroad. In general, these rules are intended to protect the domestic tax base by preventing taxpayers from avoiding domestic tax on passive or other specific types of income by moving to or holding these types of income in a foreign country. When triggered, these rules require a domestic shareholder to be taxed currently on its pro rata share of certain types of income earned by certain foreign subsidiaries, regardless of when or if that income is distributed to the shareholder. Anti-avoidance rules exist in both worldwide and territorial tax systems, and are in effect in each of our study countries and the United States (commonly known as Subpart F in the United States). A prominent anti-avoidance rule used by all study countries except the Netherlands applies to controlled foreign corporations (CFC). Each country’s CFC rules vary, but they generally tax domestic shareholders, including shareholding corporations, currently on certain types of income earned by foreign corporations that qualify as controlled by domestic shareholders. This is illustrated in figure 4. This means that the domestic corporation may be taxed on income that it has not received from the foreign corporation (called a deemed dividend in figure 4). This income is taxable when earned by the subsidiary, although CFC rules generally permit the domestic taxpayer to offset some or all of their domestic tax liability through credits on the foreign taxes paid on the income. Generally, study countries establish criteria in three areas that, when met, define a domestic shareholder’s tax liability for certain types of income earned by a foreign corporation under the CFC rules. First, countries define when a foreign corporation is controlled by domestic shareholders. For example, Australia defines a controlled foreign corporation as any foreign corporation that meets either of the following definitions: (1) where five or fewer Australian residents effectively control the foreign corporation or own more than 50 percent of the foreign corporation; or (2) where one Australian entity has an individual ownership of 40 percent or more of the foreign corporation not controlled by another corporation. Second, countries generally set a minimum level of ownership in the foreign corporation that domestic shareholders must meet before being taxed on the foreign corporation’s earnings. For example, under Canada’s CFC rules, a Canadian shareholder must own at least 10 percent of the foreign corporation to be taxed on certain types of income earned by the foreign corporation. Third, the controlled foreign corporation generally must earn certain types of income that are specified in each country’s CFC rules. For example, Germany requires that a CFC earn passive income that is taxed at an effective rate of 25 percent or less by the foreign country before a domestic corporation is required to pay tax on the CFC’s earnings. Once the criteria above are met, domestic shareholders are taxed currently on certain types of attributed income earned by the CFC. Some countries, like Canada, generally limit the taxable foreign earnings to the domestic corporation’s pro rata share of passive income. Other countries, like France, tax domestic corporations on their pro rata sh all earnings by the foreign corporation. Table 5 presents a simplified overview of the CFC rules used by our study countries. Additional details on other types of anti-avoidance rules can be found in appendix IV. Differences in tax rates across countries and differences in the taxation of different types of income may create incentives to avoid tax by shifting income from a high tax jurisdiction to a lower taxed jurisdiction or by converting income from a taxable type to tax-exempt type. Such efforts to reduce taxes may sometimes be legal tax avoidance, but may also be illegal noncompliance. Tax experts identified four areas as sources of compliance risk or taxpayer compliance burden in our study countries. None of our study countries were able to provide quantitative estimates of the extent of noncompliance with their tax laws governing foreign-source income or the amount of compliance burden placed on taxpayers. Furthermore, an exhaustive list of all sources of compliance risk and burden does not exist. However, four areas that tax experts, including tax agency officials, tax practitioners, and academics identified were: transfer pricing, anti-avoidance rules, foreign tax credits, and domestic expense deductions. These areas are also viewed by the Internal Revenue Service (IRS) or other tax experts as sources of compliance risk or compliance burden in the United States. While countries establish rules in these four areas to serve a variety of policy goals, including maintaining economic competitiveness and avoiding double taxation, one important consideration is protecting the domestic tax base. One unique tax administration challenge that MNCs present is that they can shift income and assets among related entities in different countries to convert taxable income, either foreign or domestic, to tax-exempt or lower-taxed foreign-source income. The laws and regulations in these four areas are intended, in part, to protect the domestic tax base by preventing MNCs from mispricing transactions, relocating domestic passive income, misusing foreign tax credits, or reallocating expenses in ways that inappropriately reduce domestic taxes. These laws also create compliance burden, often requiring taxpayers to maintain detailed records and conduct complex analyses of international transactions. Many tax agency officials we met with stated that transfer pricing was the most significant compliance risk they face in the area of international taxation. Similarly, many business representatives said complying with transfer pricing rules was often the most burdensome aspect of international taxation. Transfer prices are the prices of goods and services transferred among related entities within an MNC. These prices create compliance risks because MNCs can sometimes deliberately manipulate them to shift income from one related entity to another in order to reduce tax liability. For example, a parent corporation that charges a foreign subsidiary a below-market price for a good or service lowers the parent corporation’s taxable income and raises the subsidiary’s taxable income. Depending on tax rates and rules governing exemption and deferral, shifting income in this way may reduce an MNC’s overall tax liability. An above-market price would shift taxable profits from the subsidiary to the parent. Because transfer prices can shift taxable income from one country to another, all of our study countries have focused attention on transfer pricing with emphasis on stringent documentation requirements and audits. Generally, the study countries require taxpayers to provide evidence that transfer prices meet an arms-length standard, which means pricing transactions as if they occurred between unrelated parties. Establishing an arms-length price can be difficult when there is no comparable market price, such as for a unique good, service, or intangible property. Although comprehensive data were not available, several experts, including the OECD, have noted that a significant amount of trade occurs between related parties. Trade in services in the United States, while not a measure of overall U.S. trade, provides an example. According to the U.S. Bureau of Economic Analysis, trade in services between CFCs and related parties increased (in nominal dollars) from approximately $38.4 billion in 1999 to approximately $178.7 billion in 2006. The changing nature of international trade, particularly the growing trade in intangibles, is making international transactions more susceptible to transfer pricing abuse. Tax experts repeatedly identified intangible property as a particular challenge when attempting to establish a transfer price that meets the arm’s length standard. The unique nature of many intangible assets, such as patents, trademarks, copyrights, and brand recognition, means that it is difficult or impossible to identify comparable transactions for transfer pricing purposes. The revenue risk posed by mispricing intangibles can be significant because it can result in a company converting taxable income into tax-exempt or lower taxed income. For example, a parent corporation can license a patented computer technology to a foreign subsidiary and charge a below-market royalty, which is taxed in the domestic country. The subsidiary, which is in a low-tax country, uses the technology to generate a profit. The subsidiary then pays a tax-exempt dividend to the parent corporation. The parent corporation’s country loses tax revenues because the tax-exempt dividend received is inflated and the taxable royalty is reduced. Conversely, the subsidiary’s country receives additional tax revenues because the subsidiary’s income is higher than it should be, as the smaller royalty payment is a deductible expense. In the aggregate, however, the MNC reduces its tax liability because the tax rate in the subsidiary’s country is lower than the tax rate in the parent corporation’s country. Because identifying comparable prices for intangibles is often difficult, tax agencies and taxpayers often rely on a profit-split approach. The goal is to determine the percentage of profit attributable to buyers and sellers in different countries. Company officials consistently reported that making these determinations often requires costly special studies done by outside technical experts. In Australia, for example, to help protect against penalties, it is recommended that companies document that they followed a four-step process including selecting and justifying a transfer pricing methodology and then conducting an analysis based on that methodology to determine an arm’s-length price. Appendix II provides details on the transfer pricing documentation and filing requirements for all of our study countries. One company official further said that even after making these investments, tax authorities may disagree with the results because of differences in opinion about the assumptions that had to be made. A number complained about transfer pricing reviews turning into disputes between countries over the distribution of tax liabilities. This can occur because, in many transfer pricing disputes, there are at least three interested parties, the taxpayers and two tax agencies. When a taxpayer reaches an agreement with one government on a price it can result in a lower tax payment for the other government. On the other hand, tax agency officials repeatedly told us that they needed detailed information on the pricing methodologies used in order to verify that companies’ prices satisfy the arm’s-length standard. Tax agency officials said documentation of the data used and analysis conducted are critical to conducting independent determinations of the appropriateness of transfer prices. As one example of the importance tax agencies place on this documentation, the Australian Tax Office (ATO) has a system for rating the documentation quality. Under this system, poorly documented transfer pricing decisions are more systematically identified, allowing better targeting of audits. Transfer pricing abuse is also known to be a significant problem in the United States. For example, IRS lists transfer pricing abuse as a high-risk compliance area because of the large number of taxpayers and significant dollar risk. While there is agreement that transfer pricing is a major compliance risk in both our study countries and the United States, there is no consensus among the tax experts we met with about whether the compliance risks are greater in our study countries’ exemption systems or in the United States’ deferral system. Some argued that the tax benefits for an MNC from manipulating transfer prices are potentially larger under an exemption system than a deferral system. They argue that gains from transfer pricing abuse are larger if income can be made tax-exempt rather than tax-deferred. However, other experts pointed out that transfer pricing abuse is already a significant problem in the United States. Some of these experts noted that the incentives to avoid or evade tax under a deferral system can be quite large because tax can be deferred indefinitely. One of these experts also pointed out that there is no empirical evidence supporting the claim that countries with exemption systems face greater noncompliance with transfer pricing rules. According to tax agency officials and outside tax experts, all study countries are placing greater emphasis on transfer pricing when auditing MNCs. For example, a tax practitioner in France said that the overwhelming majority of the audit issues he faces are transfer-pricing related. Another tax practitioner made the same observation about Germany, saying that there is a general perception that the burden for complying with transfer pricing has increased in recent years. These and other company representatives we spoke with said that time spent determining and documenting transfer prices in accordance with country requirements is a primary source of burden. These findings are echoed in the research of others. For example, according to a survey of 850 MNCs, 65 percent of respondents believe that transfer pricing documentation is more important now than it was 2 years ago. Similarly, two-thirds of those respondents said they increased their resources on transfer pricing experts and studies in the last 3 years. All of the study countries have developed advanced pricing agreement (APA) programs that allow taxpayers and tax agencies to resolve transfer pricing issues before tax returns are filed and without the need for time consuming and expensive audits. Tax experts’ opinions on APA participation varied, but often these experts did not consider them an efficient use of resources for addressing transfer pricing issues. Due to the time and resources required to obtain an APA, some taxpayers only pursue them for high-value transactions. Guidance provided by the Australian Tax Office illustrates the time and extensive documentation that can be required for an APA. The document, included in appendix III, lists requirements such as numerous meetings with agency officials, details of the transfer pricing methodology, and data supporting that methodology. The amount of time needed to complete an APA can be greater when it involves multiple countries. According to statistics from some of our study countries, APAs may take a year, or multiple years, to finalize. Between 1992 and the end of 2007, Canada finalized 153 APAs. Some tax practitioners said that the decision to use APAs can also depend on the perceived risk that a transaction is likely to be subject to audit. Some taxpayers determine that APAs are less burdensome than going through an audit. According to taxpayers and tax officials we spoke with from the study countries, rules limiting the tax advantages of earning certain types of income offshore can serve as a source of taxpayer compliance burden and can be subject to compliance risk. As shown earlier in table 5, all of our study countries with the exception of the Netherlands use CFC rules as a primary method to limit the exemption or tax-deferral of certain income held offshore. In addition, all of our study countries, including the Netherlands, have additional anti-avoidance rules that may apply and disallow tax advantages on specific types of income earned offshore. See appendix IV for details of other anti-avoidance rules in our study countries and in the United States. The study countries were not able to provide us with statistics on the number of subsidiaries subject to these anti- avoidance rules, the amount of income earned by them, or the residual tax revenue they generated. Government officials we spoke with in several countries estimated the revenue generated from these rules to be low. However, some tax experts we spoke with stated that these rules played an important role in preventing MNCs from avoiding domestic taxes by earning income through CFCs. When CFC rules are triggered, it can result in an increase in the MNC’s tax liability. As a result, some of the tax practitioners we talked to said that structuring subsidiaries to avoid CFC rules requires careful planning and continuous monitoring. It is even possible that the actions of others could change a foreign subsidiary’s CFC status. For example, as shown in table 5, one way a subsidiary of an Australian MNC can be a CFC is if five or fewer Australian investors own more than 50 percent of its shares. Consequently, a subsidiary that is not currently a CFC could become one if other Australian investors increase their ownership share. Some tax practitioners told us that the complexity of the requirements for determining whether CFC rules applied and the amount of information needed to support a determination created considerable burden. For example, a French tax professional said that France’s CFC rules are burdensome because they require the taxpayer to make a series of complex determinations (these were summarized in table 5)—such as whether the foreign tax liability of a subsidiary is greater or less than 50 percent of what it would be had the income been earned in France—in order to decide whether the subsidiary is a CFC. Given differences in accounting and tax rules between France and a foreign subsidiary’s home country, these calculations can become complicated. German CFC rules require similar comparisons of actual taxes paid to theoretical taxes owed in determining whether the subsidiary will be taxed as a CFC. Australia takes a different approach, providing a list of countries where CFCs can be located and have fewer types of income that may be attributed to domestic corporations. It is not clear the extent to which this reduces burden in comparison to the other study countries. Tax experts in Canada also said that acquiring information for documentation requirements related to CFC rules is particularly burdensome. For example, a Canadian firm with a 10 percent holding in a foreign subsidiary is required to provide the Canada Revenue Agency (CRA) with detailed tax and operations information from the foreign subsidiary. With only a 10 percent ownership stake, the Canadian firm may find it challenging to obtain such information in a timely manner, or at all. Generally, CFC rules intend to limit an MNC’s ability to shift income, especially passive income, to foreign jurisdictions to avoid or postpone domestic tax. Enforcing these rules could be difficult if the tax agency is not present in the foreign jurisdictions. For example, some officials in France and Canada said they may not be able to obtain and validate information needed to enforce these rules. One French official stated that it is difficult to see if a foreign subsidiary located in a low-tax jurisdiction thousands of miles away was an active business or being used to shelter income. While the Netherlands does not have specific CFC rules, taxpayers and tax officials stated that the compliance burden associated with other anti- avoidance rules can be significant. According to tax professionals we spoke with, the Netherlands has low-taxed passive shareholding rules, another type of anti-avoidance rule. Overall, the tax practitioners and experts we spoke with agreed that the compliance burden related to anti- avoidance rules in the Netherlands could be significant. The study countries all have FTC systems; however, according to both tax agency officials and tax practitioners FTCs play less of a role in these countries than in the United States because of the extent to which foreign- source income is exempt. For exempt income, taxpayers do not have to track and report foreign taxes paid. However, FTCs still exist as the study countries use them to avoid double taxation on foreign-source income that is not exempt, such as income subject to anti-avoidance rules. Most study countries were not able to supply data on the amount of FTCs that are claimed by domestic parent corporations in their countries. However, some tax experts said that the extent to which FTCs are generated varies by country, the type of industry in which the MNC conducts business, and the overall structure and location of the MNC’s subsidiaries. For example, according to one German tax practitioner we spoke with, FTCs in that country tend to be generated mainly by businesses in the financial and insurance industries or where CFCs are involved. As shown in table 6, the study countries vary in the rules they apply to FTCs. Many of these rules address the extent to which companies are allowed to accumulate FTCs and use them to offset other types of income. For example, Australia requires that all FTCs must be used in the taxable period in which they are recognized by the taxpayer on their tax filing. Any FTCs that a company has accumulated that are in excess of the amount of domestic tax actually paid on that income are lost. Canada, on the other hand, allows companies to carry excess FTCs back into the previous 3 years or forward up to 10 years. The United States allows companies to apply accumulated FTCs across different types of foreign-source incomes, across multiple countries, and over multiple years. For example, FTCs accumulated for foreign taxes paid on royalty income can be combined with FTCs accumulated on dividend income. Some practitioners said there was some burden in tracking FTCs, but generally these rules were much less burdensome than complying with transfer pricing and anti-avoidance rules. One tax practitioner from Germany pointed out that in instances where MNCs have numerous subsidiaries subject to anti-avoidance rules it generally results in more instances where income is subject to tax in two countries, thus creating additional burden to identify and track FTCs. Tax agency officials, taxpayers, and tax experts agreed that Canada’s rules for tracking foreign-source income and determining whether the income qualifies for tax exemption are complex and challenging for taxpayers and tax officials. As discussed earlier in this report, Canada’s rules for determining whether or not dividend income received from foreign subsidiaries is exempt from domestic taxation include ownership requirements, location and business activities in a treaty country, and evaluating what type of earnings (e.g., capital gains, passive income, or active income) the subsidiary is distributing as a dividend. Canadian corporations receiving dividend income that does not qualify for exemption are taxed on that income, although FTCs may be applied to offset domestic tax. Canadian corporations are responsible for tracking all foreign earnings to ensure appropriate taxation once the income is received by the Canadian corporation. Taxpayers said these rules are burdensome, in part, because they require information only available from foreign subsidiaries, complex calculations and adjustments to income based on Canadian rules, and monitoring ownership changes for the foreign subsidiary. Tax agency officials said the rules are a compliance risk because of their complexity and difficulty of validating adherence. One area identified by tax officials as a source of compliance risk in Canada is the generation of abusive FTCs to offset overall tax liability. Often termed FTC generators, these activities, for example, allow taxpayers to take advantage of definitions of debt and equity in two countries by setting up a subsidiary for the purpose of holding assets and generating an income stream in such a way that the income stream is subject to foreign tax but also receives an offsetting deduction so that there is no net foreign tax. The taxpayer then tries to claim a domestic tax credit against this foreign tax paid while ignoring the offset. Tax agency officials in Canada told us that FTC generators are considered a significant compliance risk in their country. CRA officials said they were currently auditing a number of domestic corporations to determine the extent to which Canadian companies are participating in these types of schemes. Because there is often no economic purpose to such a transaction, one company generally pays the other a fee for participating in the transaction. CRA officials said, so far, they have identified a substantial amount in avoided Canadian tax from 2001 to 2005. Several experts we spoke to with knowledge of the other study countries said they did not think FTC generators were a significant issue in those countries. For example, a tax practitioner in Germany told us that since the majority of repatriated income to Germany is tax exempt FTCs are not produced in many instances. Similarly, Australian tax agency officials said that since Australian rules require FTCs to be used immediately in the year they are recognized, it reduces the ability to exploit the FTC generator scheme. However, some experts also pointed out that there is always a possibility that taxpayers could structure specific transactions to produce improper FTCs. FTC generators are also known to be a significant problem in the United States. For example, IRS lists them as a high-risk compliance area because of the large number of taxpayers and significant dollar risk that these types of schemes present. Using sometimes indirect methods, all study countries limit the domestic deductibility of some expenses associated with earning foreign-source income. Tax experts said that methods resulted in fewer compliance risks and burdens as compared to more direct methods. The deductibility of expenses incurred to earn foreign-source income is an issue because of the effect on revenue. If domestic deductibility is allowed under an exemption system, then MNCs are able to deduct expenses even though the resulting income is not subject to domestic tax. France and Germany provide an example of an indirect approach to limiting expense deductions. As shown in table 2, they require corporations to add 5 percent of their gross tax-exempt dividends to their domestic taxable income (making dividends effectively 95 percent exempt) as an offset for deductible expenses incurred to earn the dividends. In our interviews with tax officials and members of the business community, this approach was cited as being less burdensome than tracing or allocating domestic expenses to tax-exempt income. Tracing would involve matching specific expenses to actual income generated. Some tax experts that we spoke to generally agreed that tracing would be ineffective. Many of the domestic expenses incurred by domestic corporations to invest or maintain an investment in a foreign subsidiary are general to the domestic corporation. These expenses include general management expenses, interest expense on borrowed money, and other administrative expenses. Because these expenses are general to the corporation, they are difficult to trace to the income items. One alternative to tracing, mentioned by several experts we talked to, is allocating overhead expenses to income sources according to formulas. Rather than tracing expenses to actual income items, this alternative would allocate expenses according to a rule. Although not used in our study countries, allocating overhead expenses in this way could be made less burdensome than tracing. However, some experts stated that this approach would create compliance risks and burdens that do not currently exist. Several experts pointed to the United States as an example of this. In general, the United States requires U.S. corporations to allocate their expenses to a class of gross income and then, if a statutory provision requires, apportion deductions between the statutory grouping and the residual grouping. IRS officials stated that these rules were a compliance risk because corporations sometimes do not apply them appropriately. Some tax experts said these rules were a significant compliance burden because they are complex, requiring considerable time to conduct detailed calculations. Another approach taken by all of our study countries is to limit the amount of interest expense that domestic corporations may deduct. Without limits on interest rates and amounts, corporations could shift income offshore and artificially increase domestic interest expenses, eroding the domestic tax base. The rules vary by country and in many cases apply to all corporations, not just multinationals. For example, Germany and France require that interest rates be equivalent to arm’s-length terms; the amount of expense that exceeds those terms is generally nondeductible. Germany also has a rule disallowing interest expenses that exceed 30 percent of the corporation’s adjusted earnings. Canada has a rule that targets interest paid to a foreign related-entity with a limit based on debt- to-equity ratios. With a few exceptions, tax professionals generally stated that the general types of interest expense rules described above did not pose much of a compliance burden. The approaches taken by the study countries do not disallow all domestic deductions for expenses incurred with respect to foreign-source dividend income. However, some experts thought that the indirect approaches for limiting the deductibility of overhead expenses were more administrable and less burdensome than more targeted alternatives. Australia, France, and Germany exempt active foreign-source income earned through foreign branches, but generally disallow domestic deductions for direct expenses attributable to earning the tax-exempt income. Direct expenses, like the cost of inventory, can be traced more easily to the income generated than more general expenses, like interest or other overhead costs. In addition to lacking data about compliance and compliance burden for their foreign tax rules, our study countries lack data on the amount of tax revenues generated from the foreign activities of domestic corporations. This is also the case for the United States. Several federal agencies consistently report on the business activities of U.S. MNCs, but tax revenues are not included in these reports. For example, the Bureau of Economic Analysis reports on the foreign direct investment activities of U.S. MNCs and IRS reports data on the amount of income U.S. MNCs earn through CFCs. U.S. international tax experts, including noted academics with multiple publications who we spoke to on this topic all agreed that regularly and consistently reporting U.S. tax revenue from foreign-source corporate income would be useful. They said that this information would help inform the debate about how to tax foreign-source income and potentially improve understanding of the role international tax rules play in the U.S. tax system. For example, one of these experts pointed out that it was not widely understood how little domestic revenue is actually raised from taxing foreign-source income and that the tax regime governing foreign- source income plays a role in protecting the domestic tax base. Treasury officials and the experts we talked to noted that producing regular revenue reports is feasible. A few academic papers and a recent release from the Secretary of the Treasury on international tax issues have reported estimates. However, the experts said that these reports from different sources are not as useful as they could be because they are irregular, incomplete, and lack transparency. The experts felt that consistent and transparent reporting by a reputable government source that clearly describes the methodology used to produce the numbers and any limitations would be superior to the current occasional reports that sometimes lack much explanation. IRS and Treasury officials said IRS already collects the necessary data through corporate income tax returns to make the necessary calculations. Therefore, the tax experts said there should not be significant additional cost to the government to provide this information. The United States, like our study countries, does not report the taxes collected by the United States on foreign-source income. Such basic information about the U.S. system would not be costly to provide and could contribute to the ongoing debate about the direction of U.S. policy. Such reporting would make explicit to policy makers, and perhaps to the general public as well, how little residual revenue is received by the United States from taxing foreign-source corporate income. Doing so could help highlight the important role that international corporate tax rules play in protecting the domestic tax base. We recommend that the Secretary of the Treasury use currently collected information to report annually on the revenue to the United States Treasury from taxing foreign-source corporate income. To enhance usefulness, such reports should describe the methodology and important limitations. We requested comments on a draft of this report from the Secretary of the Treasury. Treasury agreed with our recommendation. The Acting Assistant Secretary (Tax Policy)'s letter is reprinted in Appendix VI. Treasury and IRS staff also provided technical comments, which we have incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff has any questions, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in Appendix VII. The objectives of this report were to (1) describe, for select case study countries that take a territorial approach, what types of foreign-source income the countries exempt and the rules governing those exemptions; and (2) describe, to the extent information is available, the compliance risks and taxpayer compliance burdens that the taxation of foreign-source corporate income presents for each of these countries. To address our objectives, we selected five countries—Australia, Canada, France, Germany, and the Netherlands—to study based on several criteria, including range of tax treatments for foreign-source corporate income, unique tax system features, and Organization for Economic Cooperation and Development (OECD) membership. To gather information related to our selection criteria, we interviewed a number of corporate income tax experts, including academics, corporate tax practitioners, corporate taxpayers, officials at the OECD, and government officials. We contacted those experts that we identified through our literature review, which is described immediately below, along with experts that were recommended by other experts. Our literature review consisted of academic articles and books, national government publications, OECD and other multinational- organization publications on worldwide and territorial tax systems, and private sector research pertaining to various international aspects of corporate income tax systems and administration. To describe the corporate income tax systems of our study countries, we consulted with corporate taxpayers, business representatives, government tax officials, and academic experts. We performed an in-depth literature review on each country’s corporate income tax system, focusing on the rules governing international taxation. We also reviewed research-based publications produced by professional services organizations, academic experts, and international organizations. In general, we relied on information provided by tax officials from the study countries as well as published documents to summarize and characterize the corporate income tax systems for each country. We collected and analyzed data on the countries and their systems for taxing foreign-source corporate income, including tax policies, administrative mechanisms, compliance activities, and taxpayer reporting and documentation requirements. We did not conduct a formal legal review of the tax laws and rules in other countries, but relied on the information supplied by tax agency officials in those countries. We also provided the tax agency officials in our study countries a copy of our report to verify data and specific factual and legal statements about the tax laws in their country. To address our second objective, we searched for publicly available data that quantified taxpayer compliance risk and burden for each of our study countries. In addition, we interviewed tax practitioners, taxpayers, government tax officials, business representatives, and officials from the OECD. We analyzed the information gathered through interviews as well as published documents to identify and describe the common sources of taxpayer compliance risk and compliance burden across the study countries. When available, we used publicly available data obtained from governments, private sector research, and academics to support evidence provided in the interviews. In addition, we provided tax agency officials from each of the study countries with a statement of facts that were presented in the report for their review and comment. Technical corrections were made to this report based upon country responses. This report shows general tax treatments and does not present all of the details, exceptions, or rules that govern the tax treatment of foreign-source income in our study countries and the United States. We conducted our work from June 2008 to September 2009 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product. Step 1: Accurately characterize the international dealings between the associated enterprises in the context of the taxpayer’s business and document that characterization; Step 2: Select the most appropriate transfer pricing methods and document the choice; Step 3: Apply the most appropriate method, determine the arm’s length outcome and document the process; and Step 4: Implement support processes. Install review process to ensure adjustment for material changes and document these processes. Contemporaneous documentation required for cross border, related party transactions. Form T-106 required to be filed annually asks for reporting of non-arms-length transactions. Taxpayers are not required to keep any transfer pricing documentation but are expected to cooperate with the tax agency in transfer pricing audits. No formal contemporaneous documentation requirement. Documentation that shows the type and content of business transaction to related parties, including general information about (1) the group and ownership structure, (2) business relations to related parties, (3) analysis of functions and risks, and (4) transfer pricing analysis. Netherlands Documentation must show the arm’s length nature of the transfer price that was applied. Appendix III: Example from Australia of the Process for Obtaining an Advanced Pricing Agreement Step 1: Pre-lodment meetings The prpoe of pre-lodgment meeting to: ■ diuss the suitability of n APA ■ llow business to provide rod otline of the propoed trfer pricing methodology ■ diuss whether the APA will nilterl or ilter■ diuss the required docmenttion nd ly■ determine whether independent expert dvice i required ■ diuss Tx Office audit ctivity (if n APA i to flow on from audit) ■ gree on te for lodging formppliction ■ gree on the APA timetable, nd ■ diuss the process for evuating the ppliction. Pre-lodgment meeting do not ind either prty to the APA progrm. Step 2: Lodment of formal application If proceeding with the APA, business will e required to lodge formppliction. The APA ppliction hold inclde: ■ detil of the propoed trfer pricing methodology, supported y relevnt informtion ■ term nd condition governing the ppliction of the trfer pricing methodology ■ howing tht the trfer pricing methodology will prodce rm’ length result■ diussion nd ly of the criticassumption, nd ■ suggeted period of time for which the APA will pply. For ilterl APA we normlly dvie the trety prtner’authority once the ppliction has een ccepted. Step 3: Analy/evaluation We evuate the d submitted nd other relevnt informtion, nd eek dditionl informtion where necessary. We normlly hve nmerous meeting with business. Step 4: Neotiation and areement For ilterl APA, the relevnt tdminitrtion exchnge poition ppertlining the cceptability of the propoed trfer pricing methodology. A written confirmtion of the conclded greement i provided to the business. For nilterl APA, we provide written confirmtion of the greement we rech with the business. Step 5: Concluded APA A conclded APA contin t least the following informtion: ■ the trsaction, greement or rrngement covered y the APA ■ the period nd tx ye covered y the APA ■ the greed trfer pricing methodology nd the criticassumption on which it i based ■ the definition of key term tht form the bas of the methodology (for exmple, sale, operting profit) ■ if pplicable, nge of rm’ length result, nd ■ the business’ligtion as result of the APA. Table 7 provides some examples of non-controlled-foreign-corporation (CFC) anti-avoidance rules. This is not a complete list of the anti- avoidance rules in these countries. The consequences of falling under these rules are not necessarily the same as the CFC rules, but those consequences are beyond the scope of this table. Japan and the United Kingdom both adopted dividend exemption systems in 2009. These countries previously taxed dividends received from foreign subsidiaries but allowed for foreign tax credits (FTC) for foreign taxes paid. Like our study countries, Japan and the United Kingdom have specific rules used to determine whether a dividend qualifies for exemption. Table 8 describes these rules. Like the study countries, both Japan and the United Kingdom have anti- avoidance rules, including controlled foreign corporation (CFC) rules, which limit the tax advantages of earning or holding certain types of income in relatively low-tax jurisdictions. Japan revised their rules at the same time the dividend exemption system was implemented. The United Kingdom plans to address reforms to their CFC rules in future years. However, the United Kingdom did introduce a worldwide debt cap rule that limits the extent to which debt expenses can be deducted by corporations in the United Kingdom. One goal of this rule is to prevent situations in which businesses in the United Kingdom borrow excessively in order to invest internationally to produce exempt dividends. This is similar to some of the interest expense limitation rules we identified in the other study countries. In addition to the contact named above, José Oyola, Assistant Director; Brian James; Ed Nannenhorn; Danielle Novak; Chhandasi Pandya; Matthew Reilly; A.J. Stephens; and Charles Veirs IV made significant contributions to this report. Cayman Islands: Review of Cayman Islands and U.S. Laws Applicable to U.S. Persons’ Financial Activity in the Cayman Islands, an E- supplement to GAO-08-778, GAO-08-1028SP. Washington, D.C.: July 2008. U.S. Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is Reported. GAO-08-950. Washington, D.C.: August 12, 2008. Tax Administration: Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005. GAO-08-957. Washington, D.C.: July 24, 2008. Business Tax Reform: Simplification and Increased Uniformity of Taxation Would Yield Benefits. GAO-06-1113T. Washington, D.C.: Sept. 20, 2006. Understanding the Tax Reform Debate: Background, Criteria, and Questions. GAO-05-1009SP. Washington, D.C.: September 2005. Tax Administration: Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1996-2000. GAO-04-358. Washington, D.C.: Feb. 27, 2004. Tax Administration: IRS’ Advanced Pricing Agreement Program. GAO/GGD-00-168. Washington, D.C.: Aug. 14, 2000. Tax Administration: Foreign- and U.S.-Controlled Corporations That Did Not Pay U.S. Income Taxes, 1989-95. GAO/GGD-99-39. Washington, D.C.: Mar. 23, 1999. International Taxation: Transfer Pricing and Information on Nonpayment of Tax. GAO/GGD-95-101. Washington, D.C.: Apr. 13, 1995. International Taxation: IRS’ Administration of Tax-Customs Valuation Rules in Tax Code Section 1059A. GAO/GGD-94-61. Washington, D.C.: Feb. 4, 1994. International Taxation: Taxes of Foreign- and U.S.-Controlled Corporations. GAO/GGD-93-112FS. Washington, D.C.: June 11, 1993. International Taxation: Problems Persist in Determining Tax Effects of Intercompany Prices. GAO/GGD-92-89. Washington, D.C.: June 15, 1992. | A debate is underway about how the United States should tax foreign-source, corporate income. Currently, the United States allows domestic corporations to defer tax on the earnings of their foreign subsidiaries and also gives credits for foreign taxes paid, while most other developed countries exempt the active earnings of their multinational corporations' foreign subsidiaries from domestic tax. The debate has focused on economic issues with little attention to tax administration. GAO was asked to describe for a group of study countries with exemption systems: (1) the rules for exempting foreign-source income, and (2) the compliance risk and taxpayer compliance burden, such as recordkeeping, of the rules. The study countries, selected to provide a range of exemption systems, are Australia, Canada, France, Germany, and the Netherlands. For these countries GAO reviewed documents; interviewed government officials, academic experts, and business representatives; and compared tax policies, compliance activities and taxpayer reporting requirements. The study countries exempt some corporate income, such as dividends received from foreign subsidiaries, from domestic tax. However, the study countries tax other types of foreign-source income such as royalties. Multinational corporations present a compliance risk because they can use subsidiaries to convert taxable income into tax-exempt or lower taxed income, eroding the domestic tax base. Although quantitative estimates of noncompliance do not exist, tax experts interviewed by GAO identified sources of compliance risk and taxpayer burden in each of the study countries. These issues, particularly the ones below, have also been identified as sources of compliance risk and burden in the United States. Transfer prices--the prices for transactions between related parties--can be manipulated to shift profits. Tax experts in the study countries said the growing importance of intangible property such as trademarks and patents is making international transactions more susceptible to transfer pricing abuse. In response, the study countries have all increased their scrutiny of transfer prices, including increased demands for documentation and more audits, resulting in increased compliance burden for taxpayers. Cooperative efforts between taxpayers and tax agencies to reduce audits, such as Advanced Pricing Agreements, received mixed reviews in the study countries. Anti-avoidance rules prevent taxpayers from moving passive income (interest and royalties are often passive income) to a foreign subsidiary in order to avoid domestic tax. Generally, the rules make such passive income, even if moved, taxable. Tax agencies and taxpayers reported difficulties in obtaining information from other countries to make complex determinations about whether the anti-avoidance rules apply or not. The United States does not report taxes paid on foreign-source income. Treasury officials said it would be feasible to do so. Such reporting would make more explicit the role international tax rules play in raising revenues and protecting the domestic tax base. All experts we spoke with on this topic agreed. |
The Homeland Security Act of 2002 established DHS and gave the agency responsibility for visa policy. Specifically, the act granted DHS the authority to issue regulations on, administer, and enforce the Immigration and Nationality Act and other immigration and nationality laws relating to the functions of U.S. consular officers in connection with the granting and denial of visas. Section 428 of the act also authorized DHS to immediately assign personnel to Saudi Arabia to review all visa applications prior to final adjudication, and authorized DHS to assign officers to other locations overseas to review visa applications. Section 428 designated the following functions for DHS officers assigned overseas: 1. provide expert advice and training to consular officers regarding specific security threats relating to the adjudication of individual visa applications or classes of applications, 2. review visa applications either on the initiative of the employee of the department or at the request of a consular officer, or other persons charged with adjudicating such applications, and 3. conduct investigations with respect to consular matters under the jurisdiction of the Secretary of Homeland Security. DHS designated ICE to handle the operational and policy-making responsibilities outlined in section 428 in January 2004. Subsequently, ICE established the Office of International Affairs and gave it responsibility for overseeing the Visa Security Program. Figure 1 shows the organization of the Visa Security Program within DHS. Since the establishment of the Visa Security Program, ICE and State have issued four primary forms of guidance governing VSP operations overseas: (1) a 2003 memorandum of understanding (MOU) concerning implementation of the Homeland Security Act; (2) a 2004 MOU on administrative aspects of assigning personnel overseas; (3) a 2008 cable directing State Bureau of Diplomatic Security (DS) officers, VSP agents, and the senior consular officer at each post to develop standard operating procedures; and (4) a 2011 MOU delineating the roles and responsibilities of VSP agents, consular officers, and diplomatic security officers in daily operations of VSP at posts overseas. 2003 MOU. In 2003, DHS and State issued a memorandum of understanding to govern the implementation of section 428. In accordance with the legislation, the memorandum outlined the following responsibilities of DHS officers assigned to posts overseas to perform visa duties: Advising and training consular officers. DHS employees are to provide expert advice to consular officers regarding specific security threats relating to visa adjudication and provide training to consular officers on terrorist threats and detecting applicant fraud. Reviewing visa applications. DHS employees have the authority to review visa applications on their own initiative or at the request of consular officers, and provide input on or recommend security advisory opinion requests. Conducting investigations. DHS employees are authorized to conduct investigations on consular matters under the jurisdiction of the Secretary of Homeland Security, as well as conduct and support investigations under other DHS authorities. 2004 MOU. In 2004, ICE and State signed a MOU on administrative aspects of assigning personnel overseas. Among other things, this MOU described administrative support, security, facilities, security awareness training, and information systems for VSP personnel. 2008 cable. In 2008, State issued a cable in which ICE and State directed VSP posts to develop standard operating procedures. The cable stated that these standard operating procedures should include, but not be limited to, clearance procedures for cables and other correspondence; dispute resolution practices; specific coordination procedures among the fraud prevention unit, VSP agents, and the regional security officer; procedures for determining case selection; specific hours of operation and other coordination issues; stating how electronic reviews will be conducted and documented; stating how physical reviews will be conducted and documented; coordination of procedures for handling expedited or exceptional visa procedures for sharing and documenting applicant information constituting grounds for ineligibility; and procedures for VSP applicant interviews and re-interviews. 2011 MOU. On January 11, 2011, ICE and State issued a MOU that explains the roles, responsibilities, and collaboration of VSP agents, consular officers, and diplomatic security officers in daily operations of VSP at posts overseas. The MOU outlines the following, among other things: general collaboration between ICE and State for VSP operations; roles and responsibilities of VSP agents and consular officers and routine interaction between the officers and agents; development of formal, targeted training and briefings by VSP agents for consular officers and other U.S. government officials at post; clarification of the dispute resolution process; and collaboration between diplomatic security officers and VSP agents on visa and passport fraud investigations. The review of visa applications by VSP agents is incorporated into the visa process at overseas posts where the VSP is located. After consular officers interview an applicant and review the relevant supporting documentation, they make a preliminary determination about whether to issue or refuse the visa or refer the case to Washington for additional security clearances. The VSP agents screen the applicant information against DHS’s Treasury Enforcement and Communications System (TECS) database to identify applicants that potentially match records of individuals who are known threats to the United States. The VSP age nts then perform a vetting process on a smaller number of applications, base upon a threat-based targeting plan. During vetting, the VSP agents perf checks against additional law enforcement and other databases, a review the applications and supporting documentation for evidence o fraud or misrepresentation, indicators of potential national security risks, criminal activity, and potential illegal immigration risks. During the review, the VSP agents may also consult consular officers and other la enforcement officials as needed. On the basis of these reviews, the VSP agents will either agree with the consular officer’s original decision or recommend refusal of the visa. The consular officer decides to issue or deny the visa. a case, a dispute resolution process is started to render a final determinatio If the consular section chief and the VSP agents disagre n of the application. Several other agencies stationed overseas have roles in the visa process. For example, State regional security officers assist the consular section by investigating passport and visa fraud detected through the consular officers’ reviews of visa applications and supporting documents. In addition, officials from the Federal Bureau of Investigation overseas can assist consular officers when questions about an applicant’s potential criminal history arise during adjudication. DHS’s Bureaus of Citizenship and Immigration Services and Customs and Border Protection have responsibility for some immigration and border security programs overseas. For example, consular officers may seek advice from these officials on issues such as DHS procedures at U.S. ports of entry. Prior to adjudication, every visa application undergoes biometric and biographic clearances against several databases, including Facial Recognition, Consular Lookout and Support System, and Terrorist Screening databases. ICE’s 5-year plan for expanding the VSP, which ICE released in consultation with State in 2007, states that global visa risk is substantial and that the VSP must be expanded in order to mitigate threats identified through the visa process and to address visa risk. The plan also includes the following principles to guide the program’s expansion: concentrate expansion on risk by deploying personnel sooner to the develop a global capacity by expanding to select high-risk posts in diverse cover the highest-risk visa activity while incorporating dynamic conditions such as funding, personnel, and logistical issues such as the availability of space. The 5-year plan also includes the following site selection methodology to inform the expansion process: Initial quantitative risk analysis. ICE and State developed a list of 216 visa-issuing locations that are ranked according to risk. The underlying analysis incorporates information on terrorist activity, DHS enforcement and removals, host government circumstances, corruption, visa activity, and several other factors. Interagency and interdepartmental consultation. Throughout the site selection process, ICE coordinates with State, law enforcement and intelligence communities, and other components of DHS. This coordination helps to establish mutual understanding among interested parties and to inform and refine the decision-making process. Site assessments. ICE selects a smaller number of locations for on-site assessments to further improve communication and gather information about local conditions at post. Final evaluation and selection. Using all of the information gathered, ICE makes a final evaluation and selection for new VSP unit locations. Figure 2 shows a timeline for the establishment of the VSP and the expansion of the program. As of December 2010, ICE had established VSP units at 19 posts in 15 countries. For fiscal years 2007 through 2010, ICE reported that approximately $94 million in appropriated funds was allotted for the Visa Security Program. Of these amounts, in fiscal years 2009 and 2010, Congress specified that $6.8 million and $7.3 million, respectively, would remain available for 1 additional year. In fiscal year 2010, the Visa Security Program received $30.7 million in appropriated funds, and the agency requested $30.7 million in the fiscal year 2011 budget request. ICE does not maintain comprehensive performance data to accurately evaluate progress toward all VSP mission objectives. In 2007, ICE outlined three primary objectives of the Visa Security Program in its 5-year expansion plan and identified and established performance measures intended to assess performance toward the stated objectives. However, the initial VSP tracking system did not gather data on all the performance measures and mission objectives identified in the VSP expansion plan. Although ICE upgraded the VSP tracking system in April 2010 to collect additional performance data, the system still does not collect data on all the performance measures, hampering ICE’s efforts to comprehensively evaluate the performance of the VSP. While ICE can provide some examples demonstrating the success of VSP operations, ICE has not produced reports identifying the progress made toward achieving VSP objectives. In addition, data collected by ICE on VSP activities prior to 2010 were limited by inconsistencies. From 2003 to 2010, ICE did not maintain comprehensive data on its identified performance measures to fully assess progress toward VSP objectives. As we reported in 2005, ICE did not maintain data on VSP activities in order to assess the program’s performance since its establishment in 2003. In the fall of 2005, in response to GAO recommendations, ICE developed a database to track VSP workload and to serve as a performance management tool. The initial VSP tracking system, which was operational until 2010, collected information on the results of the review of visa applications by VSP agents, including tracking the number of visas screened, the number of visas vetted, and the number of visas recommended for denial by VSP agents. While the initial tracking system allowed ICE to track VSP workload and assist with performance assessment, the VSP did not establish program objectives until 2007. The Government Performance and Results Act of 1993 requires agencies to develop objective performance goals and report on their progress. In addition, GAO’s Standards for Internal Control in the Federal Government state that U.S. agencies should monitor and evaluate the quality of performance over time. ICE’s 5-year expansion plan for the VSP, issued in 2007, identified three primary mission objectives to enhance national security and public safety: 1. identify and counteract threats before they reach the United States, 2. identify not-yet-known threats to homeland security, and 3. maximize the law enforcement and counterterrorism value of the visa process. Furthermore, the expansion plan indicates that the program must measure its performance and demonstrate the value it contributes to homeland security, with mechanisms in place to adequately and accurately measure its performance. ICE identified six categories of performance measures to assess the progress toward the objectives of the program (see table 1): The VSP tracks and reports on activities through reports submitted regularly by VSP agents at overseas posts, through the activities recorded in the TECS database, and through the VSP tracking system. The VSP tracking system is used by ICE to monitor and report on performance of its VSP agents overseas. While ICE developed a VSP tracking system before the expansion plan identified the VSP objectives in 2007, ICE did not modify the system to collect data related to the performance measures and objectives in the expansion plan. The initial VSP tracking system tracked the results of one of the six identified performance measures—the number of recommendations for refusal—and the system did not track the other five performance measures (see table 1). Furthermore, the initial VSP tracking system did not collect performance data to evaluate progress toward two of its overall objectives, identifying not-yet-known threats and maximizing law enforcement and counterterrorism value. According to VSP officials, in April 2010, ICE implemented a new data tracking system intended, among other things, to better track performance, to better reflect the work performed by the VSP agents overseas, and to provide management with improved reports to better evaluate the VSP activities performed overseas. However, the new system does not collect performance data on three of the measures identified in the plan: (1) investigations opened or closed and hours spent supporting investigative activity, (2) consular and other training provided, and (3) assistance and liaison provided by VSP agents. Furthermore, while ICE has some information regarding the hours charged to VSP activities at posts, it cannot accurately determine the time VSP agents spend on non- VSP activities. An ICE official indicated that some activities are recorded outside of the VSP tracking system. For example, training for consular officers performed by VSP agents are often included in the weekly reports submitted to ICE. In addition, some of the liaison activities and assistance VSP agents provide to local law enforcement is captured in TECS and other DHS reports, such as search, arrest, and seizure reports. However, ICE does not track these activities systematically and cannot evaluate the comprehensive effort of these activities. ICE has requested upgrades to the VSP tracking system to capture additional data on training and liaison activities, but according to an ICE official, because of development delays, the system upgrades are not complete. ICE has reported on the results of some VSP activities, but these reports do not address all of the VSP performance measures and therefore do not show progress toward each of the VSP mission objectives. For example, ICE annual reports and DHS’s performance report for fiscal years 2008 to 2010 address only one of the six VSP performance measures—the number of visa applications denied because of recommendations from VSP agents. For example, ICE reported that the VSP recommended refusal of more than 900 visa applications in fiscal year 2008. ICE has presented some anecdotal examples of VSP participation in the visa process. For example, in testimony in 2009, the Assistant Secretary of ICE stated that the review of a specific visa applicant revealed information that resulted in the denial of the applicant’s visa on the basis of national security. However, because these reports do not address all VSP performance measures, they do not comprehensively show progress toward all of the VSP objectives identified in the expansion plan. According to ICE officials, the VSP reviews monthly statistical reports on the activities performed by the VSP agents at each post, which allows management to identify discrepancies in the VSP activities and eliminate potential errors in the system. According to ICE, reports and information from the VSP tracking system are routinely used to inform budget decisions as well as other resource decisions including permanent and temporary duty staffing of VSP posts. VSP data collected through the initial tracking system are significantly limited by inconsistencies. As we reported in 2005, ICE had not maintained measurable data to fully demonstrate the impact of VSP agents on the visa process. We have reported that for agencies to be able to assess progress toward performance goals, the performance measures, and the quality of the data supporting those measures, must be reliable and valid. Our analysis of VSP data collected at posts in fiscal years 2007 to 2010 identified significant limitations to the data’s reliability. For example, at one post the data recorded for the category “sum of post-adjudication: vetted” rose from 1,630 applications in fiscal year 2007 to 28,856 in fiscal year 2008, and then decreased to 2,754 in fiscal year 2009. In addition, another post recorded in fiscal year 2007 that VSP agents screened and vetted over 13,000 applicants that received security advisory opinions, but recorded zero applicants in the security advisory opinion categories in any subsequent year. ICE officials indicated that ICE did not provide guidance to the VSP agents on the proper use of the tracking system, which likely resulted in inconsistent use of the system. Furthermore, according to an ICE official, the accuracy of the data in the tracking system is contingent upon VSP agents at post entering the data and using the system consistently across all posts. ICE officials acknowledged that turnover of VSP agents at many posts likely resulted in inconsistent use of the tracking system. The Visa Security Program faces several key challenges in implementing operations at overseas posts. First, limited guidance from headquarters regarding VSP operations has led to confusion and inconsistency among posts. Both VSP and consular officials indicated that ICE and State have issued limited official guidance about how VSP agents, consular officers, and DS officials should interact with one another at post or resolve disputes concerning specific visa applications. Second, VSP agents’ advising and training of consular officers, as mandated by section 428 of the Homeland Security Act, varies from post to post, and some posts provided no training to consular officers. Third, VSP agents perform a variety of investigative and administrative functions beyond their visa security responsibilities, including criminal investigations, attaché functions, and regional responsibilities. Fourth, ICE’s use of 30-day temporary duty assignments has created challenges and affected continuity of operations at some posts. Last, ICE does not provide language or country-specific training for its agents serving overseas, thereby limiting agents’ ability to conduct interviews and coordinate with host country officials. Some VSP posts reported difficulties in the interactions between VSP agents and consular officers at post, and ICE and State had provided limited guidance in this regard. During our visits to several posts in 2010, both VSP agents and consular officers at several posts we visited indicated that difficulties arose from confusion surrounding the VSP-consular relationship. For example, a consular official at one post stated that he does not know how to interact with the VSP agents or what to do with the information VSP agents provide on visa applicants, particularly when that information is insufficient to render an applicant ineligible for a visa. This official suggested State’s Visa Office provide yearly guidance on the VSP- consular relationship and instructions on how to use information from the VSP tracking system reports. At another post, disagreement over how the consular section should share information with law enforcement agencies at post led to significant tension between VSP agents and DS officials. One consular official at this post stated that tension between VSP agents and DS officials at post sometimes prevents the consular section from receiving information in a timely manner. At a third post, the Consular Chief stated that VSP agents and consular officials rarely interacted with one another and that visa applications sometimes “disappeared” in the VSP unit. Consular officers at this post stated they did not understand the VSP’s mission. ICE had issued limited guidance for VSP-consular interaction. ICE guidance, including the 2003 joint DHS-State MOU and the 2008 cable, does not explicitly address VSP-consular interaction at posts. The 2003 MOU states that DHS, in consultation with State, will develop policies and procedures for DHS employees’ overseas functions, but does not detail such policies. The 2008 cable directs VSP posts to develop standard operating procedures for a number of operational areas requiring interaction among VSP, consular officers, and DS officials, such as chain of command, dispute resolution practices, specific coordination procedures between VSP agents and State officials at post, and case selection procedures. However, the cable does not include guidelines for such procedures. The most recent ICE-State MOU, issued in January 2011, addresses roles, responsibilities, and collaboration at VSP posts abroad. Specifically, the new MOU provides additional information on routine interaction between VSP agents and consular officers at post. For example, it indicates that interviewing officers can request VSP screening prior to an interview, VSP can request cases to be put on hold for additional investigation, and the consular chief may ask VSP to expedite cases. Most of the VSP posts had not developed written standard operating procedures as recommended by the 2008 ICE-State cable. Two of the 13 posts had developed written standard operating procedures, but those procedures did not include all of the components identified in the 2008 cable. Nine of the 13 consular sections and 13 of 13 VSP units reported having developed informal standard operating procedures, but the scope and content of these procedures varied widely. VSP agents at 1 post told us that they were waiting for the issuance of the 2011 MOU before developing standard operating procedures and hoped that the MOU would provide additional operational guidance. At 1 post, VSP agents said that they had declined to develop standard operating procedures with the consular section and told consular officials that headquarters did not want them to develop “post-specific” standard operating procedures. The 2008 cable issued by ICE and State—intended to address consular concerns about the VSP, according to VSP officials—recommends that VSP posts develop standard operating procedures. The 2008 cable also directs regional security officers and VSP agents to work with consular officers to establish post-specific procedures to manage fraud investigations that comply with the 2003 MOU. However, VSP officials told us that they later instructed VSP agents to postpone development of post- specific standard operating procedures pending completion of the new MOU with State. The 2011 MOU states that ICE and State may develop post-specific standard operating procedures or other agreements regarding VSP operations, adding that these procedures may further refine, but must remain consistent with, the roles, responsibilities, and collaboration described in previous guidance. At posts that had developed standard operating procedures, consular officers stated that these procedures had improved the VSP-consular relationship. For example, a VSP agent at 1 post developed standard operating procedures with both the consular section and DS officials. The standard operating procedures at this post address the timing of VSP screening and vetting activities, how much time those activities will take, and points of contact in each agency. One VSP agent at this post described the process of developing these standard operating procedures as “painless,” and the Consular Chief at post indicated that the VSP agents’ reviews of visa applications were helpful because they provided a second review of visa applicants. In addition, a State official at another post that had developed standard operating procedures stated that having written guidance is crucial to a good relationship and valuable for new consular officers. Although the Homeland Security Act requires DHS to advise and train consular officers, VSP agents’ training and advising of consular officers varies among posts. Section 428 of the Homeland Security Act directs VSP agents to provide “expert advice and training to consular officers regarding specific security threats relating to the adjudication of individual visa applications or classes of applications.” In addition, the 2003 and 2011 MOUs also state that VSP agents will provide training to consular officers. Five of the 13 consular sections we interviewed stated that they had received no training from the VSP agents in the last year, and none of the VSP agents we interviewed reported providing training on specific security threats. At posts where VSP agents provided formal training for consular officers, topics covered included fraudulent documents, immigration law, human smuggling, and interviewing techniques. In addition, 6 of the 13 VSP agents interviewed provided introductory briefings to new consular officers during the past year, but the VSP agents at the other 7 posts did not provide these briefings. VSP agents at 3 posts stated that they do not have time to deliver advice and training to consular officers. At 1 post, VSP agents refused to allow consular officers to observe VSP screening and vetting activities on the ground that they did not have a law enforcement “need to know.” At the embassy in Riyadh, consular officers generally agreed that the VSP agents do not provide advice and training and are not proactive in developing such programs. Additionally, Riyadh consular officers stated that the VSP agents do not advise them on the security situation, current trends, or types of information to collect to assist the agents. During our site visits and interviews, consular officers at several posts stated that they do not understand either the VSP’s mission, or what the VSP agents do, or what types of information they collect. Officers at 6 of 13 consular sections interviewed requested additional training on the VSP’s procedures and activities. For example, in Riyadh, consular officers generally agreed that greater knowledge of VSP activities would inform their interviews of visa applicants. At 1 post the VSP agents provided lunchtime briefings on patterns or trends with implications for visa issuance, as well as an orientation for all new consular officers and allow consular officers to observe screening and vetting activities. The Consular Chief at this post stated that the training was very useful to consular officers and provided a better appreciation for how the VSP operates. Although ICE and State have developed formal and informal procedures for resolving disputes about specific visas, both VSP and consular officials stated that these procedures are sometimes insufficient for resolving such disputes. Disagreement between VSP and consular officials about specific visa applications is generally infrequent, and posts usually resolve these disputes through informal discussions between VSP and consular officials. However, 4 of 6 posts we visited reported disagreements about specific visa cases that could not be resolved informally at the post, and that in some cases, unresolved disputes have led to tension at post. ICE and State officials told us that the two agencies sometimes have different interpretations of visa law, such as criteria for ineligibility based on “fraud or misrepresentation” or “crimes of moral turpitude.” VSP officials also told us that they sometimes disagree with consular officials as to what degree of “association” with a terrorist is sufficient to render an applicant ineligible for a visa. Further, according to State officials, ICE and State have differing understandings of the VSP’s jurisdiction under the Homeland Security Act. Although the 2003 MOU outlines a dispute resolution mechanism, both ICE and State officials told us in May 2010 that this mechanism is not sufficient. The 2003 MOU states, “If the chief of section or supervisory consular officer does not agree that the visa should be refused or revoked, the post will initiate a request for a security or other advisory opinion and the DHS employee will be consulted in its preparation.” The MOU goes on to state that no advisory opinion will be issued thereafter without the full consultation of State and DHS. However, both VSP and consular officials told us that this process has not always worked well in practice and that security advisory opinions sometimes do not result in the resolution of the dispute. According to ICE and State officials, because the Secretary of Homeland Security has not delegated authority to refuse visas under section 428 of the Homeland Security Act, any irreconcilable dispute about a visa application ultimately must be elevated to the Secretary level for final resolution. ICE and State officials stated that to supplement this process, ICE and Consular Affairs officials at headquarters have sometimes used other informal methods to reach agreement on the adjudication of a visa. For example, ICE and State tried to resolve disagreements at the unit chief level when possible. The 2011 MOU addresses some of these issues by specifying that posts can raise disputes to the Managing Director of the Visa Office and the Assistant Director of ICE Homeland Security Investigations–International Affairs and, subsequently, to the State Assistant Secretary for Consular Affairs and the Director of ICE. In some cases, VSP agents’ performance of activities unrelated to visa security has limited their ability to carry out visa security activities. VSP agents perform a variety of investigative and administrative functions in addition to their visa security workload, such as conducting nonconsular investigations, serving as ICE’s official presence in the region, and performing the duties of DHS attachés. According to ICE officials, VSP agents perform non-VSP functions only after completing their visa security screening and vetting workload. However, both VSP agents and State officials at some posts told us that these other investigative and administrative functions sometimes slow or limit VSP agents’ visa security- related activities. Existing guidance for VSP agents’ performance of other non-VSP functions is limited. Section 428 of the Homeland Security Act states that one of the functions of VSP employees assigned to overseas posts is to conduct investigations with respect to consular matters under the jurisdiction of the Secretary of Homeland Security. For example, VSP agents may uncover and follow up on leads as a result of their screening and vetting activities. While the 2003 MOU between DHS and State states that DHS employees may conduct investigations with regard to consular matters under the jurisdiction of the Secretary of Homeland Security, those officials shall not conduct investigations that are within the jurisdiction of the Bureau of Diplomatic Security or the State Inspector General. Furthermore, VSP agents have the same position description as other ICE agents and have the authority to perform a wide range of tasks unrelated to visa security, including the ability to investigate a wide range of cases within ICE’s jurisdiction. For example, VSP agents pursue cases related to bulk cash smuggling or human rights violations. According to ICE officials, ICE has not issued formal guidance that dictates how VSP agents should spend their time. ICE officials told us that, in some cases, requests to VSP agents come directly from other agencies, not from ICE itself. The 2011 MOU states that the primary responsibility of VSP agents is visa security. However, the 2011 MOU acknowledges that ICE personnel perform functions of regional or worldwide scope related to the post where they are assigned and that VSP agents may be called upon to perform other functions in support of the consulate. ICE officials told us that, at most Visa Security Program posts, the VSP units represent the only ICE presence at post, and that some VSP agents have ICE responsibilities for other countries in the region. ICE officials told us that VSP agents are frequently tasked with collateral requests to assist other ICE offices with investigations. For example, as part of an ongoing investigation into a U.S.-hosted Web site, one VSP agent assisted in the arrest of two individuals who were producing and distributing child pornography. VSP agents are also tasked with a variety of attaché functions, including serving as the liaison between ICE and other U.S. government agencies. For example, as the only DHS representative in Saudi Arabia, the VSP in Riyadh is also responsible for supporting the Coast Guard, Transportation Security Administration, official visitors, and detention and removal operations. In addition, the regional responsibilities of the VSP agent may require the agent to work on other investigations or respond to collateral requests in other countries in the region. At one post, VSP agents told us that these responsibilities were essentially nominal and involved very little additional work. In Riyadh, these regional responsibilities involved frequent travel throughout the region to perform other investigations. ICE officials told us that agents pursue these other investigations only after completing Visa Security Program responsibilities. However, consular officers at some posts told us that these additional investigations interfered with completion of visa security work and made ICE agents less available to consular officers. For example, at one post, the VSP agent told us he was sometimes unable to complete his screening and vetting activities because of other ICE responsibilities. At another post, VSP agents worked alongside other ICE agents, and the VSP agent at this post told us he focused primarily on visa security work. In our interviews, VSP agents’ estimates of the amount of time spent on nonvisa requests and investigations ranged from 5 percent to 40 percent. ICE does not track the time VSP agents spend on both its visa security activities and its nonvisa requests and investigations. While the VSP expansion plan identifies the hours spent performing investigations as a performance measure, ICE can not accurately determine the amount of time that VSP agents spend on investigative and visa security activities, as its systems do not distinguish between the time VSP agents and other ICE officials spend on investigations at post. Furthermore, the VSP tracking system does not collect data on the time VSP agents spend on visa security activities. ICE cannot identify the time VSP agents spend on visa security operations or on the other investigation and attaché functions performed by VSP agents stationed overseas. VSP agents’ additional investigations also overlap with consular and DS investigations at some posts, leading to confusion in the consular section. According to the 2008 joint ICE-State cable to VSP posts, VSP agents’ responsibility to identify the potential exploitation of the visa process by terrorists frequently overlaps the responsibilities of consular units investigating fraud and criminal investigations. According to one State official, all three units have a general understanding of their respective jurisdictions but sometimes interpret these jurisdictions differently. Generally, consular fraud investigations begin with consular officers, who check for fraudulent documentation and application information. When consular officers notice organized fraud activity, they refer the case to the post’s Fraud Prevention Unit. When this organized activity is criminal, the post’s DS office launches an investigation. When the activity is terrorism- related, the post’s VSP agents investigate. However, some posts we visited had experienced tension between VSP agents and other law enforcement agency officials at post. For example, at one post, the VSP agents and DS officials disagreed about whether the VSP agent had authority and responsibility to conduct investigations locally. Consular officials at another post wanted a DS officer to serve as a liaison between VSP and the consular section. The 2011 MOU describes the types of cases that fall under the jurisdiction of diplomatic security investigators and VSP agents, and states that cases that fall under the responsibility of both parties will require the officials to notify each other. Staffing shortages, and a reliance on temporary duty VSP agents to fill such shortages, have led to difficulties at some posts. Consular officers at 3 of 13 posts we interviewed discussed challenges caused by this use of temporary duty agents. For example, the VSP unit in Riyadh used two temporary duty agents per month in fiscal year 2009 and one temporary duty agent per month in fiscal year 2010. Although ICE officials indicated that the VSP filled its positions in Riyadh as of December 2010, both VSP and consular officials stated that this reliance on temporary duty agents affected continuity of operations. One consular official pointed to a “severe lack of coverage” for consular operations in Riyadh, because the unit was not fully staffed and relied on temporary duty agents. Consular officers stated that agents in Riyadh are rarely available to answer questions and that the value of these temporary duty agents was limited, because it took them several weeks of their 30-day tour to learn VSP policies and procedures. Additionally, consular officers stated that temporary duty agents’ grounds for recommending refusal of visa applications were sometimes inconsistent or insufficient. Lack of staff at VSPs in Jeddah and Dhahran also created delays and forced consular officers to re-adjudicate cases because VSP agents delayed an application beyond the point where consular “name checks” of applicants expire. According to one VSP official, reliance on temporary duty agents limits continuity of operations at post. The Visa Security Program’s 5-year plan identified recruitment of qualified personnel as a challenge and recommended incentives for VSP agents as critical to the program’s mission, stating, “These assignments present significant attendant lifestyle difficulties. If the mission is to be accomplished, ICE, like State, needs a way to provide incentives for qualified personnel to accept these hardship assignments.” However, according to ICE officials, ICE has not has not provided incentives to facilitate recruitment for hardship posts. ICE officials stated that they have had difficulty attracting agents to Saudi Arabia, and ICE agents at post told us they have little incentive to volunteer for Visa Security Program assignments. ICE officials in headquarters stated that opportunities to gain international experience and earn danger pay are the primary recruitment incentives for VSP service. Additionally, according to ICE officials, some hardship posts, such as Riyadh, now allow spouses to accompany agents during their tour. However, according to an ICE official, ICE does not offer career and financial incentives for personnel at hardship posts, such as Washington, D.C.-based locality pay or priority consideration for onward assignments, which State Foreign Service Officers receive when posted at the same locations. VSP agents generally do not receive foreign language training before deployment overseas. Section 428 of the Homeland Security Act allows that, to the extent possible, VSP agents shall be provided the necessary training to enable them to perform their designated functions—reviewing visa applications, and conducting investigations on consular matters— including training in foreign languages, interview techniques, and fraud detection techniques, in conditions in the particular country where each employee is assigned, and in other appropriate areas of study. The 2003 MOU states that DHS training and assignment policies will emphasize identification or development of personnel with the ability to speak the host country language and “experience in or knowledge of the host country and extensive understanding of terrorism or other homeland security concerns in the host country.” The 2011 MOU states that whenever practical, VSP staff should receive interagency training and, prior to deployment, should undergo orientation including, if possible, appropriate specialized consultations and briefings with Consular Affairs and Diplomatic Security officers. ICE provides some training for VSP agents. ICE trains agents for Visa Security Program duties in a 3-week training course, sponsored by ICE and two other DHS divisions and conducted three times per year at the Federal Law Enforcement Training Center in Glynco, Georgia. This training includes, among other things, interview techniques, VSP systems, document examination, and terrorist trends. However, ICE does not have a program for language training and has not established language training as a requirement for VSP agents. To date, VSP agents at one post have received language training. This was because, at one post, the Chief of Mission required language training as a condition for approving the VSP’s request to send personnel to post. According to a VSP agent who received this training at the start of his deployment, language skills were “critical” because he was able to interact with host country law enforcement and conduct interviews. Both the VSP agent and Consul General at this post recommended that all VSP agents receive language training. According to ICE officials, ICE’s ability to provide language training for VSP agents is limited by budgetary constraints. Because some VSP agents serve 1- or 2-year tours, language training can be an expensive investment given the amount of time an agent would actually use this training. ICE officials told us that, when possible, they deploy ICE agents with existing language skills. ICE also indicated that self-study language training is available for VSP agents. According to some consular officers and VSP agents, VSP agents who have prior experience with immigration law may be better able to advise consular officers than officers whose training on the subject is limited to the VSP training course. For example, a consular official at one post stated that she found VSP agents with backgrounds in the former Immigration and Naturalization Service to be particularly helpful because they have extensive expertise on immigration law. All ICE agents receive basic instruction on immigration law, and ICE provides additional instruction to its agents during VSP training. One VSP agent stated he was unsure whether this training would provide sufficient expertise in immigration law for less experienced agents. VSP agents do not attend State’s Consular General training at the Foreign Service Institute, although VSP agents and consular officials at some posts stated that attending such training would be beneficial. VSP agents at several posts also expressed a desire for more frequent opportunities to share problems, techniques, and best practices with headquarters and other VSP units. Although ICE developed a plan to expand the VSP to additional high-risk visa-issuing posts, ICE has not fully adhered to the plan or kept it up to date. The VSP 5-year expansion plan, developed in 2007, identifies 14 posts for expansion between 2009 and 2010, but 9 of these locations have not been established, and ICE has not updated the plan to reflect the current situation. Furthermore, ICE has not fully addressed remaining visa risk in high-risk posts that do not have a VSP presence. ICE, with input from State, developed a list of worldwide visa-issuing posts that are ranked according to visa risk. Although the expansion plan states that risk analysis is the primary input to VSP site selection and that the expansion plan represents an effort to address visa risk, ICE has not expanded the VSP to some high-risk posts. For example, 11 of the top 20 high-risk posts identified by ICE and State are not covered by VSP. The expansion of the VSP may be limited by a number of factors—including budget limitations and objections from State officials at some posts—and ICE has not identified possible alternatives that would provide the additional security of VSP review at those posts that do not have a VSP presence. Although ICE has expanded the VSP to a total of 19 posts in 15 countries, the agency has not fully followed the 5-year expansion plan. ICE’s plan identified 14 posts for expansion in 2009 and 2010, but ICE did not establish VSP units at 9 of these 14 posts. Further, ICE officials stated that 3 locations planned for 2011 may not be opened because of budget constraints. Moreover, the expansion plan has not been updated since its release in 2007, although ICE officials said that the expansion plan will be revised in 2011. In the expansion plan, ICE notes that the locations it identifies for expansion reflect its best current assessment of the factors relevant to decision makers and that evolving variables, including changes in risk and the results of site assessments to determine the feasibility and timing of deployment, may affect, among other things, the ultimate selection of locations for VSP expansion. The plan states that ICE will continue to update its assessment of conditions based on the most current information and intelligence. A number of factors have limited the VSP’s expansion and consequently its coverage of global visa risk. According to ICE officials, expansion of the VSP has been constrained by budget limitations, difficulties in obtaining visas to certain countries, State’s mandate to reduce personnel overseas, and objections from State officials at some posts for reasons such as limited embassy space and security concerns. For example, space limitations and security concerns are currently hindering VSP’s expansion to a high-risk post of interest to ICE officials. The inability to obtain visas to another country is preventing ICE officials from conducting a preliminary site assessment at a possible expansion post in that country. ICE has not consistently located VSP units at the posts identified as highest risk and has not ensured VSP coverage for the posts without a VSP unit, leaving significant gaps in the program’s capacity to address global visa risk. The VSP expansion plan states that global visa risk is substantial and that the VSP addresses threats that could exploit the visa process. ICE, in consultation with State, ranked 216 overseas posts based upon the visa security risk posed at each location. However, 5 of the 19 established VSP units are located at posts other than the 50 posts in the top tier, or critical quartile, of the agencies’ rankings of high-risk posts. One established location ranks 70th on the list, while another ranks 86th. ICE officials explained that certain posts were opened to achieve regional coverage for other ICE activities. Moreover, of the 20 posts identified by ICE and State as highest risk, 11 do not have a VSP unit. ICE officials stated that visa risk at posts without a VSP presence is addressed through the security advisory opinion (SAO) process, which provides in-depth screening and vetting of certain visa applicants at posts worldwide, regardless of whether the post has a VSP unit. SAOs are initiated when an applicant meets certain predefined criteria or when a consular officer requests an SAO for a specific visa application. Officials from several agencies, including ICE and State, participate in certain categories of SAO reviews in Washington, D.C. However, while the SAO process can mitigate some visa risk at those locations without a VSP unit, it does not ensure the breadth of coverage provided by VSP agents through the routine screening and vetting of applicants who are not subjected to the SAO process. ICE’s expansion plan does not identify ways in which to address this lack of VSP coverage at the remaining high-risk posts it identified. However, ICE officials in headquarters indicated that they have used TECS, the primary database used by VSP agents to screen and vet visa applicants, to conduct screening and vetting domestically when a VSP unit at a post experienced computer problems or temporary personnel shortages. TECS interfaces with other law enforcement databases can be accessed by ICE officials. Similarly, one VSP agent stated that agents can perform screening and vetting for other posts in the event of a computer systems outage. In addition, ICE officials stated that they are currently developing a system that will make the screening and vetting process more automated and will provide information to consular officers in advance of the visa applicant’s interview and adjudication decision. Further, several ICE and State officials at post indicated that the screening and vetting of visa applicants could be performed domestically on a permanent basis. The Visa Security Program is intended to build additional security into the visa process by incorporating a law enforcement function at posts with the highest risk. However, the program is hampered in its efforts to strengthen visa security globally. A lack of comprehensive performance data collected since the establishment of the VSP in 2003 hinders ICE’s ability to evaluate and report on the extent to which the VSP enhances the security of the visa process. Although ICE officials state that they have made improvements to their data tracking systems, the agency cannot demonstrate the progress of the VSP prior to 2010 toward its stated objectives of enhancing public safety and national security. Furthermore, the responsibility of VSP agents to perform investigations unrelated to visa security may limit their ability to carry out visa security activities, their primary responsibility, further affecting the relationship with consular officials, and may limit the VSP’s performance and its ability to enhance national security and public safety. In addition, the VSP is not contributing to the visa process at many high-risk posts. As a result, there is a significant gap in the additional scrutiny that VSP provides in the visa process among many posts considered to be of high risk. ICE has not considered other options to strengthen security at those posts where VSP does not have a physical presence. The VSP will be limited in its goal to minimize global visa risk until DHS addresses the challenges of guidance, staffing, and data collection, and provides coverage and support to those high-risk posts without VSP agents at post. To ensure that the Visa Security Program enhances the security of the visa process at posts overseas, we recommend that the Secretary of Homeland Security take the following four actions: 1. ensure that the VSP tracking system collects reliable data on all performance measures, to allow ICE to accurately evaluate VSP performance and report to Congress on progress toward the VSP mission objectives; 2. issue guidance requiring VSP agents to provide training for consular officers as mandated by section 428 of the Homeland Security Act; 3. develop a mechanism to track the amount of time spent by VSP agents on visa security activities and other investigations, in order to determine appropriate staffing levels and resource needs for VSP operations at posts overseas to ensure visa security operations are not limited; and 4. develop a plan to provide VSP coverage at high-risk posts where the possibility of deploying agents may be limited. We provided a draft of our report to DHS and State. DHS provided written comments about the draft, which are reproduced in appendix II. State did not provide official comments on the draft. In addition, DHS and State provided technical comments, which we incorporated as appropriate. DHS agreed with our recommendation that the department issue guidance instructing VSP agents to provide training to consular officers as mandated by section 428 of the Homeland Security Act. In addition, DHS concurred with our recommendation that it develop a plan to provide coverage for posts that lack a VSP presence and indicated that it is taking steps to address this recommendation. DHS did not agree with our recommendation that it ensure that the VSP tracking system collected reliable data on all performance measures. In its written comments, DHS stated that the VSP currently captures all the required performance metrics identified in its 5-year expansion plan through the VSP tracking system and TECS. Although we acknowledge that ICE is collecting some data on the performance measures identified in the VSP expansion plan, our analysis showed that the data were not sufficient to accurately demonstrate the progress made toward the stated objectives. As we report, the 5-year expansion plan identifies six performance measures to assess VSP performance. The documents that ICE provided us indicate that ICE has collected comprehensive data on three of the performance measures, but not on the three remaining performance measures. Specifically, ICE did not provide us evidence that it collected data on the assistance and liaison activities performed by VSP. Furthermore, although ICE collects some information on the hours that VSP agents spend on investigations and the training they provided to consular officials, the VSP tracking system and TECS do not collect comprehensive data on the activities performed by all of its VSP agents abroad. Without collecting comprehensive data on the performance measures identified by ICE, DHS cannot accurately demonstrate progress toward its stated objectives of enhancing national security. Therefore we have retained our recommendation. DHS did not agree with our draft recommendation to issue operational guidance for VSP posts. DHS stated that the 2011 MOU provides general guidance for the visa process and the development of standard operating procedures. We acknowledge that the MOU between ICE and State, signed on January 11, 2011, clarifies the respective roles and responsibilities of VSP agents and consular officers at post and states that posts may develop standard operating procedures that were identified in the 2008 cable. Therefore, we are removing our draft recommendation from the report. However, although the 2011 MOU and the 2008 cable provide a basis for developing effective standard operating procedures, we remain concerned that, during our review, most posts had not developed these procedures. Only 2 of 13 posts we contacted had developed standard operating procedures as recommended in the 2008 cable. At the 2 posts that developed standard operating procedures, consular officers stated that procedures had improved the consular-VSP relationship. It is critical for DHS to encourage posts to develop standard operating procedures to improve the VSP-consular relationship and strengthen VSP operations at posts. DHS also did not agree with our recommendation to develop a mechanism to track the amount of time that VSP agents spend on visa security activities and other investigations. DHS states that ICE currently tracks case investigation hours through TECS, and that adding the metric to the VSP tracking system would be redundant. DHS’s response does not address our finding that ICE does not have a mechanism that allows the agency to track the amount of time VSP agents spend on both investigation hours and hours spent on visa security activities. Although ICE states that its system tracks case hours of its agents, we found, based on ICE documentation, that ICE cannot accurately determine the amount of time that VSP agents spend on investigative and visa security activities. First, the reports that ICE provided us show the hours ICE officials spent on investigative and noninvestigative activities, but do not distinguish between the hours logged by VSP agents and hours logged by other ICE officials at posts abroad. During our structured interviews, VSP agents indicated that the time they spent on activities other than visa security reviews ranged from 5 to 40 percent. Second, our analysis of the VSP tracking system, which is intended to track visa-related activities of VSP agents, identified significant limitations to the reliability of the data. Thus, ICE does not maintain accurate data on the time VSP agents spend on visa security activities at posts. The VSP is intended to add additional security to the visa process through the screening and vetting of visa applications by experienced law enforcement officers. Without accurate data to determine the amount of time VSP agents spend on the visa security activities, ICE will not be able to determine whether the current allocations of staffing and resources at posts are adequate to carry out the visa security reviews and thereby fulfill the VSP objective of enhancing national security and public safety. Therefore, we have not changed our recommendation. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Homeland Security and State, as well as other interested Members of Congress. 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, please contact me at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contribution to this report are listed in appendix III. To assess the ability of the Department of Homeland Security (DHS) to measure the objectives and performance of the Visa Security Program (VSP), we reviewed VSP mission objectives and performance measures identified in Bureau of Immigration and Custom Enforcement’s (ICE) 5- year expansion plan. We reviewed data from the VSP tracking system, used to collect information on daily VSP activities, and compared the data collected from the system with the measures and mission objectives identified in the expansion plan. On the basis of inconsistencies of the data from the reporting systems prior to 2010 that we identified through our analysis of the reports and confirmed with ICE officials, we determined that the data that we received were not sufficiently reliable for the purposes of this report. We also reviewed performance reports from DHS and ICE that included references to the VSP. In addition, we met with ICE officials in Washington, D.C., who manage the VSP. We also observed VSP agents at six U.S. embassies and consulates conducting their daily screening and vetting activities and using the VSP Tracking System. To identify challenges to the VSP’s capacity to accomplish its goals, we reviewed the Homeland Security Act of 2002, which authorized DHS to assign DHS employees to posts overseas to support the visa process through various functions. We also reviewed documentation including the 2003 memorandum of understanding (MOU) between DHS and the Department of State (State) governing the implementation of section 428 of the Homeland Security Act; the 2004 administrative MOU; the 2008 cable directing VSP units to develop standard operating procedures; the 2011 MOU explaining the roles, responsibilities, and collaboration of VSP agents and other officials at posts overseas; VSP’s training curriculum; and the VSP expansion plan. We met with ICE officials in Washington, D.C., who manage the VSP and State officials from the Bureaus of Consular Affairs and Diplomatic Security. We also visited six U.S. embassies and consulates with established VSP units where we interviewed and observed VSP agents, State officials from the Bureaus of Consular Affairs and Diplomatic Security, and chiefs of mission or deputy chiefs of mission. In order to allow for post-by-post comparison, we administered a set of structured interview questions to both the VSP units and consular sections in person at the six previously mentioned posts and by phone at an additional seven VSP locations. The five most recently established VSP posts, as well as one unit that underwent recent personnel turnover, were not included in our review. To examine DHS’s efforts to expand the Visa Security Program, we reviewed relevant documents such as the VSP 5-year expansion plan, which includes the mission and contributions of the program, criteria for selecting new expansion posts, cost estimates for establishing and maintaining VSP posts, and projected budget information. In addition, we reviewed the ranked list of visa-issuing posts identified by ICE, in consultation with State. We then compared the expansion plan and the ranked list of posts with the VSP’s actual expansion between 2005 and 2010. In addition, we reviewed the requests submitted by ICE to overseas posts for expansion of the program. Our interviews with ICE and State officials at 13 VSP locations worldwide and in Washington, D.C., also informed this analysis. Jess T. Ford, (202) 512-4128 or [email protected]. In addition to the contact names above, Anthony Moran (Assistant Director) and Jeff Miller, Ashley Vaughan, Dave Bieler, Katie Bernet, Amanda Miller, Mary Moutsos, Sushmita Srikanth, and Brian Egger made key contributions to this report. | Since 2003, the Department of Homeland Security's (DHS) Visa Security Program (VSP) has participated in the visa process by reviewing applications at some embassies and consulates, with the intention of preventing individuals who pose a threat from entering the United States. The attempted bombing of an airline on December 25, 2009, renewed concerns about the security of the visa process and the effectiveness of the VSP. For this report GAO assessed (1) the ability of DHS's Immigration and Customs Enforcement (ICE) to measure the program's objectives and performance, (2) challenges to VSP operations, and (3) ICE efforts to expand the VSP program. To evaluate the VSP, we reviewed VSP data, guidance, and the ICE's 5-year expansion plan. We also interviewed ICE officials, and observed VSP operations at 6 posts overseas. ICE cannot accurately assess progress toward its VSP objectives. ICE outlined three primary objectives of the VSP--identifying and counteracting potential terrorist threats from entering the United States, identifying not-yet-known threats, and maximizing law enforcement and counterterrorism value of the visa process--and established performance measures intended to assess VSP performance, including situations where VSP agents provide information that results in a consular officer's decision to deny a visa. ICE's VSP tracking system, used to collect data on VSP activities, does not gather comprehensive data on all the performance measures needed to evaluate VSP mission objectives. In addition, data collected by ICE on VSP activities were limited by inconsistencies. ICE upgraded its VSP tracking system in April 2010 to collect additional performance data, but the system still does not collect data on all the performance measures. Therefore, ICE's ability to comprehensively evaluate the performance of the VSP remains limited. While ICE can provide some examples demonstrating the success of VSP operations, ICE has not reported on the progress made toward achieving all VSP objectives. Several challenges to the implementation of the VSP affected operations overseas. DHS and the Department of State (State) have issued some guidance, including several memorandums of understanding, to govern VSP operations. However, some posts experienced difficulties because of the limited guidance regarding interactions between State officials and VSP agents, which has led to tensions between the VSP agents and State officials at some posts. In addition, most VSP posts have not developed standard operating procedures for VSP operations, leading to inconsistency among posts. Additionally, the mandated advising and training of consular officers by VSP agents varies from post to post, and at some posts consular officers received no training. Finally, VSP agents perform a variety of investigative and administrative functions beyond their visa security responsibilities that sometimes slow or limit visa security activities, and ICE does not track this information in the VSP tracking system, making it unable to identify the time spent on these activities. In 2007, ICE developed a 5-year expansion plan for the VSP, but ICE has not fully followed or updated the plan. For instance, ICE did not establish 9 posts identified for expansion in 2009 and 2010. Furthermore, the expansion plan states that risk analysis is the primary input to VSP site selection, and ICE, with input from State, ranked visa-issuing posts by visa risk, which includes factors such as the terrorist threat and vulnerabilities present at each post. However, 11 of the top 20 high-risk posts identified in the expansion plan are not covered by the VSP. Furthermore, ICE has not taken steps to address visa risk in high-risk posts that do not have a VSP presence. Although the expansion of the VSP is limited by a number of factors, such as budgetary limitations or limited embassy space, ICE has not identified possible alternatives that would provide the additional security of VSP review at those posts that do not have a VSP presence. GAO made several recommendations designed to address weaknesses we identified in the VSP. DHS concurred with the recommendations that the VSP provide consular officer training and develop a plan to provide more VSP coverage at high-risk posts. DHS did not concur with the recommendations that the VSP collect comprehensive data on all performance measures and track the time spent on visa security activities. GAO continues to maintain that these recommendations are necessary to accurately assess VSP performance. |
As we reported in January 2017, CBP electronically vets all travelers before they board U.S.-bound flights and continues to do so until they land at a U.S. port of entry. Through these vetting efforts, CBP seeks to identify high-risk travelers from the millions of individuals who travel to the United States each year. As we reported in January 2017, CBP’s vetting and targeting efforts are primarily conducted by its National Targeting Center (NTC) and entail (1) traveler data matching and analysis, (2) rules- based targeting, and (3) recurrent vetting. Specifically: CBP’s primary method of identifying high-risk individuals is through the comparison of travelers’ information (such as name, date of birth, and gender) against records extracted from U.S. government databases, including the Terrorist Screening Database (TSDB)—the U.S. government’s consolidated terrorist watch list. Traveler data matching focuses on identifying known high-risk individuals—that is, individuals who may be inadmissible to the United States under U.S. immigration law or who may otherwise pose a threat to homeland or national security. CBP’s primary tool for vetting and targeting travelers is the Automated Targeting System (ATS), which is a computer-based enforcement and support system that compares traveler information against intelligence and law enforcement data to identify high-risk travelers. Traveler data matching occurs throughout the travel process and, upon a positive or possible match, CBP officers can select these individuals for further vetting, interviewing, and inspection. CBP’s rules-based targeting efforts seek to identify unknown high-risk travelers—that is, travelers for whom U.S. government entities do not have available derogatory information directly linking them to terrorist activities or any other actions that would make them potentially inadmissible to the United States but who may present a threat and thus warrant additional scrutiny. CBP identifies unknown high-risk individuals by comparing their information against a set of targeting rules based on intelligence, law enforcement, and other information. NTC officials stated that these rules have identified potential high-risk travelers, including potential foreign fighters. Rules-based targeting evaluates travelers during the travel process and, in some cases, in advance of the travel process. If a traveler is a rule “hit,” this individual can be selected for further vetting, interviewing, and inspection. CBP supports its traveler data matching and rules-based targeting efforts through the use of recurrent vetting. NTC’s vetting, targeting, and traveler data matching activities in ATS run 24 hours a day and seven days a week and automatically scan updated traveler information, when available. This process is to ensure that new information that affects a traveler’s admissibility is identified in near real time. Recurrent vetting occurs throughout the travel process and continues until a traveler arrives at a domestic port of entry. For example, after checking into a foreign airport, a traveler may have his or her visa revoked for a security or immigration-related violation. Due to recurrent vetting, CBP would be alerted to this through ATS and could take action, as appropriate. As we reported in January 2017, throughout the travel process, CBP’s predeparture programs use the results of NTC’s efforts to identify and interdict high-risk individuals destined for the United States while they are still overseas; however, we found that CBP had not evaluated the effectiveness of its predeparture programs as a whole, including implementing a system of performance measures and baselines to assess whether the programs are achieving their stated goals. CBP operates three air predeparture programs that are responsible for all U.S.-bound air travelers—Preclearance; the Immigration Advisory Program (IAP) and Joint Security Program (JSP); and the regional carrier liaison groups (RCLG). As we reported in January 2017, CBP data indicated that these programs identified and ultimately interdicted approximately 22,000 high-risk air travelers in fiscal year 2015, the most recent data available at the time of our review. Information on individuals who the NTC identifies through traveler data matching or rules-based targeting, including recurrent vetting, is compiled automatically through ATS into a daily high-priority list, or traveler referral list. CBP officers at the NTC review the traveler referral list for accuracy and to remove, if possible, any automatically generated matches determined to not be potential high-risk individuals. After this review, CBP officers at the NTC use ATS to send the traveler referral list to officers at each Preclearance, IAP, JSP, and RCLG location, as shown in figure 2. Preclearance. Preclearance locations operate at foreign airports and serve as U.S. ports of entry. Preclearance operations began in 1952 in Toronto to facilitate trade and travel between the United States and Canada. As of January 2017, CBP operated 15 air Preclearance locations in six countries. Through the Preclearance program, uniformed CBP officers at a foreign airport exercise U.S. legal authorities to inspect travelers and luggage and make admissibility determinations prior to an individual boarding a plane to the United States. According to CBP officials, an inspection at a Preclearance location is the same inspection an individual would undergo at a domestic port of entry, and officers conducting Preclearance inspections exercise the same authority as officers at domestic ports of entry to approve or deny admission into the United States. As a result, travelers arriving at domestic air ports of entry from Preclearance locations do not have to be re-inspected upon entry. According to CBP data, in fiscal year 2015, CBP officers at Preclearance locations determined that 10,648 air travelers were inadmissible out of the approximately 16 million air travelers seeking admission to the United States through a Preclearance location. In addition to requiring that all travelers undergo a primary inspection, CBP officers in these locations also referred almost 290,000 individuals for secondary inspection. Immigration Advisory Program (IAP) and Joint Security Program (JSP). IAP and JSP operate at 9 and 2 foreign airports, respectively, as of January 2017. According to CBP officials, under this program, unarmed, plainclothes CBP officers posted at foreign airports partner with air carriers and host country government officials to help prevent terrorists and other high-risk individuals from boarding U.S.-bound flights by vetting and interviewing them before travel. According to CBP program documentation, CBP established IAP in 2004 to prevent terrorists, high- risk travelers, and improperly documented travelers from boarding airlines destined to the United States. Building on the IAP concept, CBP established JSP in 2009 to partner with host country law enforcement officials to identify high-risk travelers. CBP officers at IAP and JSP locations have the ability to question travelers and review their travel documents. They are to act in an advisory manner to the air carriers and host governments and do not have authority to deny boarding to individuals on U.S.-bound flights or fully inspect travelers or their belongings. IAP and JSP officers are authorized by CBP to make recommendations to airlines as to whether to board or deny boarding (known as a no-board recommendation) to selected travelers based on their likely admissibility status upon arrival to the United States. The final decision to board travelers, however, lies with the carriers. According to CBP data, CBP officers at IAP and JSP locations made 3,925 no-board recommendations in fiscal year 2015 for the approximately 29 million air travelers bound for the United States from such locations. During this same time period, CBP data indicated 1,154 confirmed encounters with individuals on the TSDB, including 106 on the No Fly List. Regional Carrier Liaison Groups (RCLG). RCLGs are located and operate at three domestic airports—Miami International Airport, John F. Kennedy International Airport, and Honolulu International Airport. CBP established RCLGs in 2006 to assist air carriers with questions regarding U.S. admissibility requirements and travel document authenticity. According to CBP officials, RCLGs are responsible for coordinating with air carriers on all actionable referrals from NTC on U.S.-bound travelers departing from an airport without an IAP, JSP, or Preclearance presence. Each RCLG is assigned responsibility for travelers departing out of a specific geographic location. Similar to IAP and JSP, CBP officers in RCLGs also make no-board recommendations, as appropriate, to air carriers. CBP officers at RCLGs do not have authority to make admissibility determinations about U.S.-bound air travelers, and the final decision to board or not board a traveler lies with the carrier. CBP officers working at the three RCLGs made 7,664 no-board recommendations in fiscal year 2015 for the approximately 59 million travelers bound for the United States from locations within the RCLGs’ spheres of responsibility. During this time period, CBP data indicated that RCLGs also reported 1,634 confirmed encounters with individuals in the TSDB, including 119 on the No Fly List. In January 2017, we reported that CBP had not evaluated the effectiveness of its predeparture programs as a whole, including implementing a system of performance measures and baselines to assess whether the programs were achieving their stated goals. We reported that CBP had taken some initial steps to measure the performance of these programs. Specifically, CBP officials told us that they had collected a large quantity of data and statistics regarding the actions of their predeparture programs and had done so since program inception for all programs. However, due to changes in operational focus, technology updates, and the use of separate data systems at program locations, CBP had not collected consistent data across all of its predeparture programs. As a result, CBP did not have baseline data on which to measure program performance. However, CBP officials stated at the time that they had updated and uniform data collection systems that were consistent across all predeparture programs, which would enable CBP to identify performance baselines from fiscal year 2015 onward. According to senior CBP officials, some of the results of these programs were not easily measured. Officials also noted that relying on data alone may not always present the most accurate picture of the true impact of predeparture programs because changes to the travel process or other factors may impact the programs in ways that are not fully captured by the data. However, on the basis of our analysis of CBP’s documentation, including official hearing statements, and interviews with program officials, we found that CBP used these data as indicators of the programs’ success. According to GAO’s Program Evaluation Guide, which articulates best practices for program evaluation, a program evaluation is a systematic study using research methods to collect and analyze data to assess how well a program is working and why. Moreover, consistent with requirements outlined in the Government Performance and Results Act of 1993 (GPRA), as updated by the GPRA Modernization Act of 2010, performance measurement is the ongoing monitoring and reporting of program accomplishments, particularly towards pre-established goals, and agencies are to establish performance measures to assess progress towards goals. Agencies can use performance measurement to make various types of management decisions to improve programs and results, such as developing strategies and allocating resources, and identify problems and take corrective action. Therefore, we recommended that CBP develop and implement a system of performance measures and baselines for each program to help ensure that these programs are achieving their intended goals. By using data from fiscal year 2015, for example, to develop initial baselines, CBP could better measure program performance towards meeting stated goals. In response, CBP established a working group to develop and implement a system of performance measures and baselines to evaluate the effectiveness of CBP’s predeparture programs. As of December 2016, the working group was gathering baseline data from fiscal year 2015 to compare with fiscal year 2016 data. In February 2017, CBP officials stated that the working group had identified potential performance measures but needs to further refine them. CBP officials stated that they expect to complete this work by the end of June 2017. The Homeland Security Act of 2002 authorized DHS to assign officers to each diplomatic and consular post at which visas are issued, and also authorized DHS to immediately assign personnel to Saudi Arabia to review all visa applications prior to final adjudication. In response, DHS implemented the Visa Security Program (VSP) in 2003, and as of March 2016, ICE had established 26 visa security units in 20 countries. VSP aims to prevent terrorists and otherwise inadmissible travelers from attempting to enter the United States by screening visa applicants before the travel process begins. When reviewing applications for visas under VSP, ICE screens applicant information to identify applicants that potentially match records of individuals who are known or suspected threats to the United States or have immigration violations or derogatory information related to their criminal histories. In accordance with the Homeland Security Act of 2002, DHS officers assigned overseas are authorized to perform the following functions: provide expert advice and training to consular officers regarding specific security threats relating to the adjudication of individual visa applications or classes of applications, review any such visa applications either on the initiative of the employee of the department or at the request of a consular officer, or other persons charged with adjudicating such applications, and conduct investigations with respect to consular matters under the jurisdiction of the Secretary of Homeland Security. In March 2011, we reported, among other things, on DHS’s efforts to expand VSP and challenges to VSP operations overseas. For example, we found that training of consular officers by VSP agents varied from post to post, with some consular officers at some posts receiving no training. Therefore, we recommended that DHS issue guidance requiring ICE to provide training for consular officers. DHS concurred and issued guidance to enhance the training of consular officers by VSP offices abroad. We also found that ICE did not gather comprehensive data on all the performance measures needed to evaluate the VSP mission objectives and that the data that ICE collected on VSP activities were limited by inconsistencies. Therefore, we recommended that ICE collect reliable data to allow it to accurately evaluate VSP performance. DHS did not concur with this recommendation and stated that VSP captured all the required performance metrics. However, as we reported, we determined that ICE was collecting some data on the required performance measures, but that the data were not sufficient to accurately demonstrate the progress made toward the program’s stated objectives. We continue to believe that without collecting comprehensive data on performance measures, DHS cannot accurately demonstrate progress of VSP in enhancing national security. In addition, we found that VSP agents performed various investigative and administrative functions beyond their visa security responsibilities, which limited their time spent on visa security activities, and ICE did not track this information in its tracking system, making it unable to identify the time spent on investigative and administrative functions. Therefore, we recommended that ICE develop a mechanism to track the amount of time its agents spent on visa security activities and other investigations to determine appropriate staffing levels and resource needs for VSP operations. DHS did not concur with our recommendation and stated that ICE tracked case investigation hours through its case management system, and that adding the metric to the VSP tracking system would be redundant. However, we found at the time, according to ICE documentation, that ICE could not accurately determine the amount of time that VSP agents spent on investigative and visa security activities because ICE did not distinguish between the hours logged by VSP agents and hours logged by other ICE officials at posts abroad and that ICE did not maintain accurate data on the time VSP agents spent on visa security activities at posts. ICE did not take action to implement these recommendations and we continue to believe that it needs to take steps to address issues we identified. We have ongoing work assessing DHS, State, and other U.S. agency efforts to strengthen the security of the visa process, including oversight of VSP, in which we plan to follow up on the findings and recommendations from our March 2011 report related to ICE’s efforts to enhance VSP performance measurement, among other things. We plan to report later this year on the results of this work. In May 2016, among other things, we reported that all 38 countries participating in the VWP had entered into the three types of required information-sharing agreements, or their equivalents, to (1) report lost and stolen passports, (2) share identity information about known or suspected terrorists, and (3) share criminal history information. However, we reported that not all countries had shared information through two of the agreements. Specifically, we reported that all VWP countries reported passport information through the first agreement, but about one-third of VWP countries were not sharing terrorist identity information through the second agreement and about one-third of the countries had not yet shared criminal history information through the third agreement. Although U.S. agencies receive law enforcement and national security information from VWP countries through other means, such as multilateral entities, the U.S. government identified the information-sharing agreements as critical for protecting the United States from nationals of VWP countries who might present a threat. For example, as we reported, information provided through HSPD-6 arrangements has enhanced U.S. traveler- screening capabilities and improved U.S. agencies’ ability to prevent known and suspected terrorists from traveling to the United States. Prior to the December 2015 enactment of the Visa Waiver Program Improvement and Terrorist Travel Prevention Act of 2015, U.S. law required VWP countries to enter into, but did not specifically require that countries implement, the information sharing agreements. DHS announced in August 2015 that it had developed a new requirement that countries implement the agreements by sharing information. However, as we reported, DHS had not specified time frames for working with VWP countries to institute this and other new VWP security requirements. In May 2016, we recommended that DHS specify time frames for working with VWP countries to institute the additional VWP security requirements, including the requirement that the countries fully implement agreements to share information about known or suspected terrorists through the countries’ HSPD-6 arrangements and PCSC agreements with the United States. DHS concurred with the recommendation and, as of April 2017, reported that officials are continuing to work with VWP countries on time frames for implementing program requirements. Chairman Gallagher, Ranking Member Watson Coleman, and Members of the Task Force, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this testimony, please contact Rebecca Gambler at (202) 512-8777 or [email protected]. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Kathryn H. Bernet, Assistant Director; Eric Hauswirth; Paul Hobart; Brandon Hunt; Hynek Kalkus; Thomas Lombardi; Sasan J. “Jon” Najmi; Erin O’Brien; Mary Pitts; and Garrett Riba. 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. | DHS seeks to identify and interdict travelers who are potential security threats to the United States, such as foreign fighters and potential terrorists, human traffickers, drug smugglers and otherwise inadmissible persons, at the earliest possible point in time. DHS also adjudicates petitions for certain visa categories and has certain responsibilities for strengthening the security of the visa process, including oversight of VSP and VWP. State manages the visa adjudication process for foreign nationals seeking admission to the United States. This statement addresses (1) CBP programs aimed at preventing high-risk travelers from boarding U.S.-bound flights; (2) ICE's management of VSP; and (3) DHS's oversight of VWP. This statement is based on prior products GAO issued from March 2011 through January 2017, along with selected updates conducted in April 2017 to obtain information from DHS on actions it has taken to address prior GAO recommendations. In January 2017, GAO reported that the Department of Homeland Security's (DHS) U.S. Customs and Border Protection (CBP) operates predeparture programs to help identify and interdict high-risk travelers before they board U.S.-bound flights. CBP officers inspect all U.S.-bound travelers on precleared flights at the 15 Preclearance locations and, if deemed inadmissible, a traveler will not be permitted to board the aircraft. CBP also operates nine Immigration Advisory Program and two Joint Security Program locations, as well as three Regional Carrier Liaison Groups, through which CBP may recommend that air carriers not permit identified high-risk travelers to board U.S.-bound flights. CBP data showed that it identified and interdicted over 22,000 high-risk air travelers through these programs in fiscal year 2015 (the most recent data available at the time of GAO's report). However, CBP had not fully evaluated the overall effectiveness of these programs using performance measures and baselines. CBP tracked some data, such as the number of travelers deemed inadmissible, but had not set baselines to determine if predeparture programs are achieving goals, consistent with best practices for performance measurement. GAO recommended that CBP develop and implement a system of performance measures and baselines to better position CBP to assess if the programs are achieving their goals. CBP concurred and has established a working group to develop such measures and baselines. In March 2011, GAO reported on the Visa Security Program (VSP) through which DHS's U.S. Immigration and Customs Enforcement (ICE) deploys personnel to certain U.S. overseas posts to review visa applications. Among other things, GAO found that ICE did not collect comprehensive data on all VSP performance measures or track the time officials spent on visa security activities. DHS did not concur with GAO's recommendations to address these limitations, stating that ICE collected data on all the required performance measures and tracked VSP case investigation hours. However, GAO continues to believe DHS needs to address these limitations. GAO has ongoing work assessing U.S. agencies' efforts to strengthen the security of the visa process, including oversight of VSP, in which GAO plans to follow up on the findings and recommendations from its March 2011 report related to ICE's efforts to enhance VSP performance measurement. In May 2016, GAO reported on DHS's oversight of the Visa Waiver Program (VWP), which allows nationals from 38 countries to travel visa-free to the United States for business or pleasure for 90 days or less. GAO reported, among other things, that all 38 countries entered into required agreements, or their equivalents, to (1) report lost and stolen passports, (2) share identity information about known or suspected terrorists, and (3) share criminal history information. However, not all countries shared such information. In August 2015, DHS established a new requirement for VWP countries to implement the latter two agreements; however, DHS did not establish time frames for instituting the amended requirements. GAO recommended that DHS work with VWP countries to implement these agreements and DHS concurred. As of April 2017, DHS reported that officials are continuing to work with VWP countries on time frames for implementing program requirements. GAO previously made recommendations to improve evaluation of CBP's predeparture programs' performance and strengthen DHS's oversight of VSP and VWP. DHS agreed with GAO's recommendations related to CBP's predeparture programs and VWP. DHS did not agree with some of GAO's recommendations related to VSP. GAO has ongoing work related to, among other things, DHS's management and oversight of VSP and plans to report later this year on the results of this work. |
Since the 1960s, geostationary and polar-orbiting environmental satellites have been used by the United States to provide meteorological data for weather observation, research, and forecasting. NOAA’s National Environmental Satellite, Data, and Information Service is responsible for managing the civilian operational geostationary and polar-orbiting satellite systems as two separate programs, called GOES and the Polar-orbiting Operational Environmental Satellites, respectively. Unlike polar-orbiting satellites, which constantly circle the earth in a relatively low polar orbit, geostationary satellites can maintain a constant view of the earth from a high orbit of about 22,300 miles in space. NOAA operates GOES as a two-satellite system that is primarily focused on the United States (see fig. 1). These satellites are uniquely positioned to provide timely environmental data about the earth’s atmosphere, its surface, cloud cover, and the space environment to meteorologists and their audiences. They also observe the development of hazardous weather, such as hurricanes and severe thunderstorms, and track their movement and intensity to reduce or avoid major losses of property and life. Furthermore, the satellites’ ability to provide broad, continuously updated coverage of atmospheric conditions over land and oceans is important to NOAA’s weather forecasting operations. To provide continuous satellite coverage, NOAA acquires several satellites at a time as part of a series and launches new satellites every few years (see table 1). NOAA’s policy is to have two operational satellites and one backup satellite in orbit at all times. Four GOES satellites—GOES-10, GOES-11, GOES-12, and GOES-13—are currently in orbit. Both GOES-11 and GOES-12 are operational satellites, with GOES-12 covering the east and GOES-11 the west. GOES-13 is currently in an on-orbit storage mode. It is a backup for the other two satellites should they experience any degradation in service. GOES-10 is at the end of its service life, but it is being used to provide limited coverage of South America. The others in the series, GOES-O and GOES-P, are planned for launch over the next 2 years. NOAA is also planning the next generation of satellites, known as the GOES-R series, which are planned for launch beginning in 2015. Each of the operational geostationary satellites continuously transmits raw environmental data to NOAA ground stations. The data are processed at these ground stations and transmitted back to the satellite for broadcast to primary weather services and the global research community in the United States and abroad. Raw and processed data are also distributed to users via ground stations through other communication channels, such as dedicated private communication lines and the Internet. Figure 2 depicts a generic data relay pattern from the geostationary satellites to the ground stations and commercial terminals. NOAA plans for the GOES-R program to improve on the technology of prior series, in terms of both system and instrument improvements. The system improvements are expected to fulfill more demanding user requirements by updating the satellite data more often and providing satellite products to users more quickly. The instrument improvements are expected to significantly increase the clarity and precision of the observed environmental data. NOAA originally planned to acquire six different types of instruments. Furthermore, two of these instruments—the Advanced Baseline Imager and the Hyperspectral Environmental Suite—were considered to be the most critical because they would provide data for key weather products. Table 2 summarizes the originally planned instruments and their expected capabilities. In September 2006, however, NOAA decided to reduce the scope and technical complexity of the GOES-R program because of expectations that total costs, which were originally estimated to be $6.2 billion, could reach $11.4 billion. Specifically, NOAA reduced the minimum number of satellites from four to two, cancelled plans for developing the Hyperspectral Environmental Suite (which reduced the number of planned satellite products from 81 to 68), and divided the Solar Imaging Suite into two separate acquisitions. The agency estimated that the revised program would cost $7 billion. Table 3 provides a summary of the timeline and scope of these key changes. NOAA’s acquisition strategy was to award contracts for the preliminary design of the GOES-R system to several vendors who would subsequently compete to be the single prime contractor responsible for overall system development and production. In keeping with this strategy, NOAA awarded contracts for the preliminary design of the overall GOES-R system to three vendors in October 2005. However, in March 2007, NOAA revised its acquisition strategy for the development contract. In response to recommendations by independent advisors, the agency decided to separate the overall system development and production contract into two separate contracts—the spacecraft segment and the ground segment. In addition, to reduce the risks associated with developing technically advanced instruments, NASA awarded contracts for the preliminary designs for five of the planned instruments. NASA subsequently awarded development contracts for these instruments and, upon completion, plans to turn them over to the prime contractor responsible for the spacecraft segment of the GOES-R program. The sixth instrument, the Magnetometer, is to be developed as part of the spacecraft contract. NOAA is solely responsible for GOES-R program funding and overall mission success. However, since it relies on NASA’s acquisition experience and technical expertise to help ensure the success of its programs, NOAA implemented an integrated program management structure with NASA for the GOES-R program (see fig. 3). NOAA also located the program office at NASA’s Goddard Space Flight Center. Within the program office, there are two project offices that manage key components of the GOES-R system. These are called the flight and ground segment project offices. The flight project office, managed by NASA, is responsible for awarding and managing the spacecraft contract and delivering flight-ready instruments to the spacecraft. The ground segment project office, managed by NOAA, oversees the ground contract, satellite data product development and distribution, and on-orbit operations of the satellites. In October 2007, we reported that NOAA had completed preliminary design studies of GOES-R, but that program costs were likely to grow and schedules were likely to be delayed. At that time, GOES-R was estimated to cost $7 billion and scheduled to have the first satellite ready for launch in 2014. However, independent studies showed that the program could cost about $2 billion more than the program’s cost estimate, and the first satellite launch could be delayed by 2 years. NOAA officials stated that they were working to reconcile the two different cost and schedule estimates. We also reported that while the program had implemented a risk management program, it had multiple risk lists that were not always consistent, and key risks were missing from the risk watch lists—including risks associated with unfilled executive positions, insufficient reserve funds for unexpected costs, and limitations in NOAA’s insight into NASA’s deliverables. Specifically, we noted that in past GOES procurements, NOAA did not have the ability to make quick decisions on problems because it lacked insight into the portions of the procurement that were managed by NASA. We recommended that the GOES-R program office manage risks using a program-level risk list and address the additional risks we identified. Over the past year, the program office has improved the integration of its risk management process and taken steps to mitigate the risks we identified. The GOES-R program has moved from the preliminary design and definition phase to the development phase of its acquisition life cycle. Program officials have awarded contracts for the five instruments, and they plan to award contracts for the spacecraft and ground segments later this year. However, the program’s cost, scope, and schedule have changed. NOAA and NASA have made progress on the GOES-R program. In January 2008, NOAA approved a key decision milestone that allowed the program to move from the preliminary design and definition phase to the development phase of the acquisition life cycle. This approval also gave the program the authority to issue the requests for proposals for the spacecraft and ground segment projects—which it did in January 2008 and May 2008, respectively. The program office plans to award the prime contract for the spacecraft in May 2009 and the contract for the ground segment in June 2009. In addition, between September 2004 and December 2007, the GOES-R program awarded contracts for the development of five key instruments. Table 4 briefly describes each of these instruments, their contract award dates, and their cost and schedule estimates, while figure 4 depicts the schedule for both the program and key instruments. The five key instruments are currently in varying stages of development. One instrument, the Advanced Baseline Imager, has experienced technical issues leading to cost overruns and schedule delays. The program office rebaselined the cost and schedule of the program in February 2007 and then rebaselined the schedule again in March 2008. Since February 2007, the contractor incurred a cost overrun of approximately $30 million and, since March 2008, the contractor has delayed $11 million worth of work. Program officials reported that they have sufficient management reserves to address the overruns experienced to date. The other instruments are still very early in development. Table 5 describes the status and risk level of each instrument. NOAA has made several important decisions about the cost, scope, and schedule of the GOES-R program. After reconciling the program office’s cost estimate of $7 billion with the independent cost estimate of about $9 billion, the agency established a new program cost estimate of $7.67 billion. This is an increase of $670 million from the previous estimate. Program officials plan to revisit this cost estimate after the spacecraft and ground segment contracts are awarded. However, agency officials, including NOAA’s Chief Financial Officer and NOAA’s National Environmental Satellite, Data, and Information Service Assistant Administrator, stated that this estimate was developed with a relatively high level of confidence and that they believe that any adjustments would be well within the $7.67 billion program budget. To mitigate the risk that costs would rise, program officials decided to remove selected program requirements from the baseline program and treat them as options that could be exercised if funds allow. These requirements include the number of products to be distributed, the time to deliver the remaining products (product latency), and how often these products are updated with new satellite data (refresh rate). Specifically, program officials eliminated the requirement to develop and distribute 34 of the 68 envisioned products, including aircraft icing threat, turbulence, and visibility. Program officials explained that these products are not currently being produced by legacy GOES satellites; they are new products that could be produced from the advanced GOES-R instruments. In addition, the program slowed planned product latency on the remaining products by as much as 10 minutes for hurricane intensity and 6 minutes for volcanic ash detection and height. It also reduced the refresh rates on these products by as much as 55 minutes for sea surface temperatures, cloud top observations, and vertical moisture profiles in the atmosphere. Program officials included the restoration of the products, latency, and refresh rates as options in the ground segment contract—items that could be acquired at a later time. NOAA also delayed GOES-R program milestones, including the dates for issuing the requests for proposals and awarding the contracts for the spacecraft and ground segments. The dates when the satellites would be available for launch have also slipped by 4 months, with the first satellite launch now scheduled for April 2015. Program officials attributed these delays to providing more stringent oversight before releasing the requests for proposals, additional time needed to evaluate the contract proposals, and funding reductions in fiscal year 2008. Table 6 identifies delays in key GOES-R milestones. Further delays in the launch of the first GOES-R satellite would run counter to NOAA’s policy of having a backup satellite in orbit at all times and could lead to gaps in satellite coverage. Specifically, in 2015, NOAA expects to have two operational satellites in orbit, but it will not have a backup satellite in place until GOES-R is launched. If NOAA experiences a problem with either of its operational satellites before a backup satellite is in orbit, it will need to rely on older decommissioned satellites that may not be fully functional. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. Satellite programs are often technically complex and risky undertakings and, as a result, they often experience technical problems, cost overruns, and schedule delays. We and others have reported on repeated missteps in the acquisition of major satellite systems, including the National Polar-orbiting Operational Environmental Satellite System, the GOES I-M series, the Space Based Infrared System High Program, and the Advanced Extremely High Frequency Satellite System. Key lessons learned from these other satellite programs include the importance of (1) ensuring sufficient technical readiness of the system’s components prior to key decisions, (2) establishing realistic cost and schedule estimates, (3) providing sufficient management at the program and contractor levels, and (4) performing adequate senior executive oversight to ensure mission success. Space programs often experience unforeseen technical problems in the development of critical components as a result of having insufficient knowledge of the components and their supporting technologies prior to key decision points. One key decision point is when an agency decides whether the component is sufficiently ready to proceed from a preliminary study phase into a development phase; this decision point results in the award of the development contract. Another key decision point occurs during the development phase when an agency decides whether the component is ready to proceed from design into production (also called the critical design review). Without sufficient technical readiness at these milestones, agencies could proceed into development contracts for components that are not well understood and enter into the production phase of development with technologies that are not yet mature. Since the late 1990s, NOAA has taken a series of steps to help mitigate technical readiness issues on GOES-R. Specifically, the agency conducted preliminary studies on the technologies to be used on the awarded contracts for the preliminary design of the planned instruments and the overall GOES-R system; awarded instrument development contracts that include provisions to develop prototypes or engineering models before the flight units for each instrument are developed; conducted a major review of the Advanced Baseline Imager before the certified that the technology for the spacecraft and ground segments was mature before awarding the contracts; removed the Hyperspectral Environmental Suite from the GOES-R series after preliminary studies showed that it was technically complex; established independent review teams responsible for assessing the program’s technical, programmatic, and management risks on an annual basis to ensure sufficient technical readiness prior to the critical design review milestone; and established processes for reviewing the maturity and readiness of algorithms for each of the products. However, key technology risks remain—affecting both the ground segment and the instruments. Specifically, while the hardware that is to be used for the ground segment is mature, key components have not previously been integrated. Consequently, if the components do not work together, the program might have to procure separate antennas, which would impact the program’s cost and schedule. The ground segment project office utilizes an integrated product team to manage and mitigate this risk and released a request for information to industry in January 2009. In addition to the ground segment risks, technical risks remain on the development of the instruments. For example, the contractor responsible for developing the Advanced Baseline Imager estimates that the instrument is over 50 percent complete and reports that it has experienced technical issues, including problems with the quality of components in the focal plane module, mirrors, and telescope. As of November 2008, the contractor incurred a cost overrun of approximately $30 million and delayed $11 million worth of work. The other instruments are earlier in their development. Since none has yet been demonstrated in a lab or test environment, the risk remains that the technologies are not sufficiently mature. The program plans to continue efforts to demonstrate technologies before key decision milestones on each instrument. In 2007, we reported that cost-estimating organizations throughout the federal government and industry use 12 key practices—related to planning, conducting, and reporting the estimate—to ensure a sound estimate. Table 7 lists these practices. The GOES-R program’s cost estimate fully implemented 11 and partially implemented 1 of the 12 best practices for developing a credible cost estimate (see table 8). The practices that were fully implemented include clearly defining the purpose of the estimate and the program’s characteristics, establishing and implementing a sound estimating approach, and appropriately assessing the risk and sensitivity of its estimate. The practice that was partially implemented involved ground rules and assumptions. The program defined and documented all of the ground rules and assumptions used in the estimate. However, an independent review team found that the assumed inflation rates used for the ground segment were overly optimistic and could lead to a shortfall of hundreds of millions of dollars. Specifically, the agency used the Department of Defense’s inflation rates rather than NASA’s historical experiences, which are more conservative. Program officials responded that the agency’s long experience in developing ground systems would balance the optimistic inflation rates and that they could adjust the inflation rates, if warranted, in later years. In the past, we have reported on poor performance in program management. The key drivers of poor management often include ineffective risk management, insufficient staff to implement earned value management, and inadequate levels of management reserve. In 2006 and 2007, we reported that, while NOAA had taken steps to restructure its management approach on the GOES-R procurement in an effort to improve performance and to avoid past mistakes, key program management areas needed additional attention. We recommended that NOAA improve the consistency of its risk management process, assess and obtain the resources it needed for overseeing the earned value of its contracts, and provide sufficient management reserves to address unexpected issues in instrument development. NOAA subsequently implemented these recommendations by streamlining its risk management processes, supplementing oversight resources, and reassessing its management reserves. Since we last reported on this issue, the program office has made additional progress in earned value management, but more remains to be done. Earned value management provides a proven means for measuring progress against cost and schedule commitments and thereby identifying potential cost overruns and schedule delays early, when the impact can be minimized. Two key aspects of this process are conducting comprehensive integrated baseline reviews and using monthly variance reports to manage the program. An integrated baseline review is a process used by stakeholders to obtain agreement on the value of planned work and to validate the baseline against which the variances are calculated. These reviews assess the technical scope of the work, key schedule milestones, the adequacy of resources, task and technical planning, and management processes; they are completed whenever a new baseline is established. Once an integrated baseline review has been completed and the project management baseline has been validated, monthly variance reports provide information on the contract status, the reasons for any deviations from cost or schedule plans, and any actions taken to address these deviations. To its credit, the GOES-R program office is using earned value management to oversee the key instrument contracts and plans to use it on the spacecraft and ground segment contracts. To date, the program office has performed integrated baseline reviews on the instruments and obtains and reviews variance reports for each of the instruments. However, there are shortfalls in the program’s approach. The program’s integrated baseline review for the Advanced Baseline Imager did not include a review of schedule milestones, the adequacy of how tasks are measured, and the contractor’s management processes. Further, the variance reports for two instruments—the Advanced Baseline Imager and the Geostationary Lightning Mapper—do not describe all of the significant variances. The imager’s reports only describe the five largest cost and schedule variances and do not include variances associated with overhead. For example, the reasons for cost and schedule variances exceeding $1 million were not disclosed in October and November 2008 cost reports. Moreover, while the reports identified problems that resulted in cost growth and schedule slippage for the five largest variances, the reports did not identify the actions taken to address them. The mapper’s reports also did not disclose the reasons for selected variances, including a $197,000 cost overrun in August 2008 and a $141,000 cost overrun in October 2008. Program officials explained that they meet with the contractor on a monthly basis to discuss all of the variances, but they were unable to provide documentation of these discussions or the reasons, impact of, or mitigation plans for the variances. As a result of these shortfalls, the program office has less assurance that key instruments will be delivered on time and within budget, and it is more difficult for program managers to identify risks and take corrective actions. Executive-level involvement is a key aspect of program success, and it is occurring on the GOES-R program. The Office of Management and Budget guidance calls for agencies to establish executive-level oversight boards to regularly track the progress of major system acquisitions. In addition, in 2007, NOAA and NASA signed both an interagency agreement and a management control plan that defined the agencies’ respective roles and responsibilities. Among other things, the agreements called for the program to provide monthly status review briefings for executives on NOAA’s Program Management Council and NASA’s Goddard Space Flight Center Management Council. Since these agreements were approved, the program has consistently briefed senior management at monthly meetings and has effectively communicated the program’s status and key risks. Additionally, key representatives of NOAA’s Program Management Council attend the NASA council’s meeting, and senior NASA executives attend NOAA’s council meetings. The Hyperspectral Environmental Suite instrument was originally planned as part of the GOES-R satellite to meet requirements for products that are currently produced by GOES satellites (such as temperature and moisture profiles at different atmospheric levels), as well as new technically- advanced products (such as moisture fluctuations and ocean color) that are not currently produced by GOES satellites. Table 9 lists the current and new products that were originally planned to be provided by the Hyperspectral Environmental Suite. NOAA still considers these requirements to be valid. According to National Weather Service meteorologists, users depend on the products that they currently receive from GOES satellites in orbit for hourly and daily weather observations. In addition, NOAA and the science community still have a need for the advanced products. NOAA had planned to use the new sounding products to improve its performance goals, such as helping to increase the lead times associated with severe thunderstorm warnings from an average of 18 minutes in 2000 to as much as 2 hours by 2025, and helping to increase the lead times associated with tornado warnings from an average of 13 minutes in 2007 to as much as 1 hour by 2025. In addition, NOAA had planned to use the new coastal waters imaging products to provide more accurate and quantitative understanding of areas along the U.S. East Coast (within 50 miles of the shore) and 130 estuaries throughout the United States—areas for which NOAA has management responsibilities. Similarly, the environmental science communities have continued to express a need for the advanced products. In 2007, the National Research Council recommended that NOAA develop a strategy to restore the planned geostationary advanced sounding capability that was removed from the GOES-R program in order to allow high-temporal and high- vertical resolution measurements of temperature and water vapor. As part of that strategy, the report recommended that NOAA work with NASA to complete a demonstration satellite in the near term. In light of the cancellation of the Hyperspectral Environmental Suite, NOAA decided to use the planned Advanced Baseline Imager to develop the products that are currently produced by the GOES satellite sounders now in orbit. In mid-2006, NOAA compared the imager’s anticipated capabilities with the legacy GOES sounder instrument and reported that the advanced imager would be able to produce the necessary data 20 times faster than the legacy sounder and with comparable or better spatial resolution. However, NOAA also reported that the advanced imager will be less accurate than the legacy sounder for four of the seven product groups. Table 10 compares the capabilities of the Advanced Baseline Imager with the legacy sounder in seven product groups. In an effort to obtain consensus from the GOES user community, NOAA briefed sounding experts on the Advanced Baseline Imager’s ability to develop products currently produced by the legacy GOES sounder. These experts included representatives from the National Weather Service; the National Environmental Satellite, Data, and Information Services; the Department of Defense’s satellite data processing centers; academia; and attendees at a weather-related conference. NOAA reported that users accepted this plan as a suitable alternative until an advanced sounder could be flown on the GOES series. NOAA noted that users were pleased with the anticipated improvements in refresh rates. While satellite data users were eager to obtain faster refresh rates, recent contract changes have since reduced these expected rates. As previously reported, when the program office reconciled its cost estimate with the independent estimate, the program removed or reduced selected capabilities from the ground segment project. One of the reduced capabilities was the refresh rates for most of the products. Instead of refresh rates that are 20 times faster, current plans call for refresh rates that are only 2 to 4 times faster than current products. The faster refresh rates are now options in the contract. In addition to efforts to address the requirements for existing products that were removed with the Hyperspectral Environmental Suite, NOAA, NASA, and the Department of Defense assessed alternatives for obtaining advanced sounding and coastal waters imaging products from a geostationary orbit. The options include placing an advanced instrument on a stand-alone satellite or on later GOES satellites. The results of the analysis recommended that NOAA work with NASA to develop a demonstration sounder to fly on an as-yet undetermined satellite in order to build a foundation for an eventual operational advanced sounder on a future GOES satellite. For coastal waters imaging, the analysis recommended that, in the near-term, NOAA evaluate a hyperspectral imager that is planned to be included on the International Space Station and that NOAA and NASA coordinate to identify and evaluate other options for the future. NOAA plans to assess the technical feasibility of various options and to have the National Research Council make recommendations on long-term options for coastal waters imaging. However, NOAA has not defined plans or a timeline for implementing any of the options or for addressing the requirements for advanced products. Further, agency officials were unable to estimate when they would establish plans to fulfill the requirements. Doing so would include justifying the funding for any new initiatives within the agency’s investment decision process. Until a decision is made on whether and how to proceed in providing the advanced products, key system users such as the National Weather Service will not be able to meet their goals for improving the lead times or accuracy of severe weather warnings, including warnings for tornadoes and hurricanes. Further, climate research organizations will not obtain the data they need to enhance the science of climate, coastal, environmental, and oceanic observations. The GOES-R satellite series is now in development, but program costs have increased, schedules have been delayed, and the scope of the program has been reduced. Unless the program exercises contract options, key benefits in terms of new products and faster data updates will not be realized. In addition, recent events make it likely that schedules will continue to slip. Any delays in the launch of the first satellite in the GOES-R program increase the risk of gaps in satellite coverage. The program office has made repeated and continuing efforts to learn from problems experienced on other satellite programs, but more can be done in selected areas. Specifically, the program has improved the technical readiness of key components, adopted many sound estimating practices, implemented an earned value management process for overseeing contracts, and is obtaining executive-level oversight. However, the program’s approach to earned value management has shortfalls. The program did not perform a comprehensive review after rebaselining a critical instrument—the Advanced Baseline Imager—and has not documented the reasons for all cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-R program will repeat the cost increases, schedule delays, and performance shortfalls that have plagued other satellite programs. In addition, while the GOES-R program office plans to recover existing product capabilities that were lost when a critical sensor was removed from the satellites, NOAA has not yet developed a plan or a timeline for recovering the advanced capabilities that were removed. Doing so would include justifying whether and how to proceed in fulfilling the advanced requirements. Until such decisions and plans are made, the geostationary satellite user community may not be able to make significant improvements in their severe weather forecasts. To improve NOAA’s ability to effectively manage the GOES-R program, we recommend that the Secretary of Commerce direct the NOAA Administrator to ensure that the following three actions are taken: As part of any effort to rebaseline the cost and schedule of the Advanced Baseline Imager, perform an integrated baseline review and ensure that the review includes an assessment of key schedule milestones, the adequacy of resources, task and technical planning, and management processes. Improve the agency’s ability to oversee contractor performance by ensuring that the reasons for cost and schedule variances are fully disclosed and documented. If feasible and justified, develop a plan and timeline for recovering the advanced capabilities that were removed from the program when the Hyperspectral Environmental Suite was cancelled. In written comments on a draft of this report, the Department of Commerce’s Acting Secretary stated that the report did a fair and thorough job of assessing the status of the GOES-R program and NOAA’s efforts to leverage lessons learned from similar programs. The department agreed with our findings and recommendations and outlined steps it is taking to implement them. For example, the department stated that NOAA will perform an integrated baseline review on the Advanced Baseline Imager, as part of any effort to rebaseline its cost and schedule, and that the GOES-R program office will ensure full disclosure of cost and schedule variances. The department also provided technical comments on the report, which we incorporated as appropriate. The department’s comments are provided in appendix II. In addition, NASA’s Associate Administrator for the Science Mission Directorate provided written comments on a draft of this report. In those comments, the Associate Administrator stated that the report is complete and accurate in its assessment of NASA’s participation in the GOES-R program. The department’s comments are provided in appendix III. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Secretary of Commerce, the Administrator of NASA, the Director of the Office of Management and Budget, 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 have any questions on matters discussed in this report, please contact me at (202) 512-9286 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) determine the status of the Geostationary Operational Environmental Satellite-R series (GOES-R) program, (2) evaluate whether the National Oceanic and Atmospheric Administration’s (NOAA) plans for the GOES-R acquisition address problems experienced on similar programs, and (3) determine whether NOAA’s plan to address the capabilities that were planned for the satellites, but then removed, will be adequate to support current data requirements. To determine the program’s status, we evaluated various programmatic and technical plans, management reports, and other program documentation. We reviewed the spacecraft and ground segment requests for proposals, cost and schedule estimates, contractor performance reports on instrument development, planned system requirements, and monthly executive-level management briefings. We also interviewed NOAA and National Aeronautics and Space Administration (NASA) officials from the GOES-R program office. To evaluate whether NOAA’s acquisition plans address problems experienced on similar programs, we identified lessons learned from other major space acquisitions by reviewing prior GAO reports and interviewing space acquisition experts. We compared these lessons learned with relevant program and contractor documents and risk lists. Key lessons were related to technical readiness, cost and schedule estimates, program management, and executive-level involvement. Specific steps in each of these areas are as follows: Technical readiness: We reviewed program, flight project, and ground segment risks, and instrument technical reviews. Cost and schedule estimates: We identified the process used to develop NOAA’s cost estimate by reviewing the program cost estimate, the Cost Analysis Requirements Document, and program cost estimate briefings. We then compared NOAA’s process with the 12 steps of a high-quality cost estimating process identified in our cost estimating guide. For each step, we assessed whether the GOES-R estimate fully met, partially met, or did not meet the practices associated with a sound cost estimate. We also interviewed government and contractor cost estimating officials. Program management: We analyzed the program’s risk management plan, risk lists, cost performance reports, and integrated baseline reviews. Executive-level involvement: We analyzed the program’s management control plan, attended NOAA and NASA executive council meetings and reviewed the program’s briefings to executives at both agencies. We also discussed these topics with appropriate agency officials. To determine the adequacy of NOAA’s plans to address the capabilities that were removed from the program, we identified the requirements for existing and advanced products that were associated with the cancelled Hyperspectral Environmental Suite instrument. We reviewed agency plans to fulfill requirements for the existing products and the analysis supporting this decision. We compared this analysis with an external scientific publication and interviewed satellite data users about the implications of plans to use the Advanced Baseline Imager to provide legacy products. To assess NOAA’s plans to fulfill requirements for advanced products, we reviewed NOAA’s analysis of options for addressing the advanced products, as well as National Research Council reports on priorities in satellite observation. We also interviewed satellite data users, including forecasters and modelers from the National Weather Service, and satellite data processing experts from the National Environmental Satellite, Data, and Information Service. We performed our work at NOAA and NASA offices in the Washington, D.C., metropolitan area. We conducted this performance audit from May 2008 to April 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Colleen M. Phillips, Assistant Director; Carol Cha; William Carrigg; Neil Doherty; Franklin Jackson; Kaelin Kuhn; Lee McCracken; Adam Vodraska; and Eric Winter made key contributions to this report. | The Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), with the aid of the National Aeronautics and Space Administration (NASA), plans to procure the next generation of geostationary operational environmental satellites, called the Geostationary Operational Environmental Satellite-R series (GOES-R). GOES-R is to replace the current series of satellites, which will likely begin to reach the end of their useful lives in approximately 2014. This series is considered critical to the United States' ability to maintain the continuity of data required for weather forecasting through the year 2028. GAO was asked to (1) determine the status of the GOES-R program, (2) evaluate whether plans for the acquisition address problems experienced on similar programs, and (3) determine whether NOAA's plan will be adequate to support current data requirements. To do so, GAO analyzed contractor and program data and interviewed officials from NOAA and NASA. NOAA has made progress on the GOES-R acquisition, but the program's cost, schedule, and scope have changed. The GOES-R program has moved into the development phase of its acquisition life cycle. It has awarded development contracts for the instruments and plans to award contracts for the spacecraft and ground segments by mid-2009. However, after reconciling program and independent cost estimates, the program established a new cost estimate of $7.67 billion--a $670 million increase from the prior $7 billion estimate. The program also reduced the number of products the satellites will produce from 81 to 34 and slowed the delivery of these products in order to reduce costs. More recently, the program also delayed key milestones, including the launch of the first satellite, which was delayed from December 2014 to April 2015. Such delays could lead to gaps in satellite coverage if NOAA experiences problems with its current operational satellites before a backup satellite is in orbit. GOES-R has taken steps to address lessons from other satellite programs, but important actions remain to be completed. NOAA has made progress in its efforts to address prior lessons by taking steps to ensure technical readiness on key components, using an acceptable cost estimating approach, implementing techniques to enhance contractor oversight, and regularly briefing agency executives. However, technical challenges remain on both the ground segment and the instruments. In addition, the program did not perform a comprehensive review after rebaselining a critical instrument, and it has not documented all of the reasons for cost overruns. Until these issues are addressed, NOAA faces an increased risk that the GOES-Rprogram will repeat the same mistakes that have plagued other satellite programs. NOAA has a plan to meet some, but not all, data requirements. An instrument that was originally planned as part of the GOES-R satellite was to meet requirements for 15 products that are currently produced, as well as 11 new, technically advanced, products. When NOAA removed this instrument from the GOES-R satellite program, it arranged to obtain the current products from another instrument. However, the agency has not developed plans or a timeline to address the requirements for the new products. Doing so would include justifying the funding for any new initiatives within the agency's investment decision process. Until a decision is made on whether and how to proceed in providing the advanced products, key system users, such as weather forecasters, will not be able to meet their goals for improving the accuracy of severe weather warnings. Further, climate research organizations will not obtain the data they need to enhance the science of climate, environmental, and oceanic observations. |
We found significant problems with the active duty pays, allowances, and related tax benefits received by the soldiers at the eight Army Reserve units we audited. The eight units we audited were: 824th Quartermaster Company – Ft. Bragg, N.C. 965th Dental Company – Seagoville, Tex. 948th Forward Surgical Team – Southfield, Mich. 443rd Military Police Company – Owings Mills, Md. FORSCOM Support Unit – Finksburg, Md. 629th Transportation Detachment - Ft. Eustis, Va. 3423rd Military Intelligence Detachment – New Haven, Conn. 431st Chemical Detachment – Johnstown, Pa. These units were deployed to help perform a variety of critical domestic and overseas combat support operations, including supply, medical, and transportation operations, as well as military police and intelligence functions. For the eight units we audited, we found numerous and varied pay problems. For those problems that we could quantify, we identified about $375,000 in errors. These problems consisted of underpayments, overpayments, and late payments that occurred during all three phases of Army Reserve mobilization to active duty. For the 18-month period from August 2002 through January 2004, we identified overpayments, underpayments, and late payments at the eight case study units estimated at $247,000, $51,000, and $77,000, respectively. Overall, we found that 332 of the 348 soldiers (95 percent) from our case study units had at least one pay problem associated with their mobilization to active duty. Table 1 shows the number of soldiers at our case study units with at least one pay problem during each of the three phases of active duty mobilization. Some of the pay problems we identified included the following. Forty-seven soldiers deployed overseas with the 824th Quartermaster Company from North Carolina improperly received hardship duty pay, totaling about $30,000, for up to 5 months after departing from their overseas duty locations. Nine soldiers of the 824th Quartermaster Company improperly received family separation allowance payments totaling an estimated $6,250 while serving at Ft. Bragg, their unit’s home station. Forty-nine soldiers with the 824th Quartermaster Company did not receive the hardship duty pay they were entitled to receive when they arrived at their designated duty locations overseas until about 3 months after their arrival. Ten soldiers with the 443rd Military Police Company had problems with their overseas housing allowance associated with their deployment in Iraq, including five soldiers who were underpaid about $2,700 and seven who did not receive their last allowance until more than 2 months after their active duty tour ended. A soldier with the 443rd MP Company who demobilized from an active duty deployment in August 2002, subsequently received erroneous active duty payments of about $52,000 through May 2004. These erroneous payments were not detected and stopped by DOD. The soldier contacted us to ask for our assistance in resolving this matter. A soldier from the 965th Dental Company who received an emergency evacuation from Kuwait as a result of an adverse reaction to anthrax and antibiotic inoculations he received in preparation for his overseas deployment, continued to receive about $2,900 in improper hostile fire and hardship duty payments after his return from Kuwait. A soldier with the 3423rd Military Intelligence Detachment did not receive an estimated $3,000 in family separation allowance payments associated with his active duty mobilization. Two soldiers received tens of thousands of dollars in active duty pays and allowances over the course of a year or more even though they never mobilized with their units. Nearly, all of the soldiers in the seven case study units that deployed overseas experienced late payments related to their combat zone tax exclusion benefit. In some cases, the problems we identified may have distracted these professional soldiers from mission requirements, as they spent considerable time and effort while deployed attempting to address these issues. Further, these problems likely had an adverse effect on soldier morale. Deficiencies in three key areas—process, human capital, and automated systems—were at the heart of the pay problems we identified. Process deficiencies included weaknesses in (1) tracking and maintaining accountability over soldiers as they moved from location to location to carry out their mobilization orders, (2) carrying out soldier readiness programs (SRPs)—primarily at the mobilization stations, (3) distributing and reconciling key pay and personnel reports during mobilizations, and (4) determining eligibility for the family separation allowance associated with active duty mobilizations. Human capital weaknesses included insufficient resources, inadequate training, and poor customer service. Finally, the automated systems supporting pays to mobilized Army Reserve soldiers were ineffective because they were not integrated and had limited processing capabilities. A substantial number of payment errors we found were caused, at least in part, by design weaknesses in the extensive, complex set of processes and procedures relied on to provide active duty pays, allowances, and related tax benefits to mobilized Army Reserve soldiers. Complex, cumbersome processes, developed in piecemeal fashion over a number of years, provide numerous opportunities for control breakdowns. We identified issues with the procedures in place for both determining eligibility and processing related transactions of active duty pay to mobilized Army Reserve soldiers. These process weaknesses involved not only the finance and military pay component of the Army, Army Reserve, and DFAS, but the Army’s operational and personnel functions as well. Mobilization policies and procedures did not provide the Army with effective accountability and visibility over soldiers’ locations to provide reasonable assurance of accurate and timely payments to mobilized Army Reserve soldiers. Reserve soldiers pass through four main transitions during the course of a typical mobilization cycle, including transitions from (1) their home stations to their designated mobilization station, (2) the mobilization station to their assigned deployment location, (3) the deployment location to their demobilization station, and (4) the demobilization station back to their home station. Soldiers’ active duty pays, allowances, and related tax benefits are closely tied to soldiers’ locations. For example, timely data regarding the dates soldiers arrive at and leave designated locations are essential for accurate and timely hardship duty pays, allowances, and related combat zone tax exclusion benefits. To effectively account for soldiers’ movements during these transitions, unit commanders, unit administrators, as well as individuals assigned to personnel and finance offices across the Army Reserves, Army mobilization stations, and in theater Army locations must work closely and communicate extensively to have the necessary data to pay Army Reserve soldiers accurately and on time throughout their active duty tours. However, we identified several critical flaws in the soldier accountability procedures in place during the period of our audit. Specifically, we identified flawed procedures for accountability over (1) soldiers that are supposed to go through processing for mobilization and demobilization, and (2) dates of soldiers’ arrival to and departure from designated hardship duty deployment locations. We found that effective procedures were not in place to monitor and validate the propriety of active duty pays to mobilized Army Reserve soldiers. The accountability controls in place at Army mobilization stations responsible for unit mobilization and demobilization processing were not effective in detecting any missing Army Reserve soldiers assigned to units passing through those locations. As a result of these control design flaws, several soldiers received up to a year of active duty pay based on issued mobilization orders, even though the soldiers never reported for active duty. Illustrative Cases: Flaws in Soldier Location Accountability Procedures Resulted in Erroneous Active Duty Payments A soldier assigned to the 965th Dental Company received a mobilization order, but based on a discussion with his commander about a medical condition, was told he would be transferred to a unit that was not mobilizing. However, the unit commander did not provide a list of the unit’s mobilizing soldiers to the UPC and did not provide any information on this soldier indicating that he would not be reporting to the unit’s mobilization station. Consequently, neither the UPC nor the mobilization station personnel had any means of detecting that a soldier had not mobilized with his unit and therefore was improperly receiving active duty pays. As a result, the soldier’s pay was started on February 11, 2003, and continued through February 2004, resulting in more than $36,000 in overpayments. This improper active duty pay was stopped only after we identified the error and notified Army officials. A soldier contacted GAO in March 2004 to inquire as to why he had been receiving active duty pay for almost a year even though, according to the soldier, he was not mobilized to active duty during that time. Subsequent inquiry determined that, at least on paper, the soldier was transferred from Maryland’s 443rd Military Police Company to Pennsylvania’s 307th Military Police Company in February 2003, and was mobilized to active duty with that unit in March 3, 2003. Applicable active duty pays and allowances for the soldier were initiated based on these March 3, 2003, orders. After the 307th Military Police Company demobilized in February 2004, the soldier’s mobilization order was revoked. Nonetheless, available pay documentation indicated the soldier continued receiving erroneous active duty pay and allowances for basic pay, and allowances for subsistence, housing, and family separation totaling an estimated $52,000 through May of 2004. Flaws in soldier accountability procedures associated with overseas deployment locations resulted in payment errors for almost all of the soldiers in our case study units. Soldiers were generally paid late or underpaid location-based incentives upon their initial arrival into designated hardship duty and hostile fire locations. Subsequently, they were often overpaid these same location-based entitlements because these payments continued, sometimes for long periods of time, after soldiers left designated overseas locations. Army local area servicing finance locations are to obtain documentation—flight manifests, for example--showing soldier arrival and departure date information to use as a basis for starting and stopping location-based pays, allowances, and associated tax benefits. However, despite diligent efforts by Army local area servicing finance officials to develop and maintain accurate documentation showing soldiers at the designated deployment locations, we found indications that this information was often not timely or accurate for the soldiers at our case study units. One of our case study units, the 443rd MP Company, relied on an extraordinary, labor-intensive workaround to ensure that necessary documentation supporting any changes in the location of the unit’s soldiers, as well as other pay-support documentation, was received by the unit’s area servicing location while the soldiers were deployed in Iraq. Individual Case Illustration: Biweekly Flights to Transmit Unit Pay Documents While deployed to guard Iraqi prisoners at Camp Cropper in Iraq, the unit commander of the 443rd Military Police Company assigned a sergeant to help address myriad pay complaints. The sergeant was deployed to Iraq as a cook, but was assigned to assist in pay administration for the unit because he was knowledgeable in DJMS-RC procedures and pay-support documentation requirements and was acquainted with one of the soldiers assigned to the unit’s servicing finance office in Camp Arifjan, Kuwait. Every 2 weeks, for about 5 months, the sergeant gathered relevant pay- support documentation from the unit’s soldiers, took a 1 hour and 15 minute flight to the Kuwait airport, and then drove an hour to the Army finance office at Camp Arifjan. The day following the sergeant’s biweekly journey to Camp Arifjan, the sergeant worked with the Army finance officials at Camp Arifjan to enter transactions into DMO, often for 8-12 hours, to get unit soldiers’ pay entitlements started or corrected, particularly hardship duty pays requiring manual input every month. These flawed procedures, which were relied on to account for Army Reserve soldiers’ actual locations and their related pay entitlements while deployed, resulted in pay problems in all seven of our case study units that deployed soldiers overseas. For example: All 49 soldiers who deployed overseas with our 824th Quartermaster Company case study unit were underpaid their hardship duty pay when they first arrived at the designated location. Subsequently, almost all solders in the unit were overpaid their hardship duty pay--most for up to 5 months--after they left the designated location, and some continued to receive these payments even after they were released from active duty. In total, we identified about $30,000 in improper hardship duty payments received by this unit’s soldiers. Seventy-six soldiers with the 965th Dental Company received improper hardship duty payments totaling almost $47,000 after they had left their hardship duty location. None of the 24 soldiers deployed with the 629th Transportation Detachment received hardship duty pay for the months they arrived and departed the hardship duty areas. In addition, they did not receive hostile fire pay for almost 3 months after their arrival at their assigned overseas deployment locations. The debts created by overpayment of these location-based payments placed an additional administrative burden on both the soldiers and the department to calculate, monitor, and collect the overpaid amounts. Some of the pay problems we found were associated with flawed procedural requirements for the pay support review, which is part of the SRP process carried out at Army mobilization stations. Procedures followed by Army mobilization station finance officials during the SRP were inconsistent with respect to what constitutes a “thorough review” of soldiers’ pay support documentation to determine if it is current and complete and has been entered into the DJMS-RC pay system. While finance officials at some mobilization stations carried out one-on-one detailed pay reviews with each soldier, as well as a unit-wide finance briefing, finance officials at other mobilization stations carried out less thorough procedures. At two mobilization stations, finance officials provided only a unit-wide briefing and did not meet individually with the soldiers to conduct a detailed review of their military pay accounts. We found far fewer pay problems (excluding location-based pays) for the soldiers who went through the individual detailed pay reviews during the SRP than the soldiers who received less thorough or no individual reviews of their pay entitlements at their mobilization stations. Design flaws in the procedures in place to obtain and reconcile key pay and personnel reports impaired the Army’s ability to detect improper active duty payments. As discussed previously, we identified several cases in which such improper payments continued for over a year without detection. The Army Reserve pay review and validation procedures were initially designed for pays to Army Reserve soldiers performing weekend drills, annual training, and short-term active duty mobilizations of 30 days or fewer. Correspondingly, pay and personnel reconciliation processes in place during our audit were focused primarily on requirements for unit commanders to reconcile data for reserve soldiers while they are in an inactive (weekend drilling only) status. Specifically, current Army Reserve procedures require that unit commanders review a key report, the Unit Commanders Pay Management Report, for soldiers in their units performing weekend drill activities, for short-term active duty mobilization activities, and in planning for lengthy active duty mobilizations. However, these procedures do not clearly require unit commanders to review this key report for Army Reserve soldiers in subsequent phases of their active duty mobilization tours. The unit commander at one of our case study units, the 965th Dental Company, stated that he did not believe that a review and reconciliation was needed. Instead, he stated he relied on the unit’s soldiers to identify any pay problems. However, in light of the extensive manual entry, and nonintegrated systems currently relied on for mobilized Army Reserve soldiers’ pay, the timely and complete reconciliation of comparable pay and personnel data in these key reports can serve as an important detective control to identify any pay errors shortly after they have occurred. In addition, Army guidance does not specify how deployed units are to receive these reports. Distribution of these reports is particularly problematic for units deployed in remote locations overseas. Unit commanders for several of our case study units stated they did not receive these key reports while deployed. Had those reports been available and reconciled, they could have been used to identify and correct improper active duty payments, such as the large, erroneous active duty overpayments discussed previously. The existing procedures for applying eligibility requirements for activated Army Reserve soldiers’ family separation allowance payments were not clear. These flawed procedural requirements for paying family separation allowance led to varying interpretations and pay errors for Army Reserve soldiers at the implementing Army home stations and mobilization stations. DOD policy clearly provides that soldiers are entitled to receive family separation allowance if their family does not reside near the duty station, which is generally defined as within 50 miles. However, DOD guidance and the form for implementing this policy were not clear because they did not provide for a determination that the soldier’s family does not live near the soldier’s duty station. Specifically, they did not require soldiers to certify that (1) they live over 50 miles away from the unit’s home station and do not commute daily, or (2) the soldier’s commander has certified the soldier’s required commute to the duty station is not reasonable. As a result, we found inconsistencies as to when soldiers received family separation allowance. For example, soldiers from the 824th Quartermaster Company received family separation allowance payments while stationed at their Ft. Bragg home station even though they lived within 50 miles of the base and no documentation was available showing the unit commander authorized an exception. In contrast, 14 soldiers with Maryland’s 443rd Military Police Company who lived over 50 miles away from their home station, including several soldiers from Puerto Rico, did not receive family separation allowance based on their arrival at their home station. Human capital weaknesses also contributed to the pay problems mobilized Army Reserve soldiers experienced in our eight case study units. Our Standards for Internal Control in the Federal Government state that effective human capital practices are critical to establishing and maintaining a strong internal control environment, including actions to ensure that an organization has the appropriate number of employees to carry out assigned responsibilities. Even in an operational environment supported by a well-designed set of policies and procedures and a world- class integrated set of automated pay and personnel systems, an effective human capital strategy—directed at ensuring that sufficient numbers of people, with the appropriate knowledge and skills, are assigned to carry out the existing extensive, complex operational requirements—is essential. Such a human capital strategy supporting accurate and timely active duty payments to mobilized Army Reserve soldiers must encompass numerous DOD components spread across the world that are now involved in carrying out the extensive coordination, manual intervention, and reconciliations required to pay mobilized Army Reserve soldiers. Well-trained pay-support personnel throughout various DOD components are particularly critical given the extensive, cumbersome, and labor- intensive process requirements that have evolved to provide active duty payments to mobilized Army Reserve soldiers. We encountered many sincere and well-meaning Army, Army Reserve and DFAS personnel involved in authorizing and processing active duty payments to these soldiers. The fact that mobilized Army Reserve soldiers received any of their entitled active duty pays, allowances, and tax benefits accurately and on-time is largely due to the dedication and tireless efforts of many of these pay-support personnel to do the right thing for these mobilized Army Reserve soldiers. However, in conjunction with our case studies, we observed the following human capital weaknesses in the current processes and organizational components now relied on to pay mobilized Army Reserve soldiers: (1) inadequate resources provided to support unit-level pay management, (2) inadequate pay management training across the spectrum of pay-support personnel, and (3) customer service breakdowns. Vacancies and turnover in key unit administrator positions, and the deployment of unit administrators to fill other military requirements, impaired a unit’s ability to carry out critical pay administration tasks that could have prevented or led to early detection of pay problems associated with our case study units. In addition to pay administration responsibilities, unit administrator duties include duties for personnel and supply operations. We were told that vacancies in unit administrator positions were difficult to fill and often remained vacant for many months because Army policy requires the individual filling the unit administrator position have a “dual” status, which means the individual must perform duties both in the capacity of an Army Reserve military occupation specialty as well as unit administrator. For example, at the 948th Surgical Team, the unit administrator position was vacant prior to and during the unit’s mobilization. We were informed that the 948th Surgical Team had difficulty filling the vacancy because of its dual status—i.e., the individual must have (1) a medical background to meet the unit’s mission requirements, and (2) knowledge and experience performing the personnel, payroll, and supply tasks of a unit administrator. In the absence of the unit administrator, the unit commander assigned a sergeant with limited knowledge of pay entitlements and DJMS-RC processing requirements to help carry out some of the unit administrator’s pay management duties. The sergeant told us that during a 2-week period during late April 2003, she spent about 100 hours attempting to resolve the unit’s pay problems, while concurrently carrying out her duties as a health specialist. In addition to concerns about the level of resources provided to support critical unit administrator positions, we identified instances in which the lack of adequate training on pay management duties and responsibilities provided to unit administrator and finance office personnel contributed to soldiers’ pay problems. Further, we found that unit commanders did not always support these important pay management duties. Our Standards for Internal Control in the Federal Government provide that management should establish and maintain a positive and supportive attitude toward internal controls and conscientious management. Several of the individuals serving as unit administrators in our case study units informed us that they had received limited or no formal training covering unit administrator pay management responsibilities and that the training they did receive did not prepare them for mobilization issues associated with supporting and processing active duty pays. Moreover, few of these unit administrators had completed all of the required training on active duty pays and allowance eligibility and processing requirements. Unit administrators have responsibility for a variety of pay-related actions, including working with the unit soldiers to obtain critical pay support documentation, maintaining copies of pay support records, providing pay- transaction support documentation to the UPC, and reviewing pay reports for errors. Without adequate training, unit administrators may not be aware of these critical pay management responsibilities. Lack of training contributed to a number of pay errors that unit administrators could have prevented: At the 824th Quartermaster unit, while our audit of unit pay reports showed that the unit administrator reviewed the documents, we saw no indication that she used this information to identify and stop an overpayment of $18,000 to one soldier in her unit. As a result, the erroneous pay was allowed to continue for another 5 months. Several soldiers with the 965th Dental Company did not receive promotion pay increases and other entitlements for over 2 months because the unit administrator failed to process necessary pay-support documentation--available at the time of unit’s initial SRP--until after the unit was deployed on active duty. At the 443rd Military Police Company, the unit’s finance sergeant who was assigned pay management responsibilities did not gather and submit current documentation needed to support active duty pays, such as documents showing soldiers’ marital status and number of dependents. As a result, soldiers from this unit experienced overpayments, underpayments, and late payments associated with their housing and cost of living allowances. Inadequate training of military pay technicians at Army finance offices at mobilization and demobilization stations, and at area servicing finance locations (for deployed soldiers), also adversely affected the accuracy and timeliness of pays to mobilized Army Reserve soldiers. Few of the military finance personnel responsible for processing pay information at the mobilization and demobilization stations and at the area servicing finance office for deployed units had formal training on DJMS-RC pay procedures. Instead, several of the military pay technicians and supervisors we talked to at the Army mobilization and demobilization stations told us they relied primarily on on-the-job training to become knowledgeable in the pay eligibility and pay transaction processing requirements for mobilized Army Reserve soldiers. For example, military pay personnel at the Defense Military Pay Office at Ft. Eustis informed us that instead of receiving formal training on active duty pay entitlements or DJMS-RC pay processing, they became knowledgeable in mobilization and demobilization pay processing procedures by processing hundreds of soldiers within 2 to 3 weeks of being assigned these responsibilities. They also said they contacted full-time civilians in the finance office, as well as UPC and DFAS officials, by telephone for assistance. Also, few of the Army finance personnel at overseas area servicing finance locations received formal training on Army Reserve pay eligibility and DJMS-RC processing requirements before assuming their duties. These personnel had primary responsibility for supporting active duty payments to mobilized Army Reserve soldiers deployed overseas, including responsibility for processing location-based active duty payments to these soldiers. Camp Arifjan was the Army location assigned responsibility for processing pay to mobilized Army Reserve soldiers deployed in Kuwait and Iraq during 2003. Officials from the 336th Command, the Army command with oversight responsibility for Camp Arifjan, confirmed that while finance personnel at Camp Arifjan received training in the pay eligibility and pay processing procedures for active duty Army soldiers, they were not adequately trained in pay eligibility and processing procedures for Army Reserve soldiers. We were told of instances in which Army finance personnel were unable to help Reserve soldiers resolve their pay problems. For example, the 948th Surgical Team contacted an Army finance unit located in Kandahar, Afghanistan, to request its assistance in resolving the unit’s pay problems. However, the finance personnel at that location were unable to help resolve the 948th Surgical Team’s pay problems because they said they had not had training in this area and were not familiar with DJMS-RC processing requirements and procedures. All 20 soldiers with the 948th Surgical unit experienced pay problems associated with their location-based hardship duty payments, which required manual processing every month by the unit’s area servicing finance office. Further, we saw little evidence that the unit commanders of our case study units received any training on their role in supporting their unit administrators in these important pay management responsibilities. For example, at one of our case study units, the 965th Dental Company, the unit commander informed us that he did not support the review of pay management reports because soldiers had the capability to review their pay online and would use this capability to identify and report any pay problems. However, as discussed earlier, while we identified numerous instances in which soldiers received overpayments or had other pay problems, we saw little indication that these soldiers found and reported these problems prior to our audit. Moreover, we identified two instances in which soldiers did not report that they had received tens of thousands of dollars in improper active duty payments. Our audit work at eight case study units identified significant soldier concerns with both the level and quality of customer service they received related to their active duty pays, allowances, and tax benefits. The soldiers’ concerns centered around three distinct areas: (1) the accessibility of customer service, (2) the ability of customer service locations to help soldiers, and (3) the treatment of soldiers requesting assistance. Servicing soldiers and their families with pay inquiries and problems is particularly critical in light of the error-prone processes and limited automated system processing capabilities. Ultimately, pay accuracy is left largely to the individual soldier. Although there are several sources that soldiers can turn to for pay issue resolution, including an online system and a toll free phone pay assistance number, soldiers at our case study units experienced problems in accessing these sources. Mission requirements and the distance between deployment locations and field finance offices often impaired the soldiers’ ability to utilize the in-theater customer service centers. Also, soldiers did not always have Internet and telephone access to utilize sources through these media. The lack of Internet access for deployed soldiers was particularly problematic because it limited soldiers’ access to pay, allowance, and tax benefit data reflected in their leave and earnings statements. Lacking leave and earnings statements, soldiers had no means to determine the propriety of their active duty payments. For example, soldiers with the 948th Surgical Team told us that their inability to access the leave and earnings statements adversely affected their overall morale. Even when mobilized reservists were able to contact customer service sources, their pay issues often continued because the office they were instructed to contact was unable to address their inquiry or correct their problem. In some cases, customer service sources failed to help soldiers because they lacked an understanding of what was needed to fix the problems. When representatives of the 948th Surgical Team contacted their parent company for help in correcting pay problems, personnel with the parent company informed them that they could not fix the unit’s pay problems because they (incorrectly) believed that the unit was paid through the Army’s active duty pay system. Soldiers at other units were redirected from one source to another. Soldiers were not aware of which sources could address which types of problems, and more significantly, the customer service sources themselves often did not know who should correct a specific problem. An Army Reserve major’s experience illustrates the time and frustration that is sometimes involved with soldiers’ attempts to obtain customer service for correcting errors in active duty pays, allowances, and related tax benefits. Individual Case Illustration: Extensive, Time-consuming Action Required to Resolve Pay Issue A soldier from Maryland was mobilized in March 2003 from the Army’s Individual Ready Reserve to active duty to serve as a liaison between the Army and Air Force to help coordinate ground and air combat operations in Iraq. After completing his 2- month active duty tour and returning to an inactive reserve status in May 2003, he contacted Army officials to inform them that he was continuing to receive active duty pays and volunteered to immediately repay these erroneous overpayments. In July 2003, he wrote a check for $6,150.75 after receiving documentation showing his debt computation. However, he continued to receive Leave and Earnings Statements indicating that he had an outstanding debt. He contacted his Army demobilization finance office to determine how to get the erroneous outstanding debt removed from his pay records. After being referred by officials at that location to various DFAS locations (including once being told, “There is nothing more I can do for you.”), he contacted us for assistance. After DFAS recomputed the soldier’s debt as a result of our inquiry, the soldier was informed that he owed an additional $1,140.54, because the original debt computation did not fully consider the erroneous combat zone tax exclusion benefits he received. Overall, he spent nearly a year after his 2-month active duty tour ended, and about 20 phone calls, faxes, and letters in contacting at least seven different DOD representatives at five different customer service centers to correct active duty pay and allowance overpayments and associated combat tax exclusion benefit problems. Finally, soldiers expressed concern about the treatment they sometimes received while attempting to obtain customer service. Soldiers expressed concern that certain customer service representatives did not treat soldiers requesting assistance respectfully. For example, one soldier who attempted to make corrections to his Certificate of Discharge or Release from Active Duty (DD 214) informed us that mobilization station personnel told him that the citations and dates of service he was trying to add “didn’t matter.” Additionally, some soldiers told us that when they raised concerns about the quality of customer service they received with respect to their pay inquiries and concerns, they were sometimes ignored. For example, soldiers with Connecticut’s 3423rd Military Intelligence Detachment told us they contacted the local Inspector General because they believed that finance personnel at their deployment location had both actively tried to impair the payment of their active duty entitlements and had tried to intimidate and discourage the unit’s soldiers from seeking help elsewhere. However, they were not aware of any action taken as a result of their concerns. Weaknesses in automated systems contributed significantly to the underpayments, overpayments, and late payments we identified. These weaknesses consisted of (1) nonintegrated systems with limited system interfaces and (2) limited processing capabilities within the pay system. The Army and DFAS rely on the same automated pay system to authorize and process active duty pays for Army Reserve soldiers as they use for Army National Guard soldiers. In addition, similar to the Army National Guard, the Army Reserve’s personnel and order-writing systems are not integrated with the pay system. Consequently, many of the systems problems experienced by mobilized Army Reserve soldiers are similar to those that we identified in our report on pay issues associated with mobilized Army National Guard soldiers. Because of the automated systems weaknesses, both Army Reserve and active Army personnel must put forth significant manual effort to accurately process pays and allowances for mobilized Army Reserve soldiers. Moreover, to compensate for the lack of automated controls over the pay process, both DFAS and the Army place substantial reliance on the review of pay reports to identify pay errors after the fact. Part of this reliance includes the expectation that soldiers review their own leave and earnings statements, even though these statements do not always provide clear explanations of all payments made. Finally, because of DJMS-RC’s limitations, the system cannot simply stop withholding taxes for soldiers in designated combat zone locations. Instead, for these soldiers, the system withholds taxes and then pays the soldiers the amount that was withheld at least a month after the soldiers were first entitled to receive this benefit. The key pay and personnel systems involved in authorizing, entering, processing, and paying mobilized Army Reserve soldiers are not integrated and have only limited interfaces. Figure 1 provides an overview of the key systems involved in authorizing, entering, processing, and making active duty payments to mobilized Army Reserve soldiers. Hard copy of administrative change documents (e.g. mobilization orders, promotion orders) Pay, allowances, Leave and Earnings Statements, etc. generated for mobilized soldiers 1 – Regional Level Application System (RLAS) 2 – Tactical Personnel System (TPS) 3 – Transition Processing (TRANSPROC) System 4 – Defense Military Pay Office (DMO) 5 – Total Army Personnel Database – Reserve (TAPDB-R) 6 – Defense Joint Military Pay System – Reserve Component (DJMS-RC) Lacking either an integrated or effectively interfaced set of personnel and pay systems, DOD must rely on error-prone, manual data entry from the same source documents into multiple systems. We found numerous instances in which pay-affecting personnel information was not entered promptly into the pay system, resulting in numerous pay errors. We found several instances in which soldiers that were promoted while on active duty did not receive their pay raises when they should have because the promotion information was not promptly recorded in DJMS-RC. For example, one Army Reserve soldier’s promotion was effective on July 1, 2003. However, the soldier’s promotion was not processed in the pay system until October 2003, which delayed an increase in both his basic pay and basic allowance for housing. The soldier received his promotion pay, including back pay, in late October 2003, resulting in late payments totaling over $2,700. Lacking an effective interface between pay and personnel systems, DOD and the Army must rely on after-the-fact detective controls, such as pay and personnel system data reconciliations to identify and correct pay errors occurring as a result of mismatches between personnel and pay system data. However, even these reconciliations will not identify soldiers that are being paid for active duty while in inactive status because the Army Reserve personnel system currently does not maintain data to indicate whether or not soldiers are on active duty. DJMS-RC was not designed to pay Army Reserve soldiers for active duty tours longer than 30 days. According to DOD officials, requiring DJMS-RC to process various types of pays for active duty tours that exceed 30 days has stretched the system’s automated processing capabilities. Because of the system’s limitations, the Army and DFAS were required to make monthly error-prone manual inputs for certain active duty pays, such as hardship duty pay. We found many instances in which these manual inputs resulted in payment errors. Moreover, because of the way in which hardship duty pay was processed and reported on soldiers’ leave and earnings statements, mobilized Army Reserve soldiers could not always determine whether they received all of their entitled pays and allowances. In addition, because of current processing limitations, DJMS-RC cannot process a required tax exclusion promptly for soldiers in a combat zone. This processing limitation has resulted in late payments of this benefit for all entitled Army Reserve soldiers. During our audit period, we found numerous errors in hardship duty pay as a result of a DJMS-RC processing limitation that required the use of a miscellaneous payment code for processing this type of pay. Because of the use of this miscellaneous code instead of a code specifically for hardship duty pay, this pay could not be automatically generated on a monthly basis once a soldier’s eligibility was established. Therefore, hardship duty pay had to be manually entered every month for eligible soldiers. We found that nearly all soldiers in our case studies who were eligible for hardship duty pay experienced problems with this pay, including late payments, underpayments, and overpayments. For example, the 965th Dental Company’s soldiers from Seagoville, Texas, experienced both underpayments and overpayments. Specifically, all 85 soldiers deployed to Kuwait were underpaid a total of approximately $8,000 for hardship duty pay they were entitled to receive during their deployment overseas. Subsequently, 76 of the unit’s soldiers were overpaid a total of almost $47,000 because they continued to receive hardship duty payments for more than 6 months after they had left the theater. Both underpayments and overpayments, as well as late payments, of hardship duty pay occurred largely because of the reliance on manual processing of this pay every month. The errors often occurred because local area finance personnel did not receive accurate or timely documentation such as flight manifests or data from the Tactical Personnel System indicating when soldiers arrived or left the theater. As a result, finance personnel did not start these payments on time, and did not stop these payments as of the end of the soldiers’ active duty tour date recorded in DJMS-RC. Use of the miscellaneous code to process hardship duty pay also precluded the use of system edits as backup controls to prevent overpayments. Because a miscellaneous code is used for various types of payments, DFAS could not set up an edit to stop hardship duty pay after a soldier’s active duty tour ended in the event finance personnel mistakenly continued to manually process hardship duty pay. Similarly, DFAS could not establish an edit to prevent duplicate payments of hardship duty pay processed using the miscellaneous code. As a result, hardship duty pay could be entered more than once for a soldier in a given month without detection. From our case studies, we identified three soldiers who each received two hardship duty payments for one month, resulting in total overpayments of $250. Use of the miscellaneous payment code also made it difficult for soldiers to understand, and determine the propriety of, some of the payments reflected on their leave and earnings statements. Hardship duty pay and other payments that are processed using the miscellaneous code are reported on leave and earnings statements as “other credits.” Furthermore, the leave and earnings statements did not provide any additional information about what the “other credits” were for unless pay clerks entered additional explanations in the “remarks” section of the statement, which they rarely did. As a result, lacking any explanations, soldiers often had no means to determine if these types of payments were appropriate and accurate. Unit commanders told us that they relied on soldiers to identify any pay problems based on their review of their leave and earnings statements. However, because leave and earnings statements do not always provide adequate information or, as discussed previously, may not be available to soldiers while deployed, reliance on the soldiers to identify pay errors is not an effective control. In addition to soldiers’ pay problems that occurred primarily because of the extensive use of manual processes, soldiers also experienced systematic problems with automated payments related to their combat zone tax exclusion, which resulted in late payments of this benefit for all soldiers in the seven case study units that deployed overseas. Soldiers are entitled to the combat zone tax exclusion for any month in which the soldier performs active service in a designated combat zone area. Because DJMS-RC was designed as a pay system for Army Reserve soldiers in weekend drill status, it does not have the processing capability to halt the withholding of applicable income taxes. Therefore, as a workaround procedure to compensate for this limitation, an automated process was established whereby the system first withholds taxes applicable to payments made while soldiers are in a combat zone, and then later reimburses soldiers for these withheld amounts in the following month. As a result of this workaround process, with few exceptions, Army Reserve soldiers who served in a designated combat zone received their combat zone tax exclusion benefit at least one month late. Soldiers experienced longer delays in receiving this benefit if they arrived in a combat zone after the midmonth cutoff for DJMS-RC processing, which is approximately on the seventh day of each month. In these cases, entitlement to the tax exclusion was not recognized until the following month, which then delayed the soldier’s receipt of his combat zone tax benefit until the next month—the third month the soldier was deployed in the combat zone. For example, members of the 824th Quartermaster Company that deployed to Afghanistan arrived in country on July 14, 2003, but did not receive their first combat zone tax exclusion reimbursements until early October, almost 3 months after they became eligible for the exclusion. DOD and the Army have reported a number of relatively recent positive actions with respect to processes, human capital practices, and automated systems that, if implemented as reported, should improve the accuracy and timeliness of active duty pays, allowances, and related tax benefits provided to mobilized Army Reserve soldiers. Payroll payments to mobilized Army Reserve soldiers rely on many of the same processes and automated systems used for payments to mobilized Army National Guard soldiers. Consequently, actions to improve the accuracy and timeliness of Army Reserve soldier payments are closely tied to actions taken in response to several of the recommendations in our November 2003 Army National Guard pay report. Because many of DOD’s actions in this area were implemented in the fall of 2003 or later, they were not in place soon enough to have had a positive impact on mobilized Army Reserve soldiers’ payments that we audited through January 2004. However, if implemented as reported to us, many of DOD’s actions in response to the recommendations in our November 2003 report should help reduce the incidence of the types of pay problems we identified for Army National Guard soldiers as well as those identified in the Army Reserve case study units I have presented today. With respect to the process deficiencies and related recommendations, DOD reported implementing additional procedural guidance intended to help minimize the pay problems attributable to non-standard or unclear procedures. One of the purposes of this guidance is to eliminate any questions regarding which DOD entity is responsible for resolving a soldier’s pay issues or questions. Further, as of January 2004, DOD reported establishing a new procedure under which DFAS assumed responsibility (from the Army finance offices located in various overseas locations) for all monthly manual entry of mobilized Army Reserve and Army National Guard soldiers’ location-based hardship duty pays. DOD also reported completing several actions related to our previous recommendations to improve the human capital practices related to payments to mobilized Army soldiers. For example, the Army reported that it had taken action to provide additional training for Army finance personnel at overseas finance locations and at mobilization and demobilization stations, as well as for those Army finance personnel scheduled for deployment. This training was directed at better ensuring that these personnel are adequately trained on existing and new pay eligibility and pay processing requirements for mobilized Army National Guard and Army Reserve soldiers. DOD also reported establishing a new policy in January 2004 directed at more clearly affixing responsibility for addressing soldiers’ pay problems or inquiries. Under this new policy, the Army National Guard established a pay ombudsman to serve as the single focal point for ensuring coordinated, prompt customer service on all Army National Guard soldiers’ pay problems. With respect to automated systems, the Army and DFAS have acknowledged serious deficiencies in the current automated systems used to pay mobilized Army Reserve soldiers, and report that they have implemented a number of significant improvements, particularly to reduce an estimated 67,000 manual monthly entries for hardship duty pay. For example, in response to our recommendations in the National Guard report, DOD reported taking actions to (1) automate manual monthly hardship duty pay in March 2004, (2) eliminate the use of “other credits” for processing hardship duty pay and instead process these pays using a unique transaction code to facilitate implementing a system edit to identify and stop erroneous payments, (3) compare active duty release dates in the Army’s system used to generate Release From Active Duty Orders with soldiers’ end of active duty tour dates shown in DJMS-RC to identify and stop any erroneous active duty payments, and (4) increase the reliability and timeliness of documentation used to support soldiers’ arrival at and departure from designated overseas locations. Further, DOD has a major system enhancement effort underway in this area–-the Defense Integrated Military Human Resources System (DIMHRS). As an interim measure, DOD is now pursuing Forward Compatible Payroll (FCP). FCP is intended to replace payroll systems now used to pay Army military personnel and help eliminate several of the labor- intensive, error-prone workarounds necessitated by current DJMS-RC processing limitations. As of May 2004, FCP was expected to be operational for all Army Reserve soldiers by March 2005. The increased operating tempo for Army Reserve and Army National Guard active duty mobilizations has stressed the current processes, human capital, and automated systems relied on to pay these soldiers. The significant number of problems we identified associated with active duty pay, allowances, and related tax benefits provided to mobilized Army Reserve soldiers at eight case study locations raises serious concerns about whether current operations can be relied on to provide accurate and timely payments. These pay problems caused considerable frustration, adversely affected soldiers’ morale, and placed an additional unnecessary burden on both the soldiers and their families. Further, if not effectively addressed, these pay problems may ultimately have an adverse impact on Army Reserve reenlistment and retention. Strengthening existing processes, human capital practices, and automated systems is critical to preventing, or at minimum, promptly detecting and correcting the errors we identified. In this regard, DOD and the Army have reported a number of relatively recent positive actions intended to improve the accuracy and timeliness of active duty pays, allowances, and related tax benefits provided to mobilized Army Reserve soldiers. DOD’s completed and planned near-term actions, if implemented as reported, should reduce the number of pay problems. However, mobilized Army Reserve soldiers cannot be reasonably assured of accurate and timely active duty pays, allowances, and related tax benefits until DOD completes a reengineering of all the processes, human capital practices, and automated systems supporting this critical area. Fully and effectively addressing Army Reserve soldiers pay problems will require priority attention and sustained, concerted, coordinated efforts by DFAS, the Army, and the Army Reserve to build on actions taken and planned. Finally, I commend the Chairman and Vice Chairman for holding an oversight hearing on this important issue. Your Committee’s continuing interest and diligence in overseeing efforts to effectively and efficiently support our Army Guard and Reserve forces will be essential in bringing about comprehensive and lasting improvements to many decades-old, entrenched problems. We are committed to continuing to work with you and DOD to identify and monitor actions needed to bring about comprehensive and lasting solutions to long-standing problems in its business and financial management operations. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you or other members of the Committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-9095 or [email protected]. Individuals making key contributions to this testimony include James D. Berry Jr., Amy C. Chang, Francine M. DelVecchio, Geoffrey B. Frank, Jennifer L. Hall, Ken Hill, Kristi L. Karls, Jason M. Kelly, Tram Le, Julia C. Matta, Jonathan T. Meyer, Michelle Philpott, John J. Ryan, Jenniffer F. Wilson, Leonard E. Zapata. While on active duty, all Army Reserve soldiers earn various statutorily authorized types of pays and allowances. The types and amounts of pay and allowances that Army Reserve soldiers are eligible to receive vary depending upon rank and length of service, dependency status, skills and certifications acquired, duty location, and the difficulty of the assignment. While Army Reserve soldiers mobilized to active duty may be entitled to receive over 50 types of pays and allowances, we focused on 14 types of pays and allowances applicable to the Army Reserve units we selected for case studies. As shown in table 2, we categorized these 14 pay and allowance types into two groups: (1) pays, including basic pay, medical and dental and foreign language proficiency skill-based pays, and location- based hostile fire and hardship duty pays, and (2) allowances, including allowances for housing, subsistence, family separation, and cost of living for the continental United States. The law makes a distinction between the terms “pays” and “allowances” which together make up a service member’s overall compensation package. Generally, the term pay includes basic pay, special pay, retainer pay, incentive pay, retired pay, and equivalent pay, but does not include allowances. 37 U.S.C. Section 101(21). DOD defines allowance as “a monetary amount paid to an individual in lieu of furnished quarters, subsistence, or the like.” DOD Financial Management Regulation, vol. 7A, Definitions, para. 15 (February 2001). While generally items considered as “pay” are taxable for federal income tax purposes, except for the cost of living allowance for the continental United States, most allowances, such as those for housing, subsistence, and family separation, are not. Pay when assigned to duty in specified locations $50, $100, or $150 per month (depending on duty location) Hardship duty location pay for certain places (phase out began on January 1, 2002) Full pay for any portion of month when assigned to a location subject to or in close proximity to hostile fire or assigned to duty in a designated imminent danger location $150 per month through September 30, 2002, $225 per month, effective October 1, 2002, through December 31, 2004. As shown in figure 2, three key phases are associated with the pays and allowances applicable to mobilized Army Reserve soldiers: (1) mobilization: starting applicable active duty pays and allowances, (2) deployment: starting and stopping applicable location-based active duty pays while continuing other nonlocation-based active duty pay and allowance entitlements, and (3) demobilization: stopping active duty pays and allowances. During mobilization, units receive alert orders and begin preparing for active duty by conducting Soldier Readiness Processing (SRP) at the unit’s home station. Among other things, the SRP is intended to ensure that each soldier’s financial records are in order. The unit administrator is supposed to gather all necessary documentation for each soldier and send it to the U.S. Army Reserve Pay Center (UPC). There, pay technicians enter transactions to initiate basic pays and allowances for the mobilized soldiers based on soldiers’ mobilization orders and documentation sent by the unit. After the initial SRP, soldiers go as a unit to an assigned active duty Army mobilization station, where they undergo a second SRP. As part of this second SRP, finance personnel at the mobilization station are responsible for confirming or correcting the results of the first SRP, including obtaining any necessary documentation and promptly initiating appropriate active duty pay and allowance transactions that were not initiated during the first SRP. Transactions to initiate and terminate pays for all mobilized Army Reserve soldiers entitled to receive special medical and dental pay entitlements are entered and processed centrally at DFAS-IN. demobilization station did not take action to stop active duty pays for demobilized Army Reserve soldiers, or if a soldier did not return to the demobilization station for active duty out-processing, the responsibility for stopping active duty pays and allowances falls to the soldier’s unit or the UPC. Because current DOD operations used to pay mobilized Army Reserve soldiers relied extensively on error-prone, manual transactions entered into multiple, nonintegrated systems, we did not statistically test controls in this area. Instead, we audited eight Army Reserve units as case studies to provide a detailed perspective on the pay experiences of mobilized Army Reserve soldiers. Each of these units had mobilized, deployed, and demobilized at some time during the 18-month period from August 2002 through January 2004. Using data supplied by the Army Reserve Headquarters Operations Center, we selected case study units that had a variety of deployment locations and missions. To identify the pay experiences associated with each case study unit, we obtained and analyzed DJMS-RC pay transaction extracts and other available documentation. We also conducted follow-up inquiries with cognizant personnel at the Army Reserve Command, Regional Readiness Command, and the Army Reserve Pay Center. Because our objective was to provide insight into the pay experiences of mobilized Army Reserve soldiers, we did not perform an exact calculation of the net pay soldiers should have received. Our audit results reflect only problems that we identified and we counted problems only once in the phase in which they first occurred, even though the problems we identified sometimes extended into subsequent phases. Soldiers in our case study units may have experienced additional pay problems that we did not identify. For purposes of characterizing pay and allowance problems for this report, we defined overpayments and underpayments as those that were in excess of (overpayment) or less than (underpayment) the entitled payment. We considered as late payments any active duty pay or allowance paid to the soldier over 30 days after the date on which the soldier was entitled to receive such payments. In addition, while we did not attempt to calculate the exact impact of any soldier over, under, and late payments on their combat zone tax exclusion benefits, we did examine readily available data to determine the extent to which our case study unit soldiers’ experienced problems with their entitled combat zone tax exclusion benefits. In addition, we conducted a number of other procedures, including Observing procedures and practices followed by the various DOD components involved in providing active duty pays and allowances to Army Reserve soldiers; Interviewing recently demobilized soldiers about their pay experiences Reviewing selected edit and validation checks in DJMS-RC, and certain data entry processes for DJMS-RC. We conducted our audit work from November 2003 through June 2004 in accordance with U.S. generally accepted government auditing standards. Further details on our scope and methodology will be provided in our soon- to-be-issued report. We audited the pay experiences of soldiers in the following eight Army Reserve units as case studies of the effectiveness of the processes, human capital practices, and automated systems in place over active duty pays, allowances, and related tax benefits: 824th Quartermaster Company, Fort Bragg, N.C. 965th Dental Company, Seagoville, Tex. 948th Forward Surgical Team, Southfield, Mich. 443rd Military Police Company, Owings Mills, Md. FORSCOM Support Unit, Finksburg, Md. 629th Transportation Company, Ft. Eustis, Va. 3423rd Military Intelligence Detachment, New Haven, Conn. 431st Chemical Detachment, Johnstown, Pa. These case studies are presented to provide an overview of the types and causes of any pay problems experienced by these units. We selected regional readiness commands that had a large number of activated Reserve units that had mobilized, deployed, and returned from their tour of active duty in support of Operations Noble Eagle, Enduring Freedom, and Iraqi Freedom. From the list of units assigned to these Readiness Commands, we selected eight case studies that had a variety of deployment locations and missions, including both overseas and continental U.S. deployments. Number of mobilized unit soldiers’ pays audited: 68 Period of mobilization: February 2003 to September 2003 Principal deployment location: Kuwait and surrounding locations, Afghanistan, and Fort Bragg, NC Deployment duties: Rigged parachutes for individual soldiers and large equipment drops. Unit Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $60,000 (57) Late payments identified (number of soldiers affected): $3,000 (9) Underpayments identified (number of soldiers affected): $10,000 (49) Combat zone tax exclusion benefit problems identified: All 49 soldiers deployed overseas received their combat zone tax exclusion benefit at least 1 month late, totaling about $20,000. In addition, approximately $1,300 was over-withheld from 5 soldiers. Examples of specific problems identified: Nine soldiers were paid family separation allowance even though they remained at their home station and worked within their normal commuting distance of fewer than 50 miles. Another soldier did not receive his entitled family separation allowance, totaling $1,400, until the end of his active duty tour. Forty-nine soldiers were underpaid hardship duty pay Forty-seven soldiers continued to receive hardship duty pay payments for up to 5 months following their return home, totaling $30,000. Forty-four soldiers that were deployed overseas were overpaid hostile fire pay. One soldier who demobilized early due to a medical condition continued to receive active duty pay and entitlements until the end of January 2004 when we identified the error, resulting in an overpayment of about $18,000. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $100,000 (86) Late payments identified (number of soldiers affected): $16,000 (86) Underpayments identified (number of soldiers affected): $27,000 (65) Combat zone tax exclusion benefit problems identified: 75 of the 85 soldiers deployed overseas received their combat zone tax exclusion benefit 2 to 3 months late, totaling approximately $24,000. In addition, we identified $200 in over-withholdings and $300 in under-withholdings. Examples of specific problems identified: Eighty-five soldiers were underpaid for hardship duty pay of $8,000 Sixty-six soldiers received hardship duty pay totally $47,000 for at least 6 months after leaving Kuwait. One soldier received mobilization orders but did not report to the unit’s mobilization station. Nonetheless, he received $36,000 of active duty pay for over 12 months. These overpayments continued until we discovered them during our audit. Another soldier received hostile fire pay, hardship duty pay, family separation allowance, and the combat zone tax exclusion benefits that he was no longer entitled to receive after he left his designated overseas deployment location early as a result of severe illness incurred during his active duty mobilization. One soldier received a duplicate basic allowance for housing allowance payment of $6,600. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $20,700 (20) Late payments identified (number of soldiers affected): $5,600 (20) Underpayments identified (number of soldiers affected): $2,000 (5) Combat zone tax exclusion benefit problems identified: All 20 unit soldiers deployed overseas received their combat zone tax exclusion benefits at least 1 month late, totaling $15,300. In addition, we identified $130 that was over-withheld. Examples of specific problems identified: After arriving in Afghanistan, (1) 19 soldiers waited 47 days to receive their initial hostile fire pay, (2) 19 soldiers received their February hardship duty pay in April, and (3) 20 soldiers waited 67 days before receiving their initial combat zone tax exclusion benefit. A sergeant spent 100 hours in late April 2003 attempting to resolve the unit’s pay problems. Several soldiers were forced to borrow money to meet financial obligations. Nineteen soldiers continued to receive hardship duty pay for a period ranging from 1 to 5 months after leaving Afghanistan. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $25,000 (48) Late payments identified (number of soldiers affected): $20,000 (110) Underpayments identified (number of soldiers affected): $15,000 (114) Combat zone tax exclusion benefit problems identified: One hundred twelve of the 114 unit soldiers deployed overseas received their combat zone tax exclusion benefits at least 1 month late, totaling an estimated $33,000. In addition, we identified $600 in under-withholding and $400 over- withholdings. Examples of specific problems identified: Bi-weekly trips to Kuwait were required for 5 months to address unit pay issues. One hundred thirteen soldiers did not receive their last month’s hardship duty pay. Six unit soldiers were paid beyond their date of separation from the Army, including 1 soldier who was overpaid about $10,500. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $8,000 (1) Late payments identified (number of soldiers affected): $300 (1) Underpayments identified (number of soldiers affected): $0 (1) Combat zone tax exclusion benefit problems identified: This soldier received his combat zone tax exclusion benefit after he demobilized, an estimated $2,500 late. Examples of specific problems identified: Nearly a year of an estimated 20 phone calls, faxes, and letters to DFAS and Army customer service representatives at five locations were required to identify and resolve an overpayment of $8,000. Did not receive any hostile fire pay until after he demobilized. Soldier continued to receive active duty pays and allowances for a month after demobilizing. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $3,000 (24) Late payments identified (number of soldiers affected): $14,000 (23) Underpayments identified (number of soldiers affected): $2,000 (24) Combat zone tax exclusion benefit problems identified: While we did not attempt to quantify, nearly all soldiers deployed overseas received their combat zone tax exclusion benefit at least 1 month late. Examples of specific problems identified: Twenty-three of 24 soldiers deployed to Kuwait received duplicate payments of $75 for hostile fire pay during their initial month of deployment. Twenty-three of 24 soldiers were underpaid hardship duty pay for 1 to 2 months during their overseas deployment. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $18,500 (10) Late payments identified (number of soldiers affected): $5,000 (9) Underpayments identified (number of soldiers affected): $4,000 (6) Combat zone tax exclusion benefit problems identified: None, because the soldiers were not eligible for this benefit. Examples of specific problems identified: Nine soldiers erroneously began receiving the overseas cost of living allowance, rather than the continental U.S. cost of living allowance, at the beginning of the mobilization. This created $3,500 in overpayments and $700 in late payments for the unit. Nine soldiers continued to receive their active duty pays and entitlements for 13 to 28 days after demobilization, resulting in $14,000 in overpayments. Pay and Allowance Problems Identified (by Phase) Overpayments identified (number of soldiers affected): $12,000 (10) Late payments identified (number of soldiers affected): $1,000 (8) Underpayments identified (number of soldiers affected): $2,000 (10) Combat zone tax exclusion benefit problems identified: While we were unable to quantify, nearly all soldiers deployed overseas received their combat zone tax exclusion benefit at least 1 month late. Examples of specific problems identified: While deployed to Kuwait, (1) 8 of 10 soldiers did not receive their first month’s hostile fire pay and (2) all 10 soldiers did not receive hardship duty pay for the first month after arrival overseas. All 10 soldiers continued to receive hardship duty pay payments for up to 7 months following their return home, despite the unit administrator’s attempts to get the pay stopped through the unit’s chain of command. The unit administrator also accessed the pay hotline at 888-PAY-ARMY, but was placed on hold for such a long time that she gave up. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | In light of GAO's November 2003 report highlighting significant pay problems experienced by Army National Guard soldiers mobilized to active duty in support of the global war on terrorism and homeland security, GAO was asked to determine if controls used to pay mobilized Army Reserve soldiers provided assurance that such pays were accurate and timely. GAO's audit used a case study approach to focus on controls over three key areas: processes, people (human capital), and automated systems. The processes and automated systems relied on to provide active duty pays, allowances, and tax benefits to mobilized Army Reserve soldiers are so error-prone, cumbersome, and complex that neither DOD nor, more importantly, Army Reserve soldiers themselves, could be reasonably assured of timely and accurate payments. Weaknesses in these areas resulted in pay problems, including overpayments, and to a lesser extent, late and underpayments of soldiers' active duty pays and allowances at eight Army Reserve case study units. Specifically, 332 of 348 soldiers (95 percent) we audited at eight case study units that were mobilized, deployed, and demobilized at some time during the 18-month period from August 2002 through January 2004 had at least one pay problem. Many of the soldiers had multiple problems associated with their active duty pays and allowances. Some of these problems lingered unresolved for considerable lengths of time, some for over 1 year. Further, nearly all soldiers began receiving their tax exemption benefit at least 1 month late. These pay problems often had a profound adverse impact on individual soldiers and their families. For example, soldiers were required to spend considerable time, sometimes while deployed in remote, hostile environments overseas, seeking help on pay inquiries or in correcting errors in their active duty pays, allowances, and related tax benefits. The processes in place to pay mobilized Army Reserve soldiers, involving potentially hundreds of DOD, Army, and Army Reserve organizations and thousands of personnel, were deficient with respect to (1) tracking soldiers' pay status as they transition through their active duty tours, (2) carrying out soldier readiness reviews, (3) after-the-fact report reconciliation requirements, and (4) unclear procedures for applying certain pay entitlements. With respect to human capital, weaknesses identified at our case study units included (1) insufficient resources allocated to key unit-level pay administration responsibilities, (2) inadequate training related to existing policies and procedures, and (3) poor customer service. Several automated systems issues also contributed to the significant pay errors, including nonintegrated systems and limited processing capabilities. |
In the last several decades, the Congress has passed legislation to increase federal agencies’ ability to determine the health and environmental risks associated with toxic chemicals and to address such risks. Some of these laws, such as the Clean Air Act, the Clean Water Act; the Federal Food, Drug and Cosmetic Act; and the Federal Insecticide, Fungicide, and Rodenticide Act; authorize the control of hazardous chemicals in, among other things, the air, water, soil, food, drugs, and pesticides. Other laws, such as the Occupational Safety and Health Act and the Consumer Product Safety Act, can be used to protect workers and consumers from unsafe exposures to chemicals in the workplace and the home. These laws were generally enacted in or before the early 1970s. Nonetheless, the Congress found that human beings and the environment were being exposed to a large number of chemicals and that some could pose an unreasonable risk of injury to health or the environment. In 1976, the Congress passed TSCA to provide EPA with the authority to obtain more information on chemicals and regulate those chemicals that pose an unreasonable risk to human health or the environment. TSCA provides EPA with the authority, upon making certain determinations, to collect information about the hazards posed by chemical substances and to take action to control unreasonable risks by either preventing dangerous chemicals from making their way into commerce or otherwise regulating them, such as by placing restrictions on those already in the marketplace. While other environmental and occupational health laws generally only control the release of chemicals in the environment, exposures in the workplace, or the disposal of chemicals, TSCA allows EPA to control the entire life cycle of chemicals from their production and distribution to their use and disposal. However, the act does not apply to certain substances such as nuclear material, firearms and ammunition, pesticides, food, food additives, tobacco, drugs, and cosmetics. TSCA’s role in ensuring that chemicals in commerce do not present an unreasonable risk of injury to health or the environment is established in six major sections of the act, as shown in table 1. Under section 4, EPA can promulgate rules to require chemical companies to test potentially harmful chemicals for their health and environmental effects. To require testing, EPA must find that a chemical (1) may present an unreasonable risk of injury to human health or the environment or (2) is or will be produced in substantial quantities and that either (a) there is or may be significant or substantial human exposure to the chemical or (b) the chemical enters or may reasonably be anticipated to enter the environment in substantial quantities. (For the remainder of this report, we will refer to parts (a) and (b) of this second finding in abbreviated form as a finding “that there is or may be substantial human or environmental exposure to the chemical”). EPA must also determine that there are insufficient data to reasonably determine or predict the effects of the chemical on health or the environment and that testing is necessary to develop such data. Section 5 requires chemical companies to notify EPA at least 90 days before beginning to manufacture a new chemical or before manufacturing or processing a chemical for a use that EPA has determined by rule is a significant new use. EPA has these 90 days to review the chemical information in the premanufacture notice and identify the chemical’s potential risks. Under section 5(e), if EPA determines that there is insufficient information available to permit a reasoned evaluation of the health and environmental effects of a chemical and that (1), in absence of such information, the chemical may present an unreasonable risk of injury to health or the environment or (2) it is or will be produced in substantial quantities and (a) it either enters or may reasonably be anticipated to enter the environment in substantial quantities or (b) there is or may be significant or substantial human exposure to the substance, then EPA can issue a proposed order or seek a court injunction to prohibit or limit the manufacture, processing, distribution in commerce, use, or disposal of the chemical. Under section 5(f), if EPA finds that the chemical will present an unreasonable risk, EPA must act to protect against the risk. If EPA finds that there is a reasonable basis to conclude that a new chemical may pose an unreasonable risk before it can protect against such risk by regulating it under section 6 of TSCA, EPA can (1) issue a proposed rule, effective immediately, to require the chemical to be marked with adequate warnings or instructions, to restrict its use, or to ban or limit the production of the chemical or (2) seek a court injunction or issue a proposed order to prohibit the manufacture, processing, or distribution of the chemical. Section 6 requires EPA to apply regulatory requirements to chemicals for which EPA finds a reasonable basis exists to conclude that the chemical presents or will present an unreasonable risk to human health or the environment. To adequately protect against a chemical’s risk, EPA can promulgate a rule that bans or restricts the chemical’s production, processing, distribution in commerce, disposal or use, or requires warning labels be placed on the chemical. Under TSCA, EPA must choose the least burdensome requirement that will adequately protect against the risk. In promulgating a rule, EPA must consider and publish a statement regarding: the effects of the chemical on health and the environment and the magnitude of human and environmental exposure; the benefits of the chemical for various uses and the availability of substitutes for those uses; and the reasonably ascertainable consequences of the rule, after consideration of the effect on the national economy, small businesses, technological innovation, the environment, and public health. If another law would sufficiently eliminate or reduce the risk of injury to health or the environment, then EPA may not promulgate a TSCA rule unless it finds that it is in the public interest to do so, considering all relevant aspects of the risk, a comparison of the estimated costs of compliance under TSCA and the other law and the relative efficiency of actions under TSCA and the other law to protect against risk of injury. Section 8 requires EPA to promulgate rules under which chemical companies must maintain records and submit such information as the EPA Administrator reasonably requires. This information can include, among other things, chemical identity, categories of use, production levels, by-products, existing data on adverse health and environmental effects, and the number of workers exposed to the chemical. In addition, section 8 provides EPA with the authority to promulgate rules under which chemical companies are required to submit lists or copies of any health and safety studies to EPA. Finally, section 8 requires chemical companies to report any information to EPA that reasonably supports a conclusion that a chemical presents a substantial risk of injury to health or the environment. Section 9 establishes TSCA’s relationship to other laws. The section includes a mechanism for EPA to alert other federal agencies of a possible need to take action if EPA has a reasonable basis to conclude that an unreasonable chemical risk may be prevented or sufficiently reduced by action under a federal law not administered by EPA. Section 9 also requires EPA to use authorities under other laws that it administers if its Administrator finds that a risk to health or the environment could be eliminated or sufficiently reduced under those laws, or unless EPA determines that it is in the public interest to protect against such risks under TSCA. Section 14 details when EPA may disclose chemical information obtained by the agency under TSCA. Chemical companies can claim certain information, such as data disclosing chemical processes, as confidential business information. EPA generally must protect confidential business information against public disclosure unless necessary to protect against an unreasonable risk of injury to health or the environment. Other federal agencies and federal contractors can obtain access to this confidential business information in order to carry out their responsibilities. EPA may also disclose certain data from health and safety studies. While TSCA authorizes EPA to promulgate rules requiring chemical companies to conduct tests on chemicals and submit the resulting data to EPA, TSCA does not require chemical companies to test new chemicals for their toxicity and exposures before they are submitted for EPA’s review and, according to EPA officials, chemical companies typically do not voluntarily perform such testing. In the absence of chemical test data, EPA largely relies on scientific models to screen new chemicals. However, use of the models can present weaknesses in an assessment because models do not always accurately determine the chemicals’ properties and the full extent of their adverse effects, especially with regard to their general health effects. Nevertheless, EPA believes that the models are useful as basic screening tools where actual test data on health and environmental effects information is not available from chemical companies. EPA believes that the models are an effective tool that, in conjunction with other factors, such as premanufacture notice information on the anticipated production levels and uses of a chemical, supplies a reasonable basis for either dropping the chemical from further review or subjecting it to more detailed review and possible controls. EPA routinely updates database sources for models with new data received through premanufacture notice submissions, required testing from consent orders, substantial risk submissions, and voluntary testing. EPA acknowledges, however, that future efforts to obtain additional test data could enhance the models’ usefulness by providing a more robust database for their further development and validation for regulatory purposes. Furthermore, the information in premanufacture notices that EPA uses to assess potential exposures to new chemicals, such as production volume and anticipated uses, are estimates that can change substantially once EPA completes its review and manufacturing begins. Although TSCA authorizes EPA to require a manufacturer to submit a new notice under certain conditions, the agency must first, after consideration of relevant statutory factors, promulgate a significant new use rule in which it identifies significant new uses or activities for which a new notice is required. EPA estimates that most premanufacture notices do not include test data of any type, and only about 15 percent include health or safety test data. Chemical companies do not have an incentive to conduct these tests because they may take over a year to complete, and some tests may cost hundreds of thousands of dollars. During a review of a new chemical, EPA evaluates risks by conducting a chemical analysis, searching the scientific literature, reviewing agency files (including files of related chemicals that have already been assessed by EPA), analyzing toxicity data on structurally similar chemicals, calculating potential releases of and exposures to the chemical, and identifying the chemical’s potential uses. On the basis of this review, EPA makes a decision to (1) take no action; (2) under section 5(e) of TSCA, require controls on the use, manufacture, processing, distribution in commerce, or disposal of the chemical pending development of test data; or (3) ban or otherwise regulate the chemical pending the receipt and evaluation of test studies performed by the chemical’s manufacturer. Because EPA generally does not have sufficient data on a chemical’s properties and effects when reviewing a new chemical, EPA uses a method known as structure activity relationships analysis (SAR) to screen and evaluate a chemical’s toxicity. This method, also referred to as the nearest analogue approach, involves using models to compare new chemicals with chemicals with similar molecular structures for which test data on health and environmental effects are available. EPA applies models where actual test data in general, and health and environmental effects test data in particular, are not available. EPA officials said that the models make conservative predictions that the agency believes result in erring on the side of protecting human health and the environment in screening chemicals. EPA’s own attempts to determine the strength of these models shows them to be highly accurate in predicting some chemical characteristics, but less accurate for other characteristics. For example, in 1993, EPA and the EU jointly conducted a study to compare EPA's predictions of individual physical and chemical properties or health or environmental effects with those identified by the EU based on test data submitted with EU notifications. The joint evaluation showed that the accuracy of EPA’s predictions varied, depending on the effect or the property being compared. For example, the study concluded that EPA methods are likely to identify those substances that are not readily biodegradable—in other words, slowly degrading chemicals. However, the study concluded that EPA methods do not appear to work as well in identifying chemicals that readily degrade as determined by the EU’s “ready biodegration” base set test. The model performance is explained by recognizing that EPA’s model does not focus on ready biodegration but rather on ultimate biodegredation. Since the 1993 study, EPA and others have conducted studies on selected aspects of some of its models, such as a 2001 study conducted by PPG Industries on the accuracy of aquatic toxicity predictions for different types of polymers. This study showed mixed results in that the models proved to be highly accurate for predicting the toxicity of the chemicals tested on rainbow trout, but were in error for about 25 percent of the cases in which the models’ results were compared with actual test data for determining the chemicals’ effects on the growth of aquatic algae, an important environmental end point. EPA officials told us that, while the overall accuracy of the models has not been validated for regulatory purposes, they are effective as screening tools that allow EPA to focus its attention on the chemicals of greatest concern—chemicals about which little is known other than that they are structurally related to known harmful chemicals. By applying approaches that make conservative predictions, EPA believes that it is more likely to identify a false positive (where a chemical is determined to be of concern, but on further analysis is found to be of low concern) than a false negative (where a chemical is initially viewed as a low concern though on further analysis is actually of higher concern). According to EPA, only about 20 percent of the premanufacture notices received annually go through the agency’s more detailed full-review process after they have been initially screened. That is, according to EPA officials, the majority of new chemicals submitted for review can be screened out as not requiring further review because (1) EPA determines on the basis of its screening models that a chemical has potential for low toxicity to human health or environment or (2) on the basis of other information, such as the anticipated uses, exposures, and releases of the chemicals, only limited potential risks to people and the environment are expected. In addition, using these models, EPA identifies for possible regulatory action, those chemicals belonging to certain chemical categories that based on its prior experience in reviewing new chemicals, are likely to pose potential risks such that testing or controls are needed. EPA officials told us that while they take efforts to improve and validate their models for regulatory purposes where opportunities arise (e.g., models are subjected to peer review when significant modifications are introduced in their design or structure), they do not have a specific program to do so. EPA officials stated that they routinely use test data to improve the models as it becomes available but TSCA does not require companies to routinely conduct tests and submit such data to the agency. Unless EPA requires testing under section 4 of TSCA, TSCA only requires chemical companies to provide notice to EPA of information the companies obtain that reasonably supports the conclusion that the chemical presents a substantial risk of injury to health or the environment. Under section 4 of TSCA, EPA may promulgate a rule requiring companies to conduct tests and submit test data but may do so only if it first determines that current data is insufficient; testing is necessary; and that either (1) the chemical may present an unreasonable risk or (2) that the chemical is or will be produced in substantial quantities and that there is or may be substantial human or environmental exposure to the chemical. EPA officials said that chemical companies may have test data that shows that a chemical has low toxicity. These officials also said that such data would be useful for helping to improve the accuracy of their models. EPA has authority under section 8 of TSCA to promulgate rules requiring companies to submit any existing test data concerning the environmental and health effects of a chemical or copies of any health and safety studies conducted or initiated by, or otherwise known by, the chemical company. EPA officials told us that other efforts are under way to validate these models for regulatory purposes. Organization for Economic Co-operation Development (OECD) member countries are undertaking collaborative efforts to develop and harmonize SAR methods for assessing chemical hazards. However, EPA is hampered in its ability to provide supporting test data to aid OECD as part of this effort because confidentiality provisions in TSCA do not allow EPA to share confidential business information submitted by chemical companies with foreign governments. EPA officials said that international efforts to validate SAR models for regulatory purposes and to move toward harmonized international chemical assessments would be improved if EPA had the ability to share this information under appropriate procedures to protect confidentiality. TSCA’s provisions are in contrast to those of the Canadian Environmental Protection Act (CEPA), for example, which authorizes the Canadian Minister of the Environment to share confidential business information with other governments under agreements or arrangements where the government undertakes to keep the information confidential. Chemical industry representatives told us that the industry also sees benefits in allowing countries to share information in order to harmonize chemical assessments among developed countries and improve chemical risk assessment methods by allowing countries to cooperate in improving models used to predict chemical toxicity. The chemical industry is concerned, however, that the confidential information shared be protected from inappropriate disclosure. These chemical industry representatives told us that some countries currently do not have stringent enough procedures for protecting confidential business information. However, they suggested that the policies and procedures EPA currently uses to protect confidential information are appropriate. Accordingly, they said that the chemical industry would not object to TSCA revisions allowing EPA to share confidential information with foreign countries and organizations, provided that such revisions contain specific reference to safeguards that EPA would establish and enforce to ensure that those receiving the information have stringent policies and procedures to protect it. In this regard, chemical industry representatives stated that such policies and procedures should include provisions such as requiring that those who handle confidential information be briefed on the importance of not disclosing the information to those without the proper clearance and keeping such information in locked storage. EPA officials told us that, in addition to assisting international efforts to enhance modeling tools and harmonize international chemical assessments, the ability to share confidential business information with foreign governments would be beneficial for developing a strategy to identify the resources needed to develop and validate new models for regulatory purposes—a measure that is especially important given the continuing central role of scientific models in EPA’s assessment program for new chemicals. These officials also suggested that it would be productive to explore regulatory and voluntary approaches that could be used to obtain additional information from chemical companies on chemical properties and characteristics, including “negative” studies—i.e., evidence that a chemical is not harmful. According to EPA, such information is useful for understanding the chemical and thus for developing and validating models for regulatory purposes. Under TSCA, companies submitting a premanufacture notice must, at the same time, submit data such as anticipated production volume, manufacturing process, and any test data in their possession and a description of any other reasonably ascertainable data concerning the environmental and health effects of the chemical. If EPA feels it needs more information on these chemicals, it could explore promulgating a test rule under section 4 or issuing a proposed order pending the development of information under section 5(e). In addition, as noted above, EPA has authority under section 8 of TSCA to promulgate rules requiring companies to submit any existing test data concerning the environmental and health effects of a chemical or copies of any health and safety studies conducted or initiated by, or otherwise known by, the chemical company. Chemical industry representatives with whom we spoke told us that they see much merit in working toward a strategy that would give EPA data that could help the agency improve its models. They believe that it is to everyone’s benefit to have approaches that produce models that are useful for identifying both safe and problematic chemicals. This is especially true for enabling industry to make timely decisions--especially for chemicals having short life spans and requiring quick production decisions essential to innovation. These chemical industry representatives also said that a comprehensive strategy for improving models would be particularly beneficial to developing countries lacking extensive experience in manufacturing chemicals because it would enable them to speed their progress toward developing chemicals that are safe and effective. Chemical companies are generally required to submit to EPA, 90 days before beginning to manufacture a new chemical, a premanufacture notice containing information including the chemical’s identity, its production process, categories of uses, estimated production volumes, potential exposure levels and releases, any test data in the possession or control of the chemical company, and a description of any other data concerning the environmental or health effects known to or reasonably ascertainable by the chemical company. EPA bases its exposure estimates for new chemicals on information contained in premanufacture notices. However, the anticipated production volume, uses, exposure levels, and release estimates outlined in the premanufacture notice do not have to be amended once manufacturing begins. That is, once EPA completes its review and production begins, absent any requirement imposed by EPA such as a significant new use rule, chemical companies are not required under TSCA to limit the production of a chemical or its uses to those specified in the premanufacture notice or to submit another premanufacture notice if changes occur. However, the potential risk of injury to human health or the environment may increase when chemical companies increase production levels or expand the uses of a chemical. To address this potential TSCA authorizes EPA to promulgate such a rule specifying that a particular use of a chemical would be a “significant new use.” The manufacturers, importers, and processors of the chemical for that use would then be required to notify EPA at least 90 days before beginning manufacturing or processing the chemical for that use. When EPA’s assessment of new chemicals identifies health and safety problems, EPA can issue a proposed rule to prevent chemical companies from manufacturing or distributing the chemical in commerce, or to otherwise restrict the chemical’s production or use, if the agency believes the new chemical may present an unreasonable risk before EPA can regulate the chemical under section 6 of TSCA. Despite limitations in the information available on new chemicals, EPA’s reviews have resulted in some action being taken to reduce the risks of over 3,500 of the 32,000 new chemicals that chemical companies have submitted for review. These actions ranged from chemical companies voluntarily withdrawing their notices of intent to manufacture new chemicals, chemical companies entering into consent orders with EPA to produce a chemical under specified conditions, and EPA promulgating significant new use rules requiring chemical companies to notify EPA of their intent to manufacture or process certain chemicals for new uses prior to manufacturing or processing the chemicals for such uses. For over 1,600 chemicals, companies withdrew their premanufacture notices, sometimes after EPA officials indicated that the agency planned to initiate the process for placing controls on the chemical, such as requiring testing or prohibiting the production or certain uses of the chemical. EPA officials told us that after EPA screened the chemical or performed a more detailed analysis of it, chemical companies often drop their plans to market a new chemical when the chemical’s niche in the marketplace is uncertain and EPA requests that the company develop and submit test data. According to an EPA official, companies may be uncertain that they will recoup the costs of testing and prefer instead to withdraw their premanufacture notice. For over 1,200 chemicals, EPA has issued orders requiring chemical companies to implement workplace controls or practices during manufacturing pending the development of information, and/or perform toxicity testing when the chemical’s production volumes reached certain levels. EPA may issue these proposed orders to control the production, distribution, use, or disposal of a new chemical when there is insufficient information available to EPA to reasonably evaluate the human health or environmental effects of a chemical and when the chemical (1) may present an unreasonable risk to human health or the environment or (2) it is or will be produced in substantial quantities and (a) it either enters or may reasonably be anticipated to enter the environment in substantial quantities or (b) there is or may be significant or substantial human exposure to the substance. Under section 5 of TSCA, EPA cannot require that chemical companies develop this information, but TSCA authorizes EPA to control the manufacturing and processing of the chemical until EPA has sufficient data to determine if the chemical will pose a risk. For about 570 of the 32,000 new chemicals submitted for review, EPA required chemical companies to submit premanufacture notices for any significant new uses of the chemical, providing EPA the opportunity to review the risks of injury to human health or the environment before new uses had begun. For example, in 2003, EPA promulgated a significant new use rule requiring chemical companies to submit a notice for the manufacture or processing of substituted benzenesulfonic acid salt for any use other than as described in the premanufacture notice. Finally, in 1984, EPA issued proposed rules that were effective upon publication to impose certain controls on four new chemicals the agency determined would pose an unreasonable risk to human health or the environment. The rules—which remain in effect today—prohibit adding any nitrosating agent, including nitrites, to metal working fluids that contain these substances. According to EPA, adding nitrites or other nitrosating agents to the substances causes the formation of a substance known to cause cancer in laboratory animals. See appendix V for more information on the rules issued to control these four chemicals. TSCA authorizes but does not specifically require EPA to review the risks of existing chemicals. Further, EPA cannot require chemical companies to test the safety of existing chemicals and provide the resulting test data to the agency, unless EPA first determines on the basis of risk or production and exposure information that the chemicals warrant such testing. EPA has used its authority to require testing for fewer than 200 of the 62,000 chemicals in commerce when EPA began reviewing chemicals under TSCA in 1979. Furthermore, according to EPA, in part because it is costly and labor-intensive for EPA to require the development of toxicity and exposure data, the agency has performed internal reviews of only an estimated 2 percent of the chemicals that were in the TSCA inventory when EPA began chemical reviews in 1979. Additionally, EPA has rarely banned, limited the production, or restricted the use of existing chemicals. Only five chemical substances or groups of chemical substances have been regulated under section 6, and the last final action EPA took to control existing chemicals under section 6 was published in 1990. Since 1998, EPA has focused its efforts on obtaining information on existing chemicals through voluntary programs, such as the HPV Challenge Program. This program will provide basic data on the characteristics of about 2,800 chemicals produced in excess of 1 million pounds a year. However, while EPA has received recommendations from the NPPTAC on a process for screening these chemicals, the agency has not yet implemented guidelines for reviewing the data so that the chemicals can be prioritized and more detailed information can be obtained to further assess their risks to human health and the environment. Canada and the EU have recently taken action—passing legislation and proposing a new regulation, respectively—to further regulate or assess existing chemicals. When implemented, these actions may require U.S. chemical companies to submit information on some chemicals manufactured or processed in or exported to Canada and the EU. EPA has authority under section 8 of TSCA to require that copies of such data for chemicals manufactured or processed by chemical companies in the United States be made available to EPA. According to EPA officials, EPA’s toxicity and exposure data on existing chemicals is often incomplete and TSCA’s authority to require testing is difficult to use in support of the agency’s review process. While TSCA authorizes the review of existing chemicals, it generally provides no specific requirement, time frame, or methodology for doing so. Instead, EPA conducts initial reviews after it receives information from the public or chemical companies that a chemical may pose a risk. For example, if a chemical company voluntarily tests a chemical or otherwise obtains information about a chemical that reasonably supports the conclusion that the chemical presents a substantial risk to human health or the environment, TSCA requires that the chemical company immediately notify EPA about this information. EPA then reviews the information to determine the need for additional testing or risk management. However, chemical companies are not required to develop and submit toxicity information to EPA unless EPA promulgates a testing rule, thus placing the burden for obtaining or requiring industry development of data on the agency. In addition, if chemical company testing shows that a chemical is not toxic, there is generally no standing requirement that the chemical companies submit this data to EPA. Consequently, when EPA decides to review existing chemicals, it generally has only limited information on the risks of injury the chemicals pose to human health and the environment. Facing difficulties obtaining such information, as noted above, EPA has made little progress in reviewing existing chemicals since EPA began reviewing chemicals under TSCA in 1979. The limited amount of information available to EPA on existing chemicals’ toxicity was illustrated in a 1998 EPA report of publicly available data on 2,863 high-production-volume chemicals produced and/or imported at over 1 million pounds per year in 1990. For each of these chemicals, EPA examined the readily available data corresponding to six basic end points that have been internationally agreed to as necessary for a screening level assessment of a chemical’s toxicity and environmental fate. EPA estimated that only about 7 percent of the 2,863 chemicals had information on all six basic end points, 50 percent had information for one to five of the end points, and 43 percent had no information for any of the end points. According to EPA officials, the agency has access to even less information for chemicals not considered high-production-volume chemicals. Furthermore, EPA has limited information on how existing chemicals are used and how they come into contact with people or the environment. To gather more exposure information, in 2003, EPA amended its TSCA Inventory Update Rule (IUR), which is primarily used to gather certain information on chemicals produced at more than a basic threshold volume in the year reported. Among other things, EPA raised the basic production volume reporting threshold from 10,000 to 25,000 pounds, required chemical companies producing or importing chemicals at a site at or above this threshold to report the number of workers reasonably likely to be exposed to the chemical at each site, and added a reporting threshold of 300,000 pounds per site at or above which chemical companies must report readily obtainable exposure-related use and processing information. Nevertheless, TSCA does provide EPA with the authority to obtain information needed to assess chemicals by issuing rules under section 4 of TSCA requiring chemical companies to test chemicals and submit the test data to EPA. However, because promulgating test rules to obtain test data on chemicals can be time consuming, EPA has negotiated agreements with chemical companies to conduct testing. In 1979, EPA instituted a process to negotiate with chemical companies and reach voluntary agreements to test the safety of certain chemicals. However, in 1984, the United States District Court for the Southern District of New York found that EPA had failed to discharge its obligations under TSCA by negotiating such voluntary agreements instead of initiating rulemaking with respect to chemicals designated for testing by the Interagency Testing Committee (ITC) under section 4(e) of TSCA. The court determined that EPA had made de facto findings that testing of the ITC-designated chemicals was necessary. The court noted that the very negotiation and acceptance of voluntary testing agreements demonstrated EPA’s belief that additional data on the particular chemicals at issue needed to be developed. Upon making such findings, the court stated that it is EPA’s duty under TSCA to make the mandatory choice between initiating rulemaking proceedings or publishing its reasons for not doing so and that EPA had not done this. The court found no support either in TSCA or “on some vague assertion of agency discretion” for EPA’s use of the negotiated testing agreements instead of rulemaking proceedings. The court also found that, in addition to violating the test rule promulgation process set forth in TSCA, EPA’s failure to use the rulemaking process bypassed several other important provisions within the statutory framework of TSCA. The court stated that it was not EPA’s prerogative to “substitute for this intricate framework a number of haphazard and informal purported equivalents” and that negotiated testing programs without rulemaking cannot be sanctioned under TSCA. In order to address the concerns raised by the court, EPA promulgated a rule in 1986, revising its procedures and providing for its current use of enforceable consent agreements, which EPA believes bind the companies signing them to perform the testing they agree to perform. EPA regulations state that when EPA believes testing is necessary, it will explore whether a consent agreement can be negotiated that satisfies those testing needs. The regulations further require EPA to publish a notice in the Federal Register when it decides to initiate negotiations. EPA will meet with manufacturers, processors, and other interested parties (those responding to EPA’s Federal Register notice) to attempt negotiation of a consent agreement. All negotiating meetings are open to the public, and EPA is to prepare meeting minutes and make them—as well as testing proposals, correspondence, and other relevant material—available to the public. When EPA prepares a draft consent agreement, it is circulated for comment to all interested parties, who have 4 weeks to submit comments or written objections. Where consensus exists on the draft consent agreement, as determined under the criteria listed in EPA’s regulations, the draft will be circulated to EPA management and interested parties for final approval and signature. EPA will then publish another Federal Register notice summarizing the consent agreement and listing the name of the chemical to be tested in its regulations. According to EPA, these agreements allow greater flexibility in the design of the testing program because test methods can be negotiated. The relationship between EPA and the chemical industry is typically nonadversarial, and it usually takes less than a year for testing to begin on chemicals subject to enforceable consent agreements. According to EPA, negotiating these agreements is generally less costly and time-consuming than promulgating test rules because EPA does not have to determine that (1) a chemical poses or may pose an unreasonable risk or (2) a significant or substantial potential may exist for human exposure to the chemical. However, chemical companies must be willing to participate in such negotiations. EPA has entered into consent agreements with chemical companies to develop tests for about 60 chemicals. EPA officials told us that, for an additional 250 chemicals, EPA issued formal decisions not to test. In a number of these cases, EPA had initiated the process to either require testing or to negotiate consent agreements but prior to finalizing the rules or agreements chemical companies or other organizations had met EPA’s need for the data. While it appears that EPA’s enforceable consent procedures have been a good mechanism for acquiring needed test data, as the United States District Court for the Southern District of New York noted, “t is not an agency’s prerogative to alter a statutory scheme even if its assertion is as good or better than the congressional one.” In this regard, it is not clear whether EPA’s current use of enforceable consent agreements would fare better than its previous use of voluntary agreements if challenged in court. EPA’s regulations require enforceable consent agreements to address many of the provisions of TSCA triggered by test rules that the court found were lacking in EPA’s earlier voluntary agreements. However, some important differences remain between the TSCA framework for testing rules and EPA’s regulations for enforceable consent agreements. First, the enforceable consent agreement regulations would not account for some of the TSCA provisions that would be triggered by a test rule. For example, the regulations do not require the submission of test data along with the premanufacture notices for new chemicals. The regulations also neither preempt state or local testing rules, as a TSCA test rule would, nor do they have the same reporting and recordkeeping requirements. Second, unlike a testing rule, which would trigger TSCA requirements for all manufacturers and processors of a particular chemical, the consent agreement would generally only trigger such requirements for those manufacturers and processors that sign the agreement. While EPA regulations state that any person exporting or intending to export a chemical that is the subject of an enforceable consent agreement must notify EPA, it is unclear how EPA would enforce this provision if the person had not signed the agreement. Despite EPA’s attempts to incorporate a number of the test rule-triggered TSCA provisions into its enforceable consent agreements, its efforts may still fall short. Like EPA’s earlier use of voluntary agreements, its use of enforceable consent agreements is not explicitly authorized under TSCA, and, if a court determined that EPA’s use of enforceable consent agreements equated to a de facto finding that testing was necessary, a court could again find that EPA lacked discretion to require testing other than through promulgation of a test rule. EPA officials believe that the agency’s revised procedures address the court’s findings, and that, while TSCA does not specifically authorize the use of consent agreements to obtain test data, a sound legal basis exists for invoking TSCA’s enforcement provisions against chemical companies that violate such agreements. Representatives of the American Chemistry Council (ACC) also told us that they have always considered the consent agreements to be enforceable and binding on the chemical companies signing them. Bolstering these views somewhat is the fact that EPA has been using the enforceable consent agreement process since establishing it by rule in 1986—nearly two decades ago. Nevertheless, an EPA legal memorandum states that although EPA could reasonably take the position that it is authorized to enter into enforceable consent agreements requiring testing—ultimately concluding that enforceable consent agreements could be enforced by EPA and would be upheld by the courts—“the matter is not free from doubt.” EPA officials have stated that revising TSCA to explicitly provide authority to enter enforceable consent agreements would be beneficial for clarifying when EPA has authority to enter into such agreements. Chemical industry representatives agreed with EPA that explicit authorization could be useful. Finally, according to EPA, the lack of information on existing chemicals and the relative difficulty in requiring testing under TSCA on such a large scale as would be required for the more than 2,000 chemicals produced at high volumes, has led EPA, in cooperation with chemical companies, environmental groups, and other interested parties, to implement a voluntary program to obtain test data on high-production-volume chemicals from chemical companies. The HPV Challenge Program focuses on obtaining chemical company “sponsors” to voluntarily provide data on the approximately 2,800 chemicals that chemical companies reported in 1990, that they produced at a high volume—generally over 1 million pounds. Through this program, sponsors develop a minimum set of information on the chemicals, either by gathering available data, using models to predict the chemicals’ properties, or conducting testing of the chemicals. EPA plans to use the data collected under the HPV Challenge Program to prioritize high-production chemicals for further assessment. However, EPA has not yet adopted a methodology for prioritizing the chemicals or determining those that require additional information. At EPA’s request in 2005, a federal advisory group has proposed a methodology for prioritizing the HPV Challenge Program chemicals. EPA anticipates implementing the recommendation and beginning screening in early 2006. While EPA will soon be collecting limited exposure information on chemicals produced at or above 25,000 pounds per year, the agency does not regularly collect exposure information on lower volume chemicals. EPA officials stated, based on the success of the HPV Challenge Program, there may be promise in a future effort to develop an appropriate level of information for lower volume chemicals, although given the demands of current efforts by EPA, industry, and others on HPV chemicals, no steps have been taken in this regard. Furthermore, EPA has no voluntary or test rule program in place for obtaining test data on chemicals that are currently produced in low volumes but which may be produced at high volumes in the future. While chemical industry organizations have said that they will voluntarily provide a basic set of test data on certain high-production-volume chemicals that are not part of the HPV Challenge Program, it is unclear that their efforts will produce information sufficient for EPA to make determinations of a chemical’s risk to human health or the environment or provide the information in a timely manner. EPA officials told us that, in cases where chemical companies do not voluntarily provide needed test data and health and safety studies in a complete and timely manner, requiring testing of existing chemicals of concern is the only practical way to ensure that needed information is obtained by the agency. For example, there are currently over 300 high-production-volume chemicals for which chemical companies have not agreed to provide the minimal test data that EPA believes are needed to initially assess their risks. Furthermore, many additional chemicals are likely to be added to this number in the future because the specific chemicals used in commerce are constantly changing, as are their production volumes. Chemical industry representatives told us that TSCA (under section 8) provides EPA with adequate authority to issue rules requiring companies to provide EPA with any test and exposure data possessed by the companies, and that EPA could use such authority to obtain company information on existing chemicals of concern. EPA could then use that information to determine whether additional rules should be issued under section 4 of TSCA to require companies to perform additional testing of the chemicals. However, EPA officials told us that it is time-consuming, costly, and inefficient for the agency to use a two-step process of (1) issuing rules under section 8 of TSCA (which can take months or years to develop) to obtain exposure data or available test date that the chemical industry does not voluntarily provide to EPA and then (2) issuing additional rules under section 4 of TSCA requiring companies to perform specific tests necessary to ensure the safety of the chemicals tested. They also said that EPA’s authority to issue rules requiring chemical companies to conduct tests on existing chemicals under section 4 of TSCA has been difficult to use because of the findings the agency must first make before EPA can require testing. Section 4 of TSCA requires EPA to find that current data is insufficient; testing is necessary; and that either (1) the chemical may present an unreasonable risk or (2) that the chemical is or will be produced in substantial quantities and that there is or may be substantial human or environmental exposure to the chemical. For example, if EPA wanted to issue a test rule on the basis of a chemical’s production volume, it would still need to make the other requisite findings. In this regard, according to EPA officials, obtaining exposure information needed for rulemaking is particularly difficult. To fully assess human exposure to a chemical, EPA needs to know how many workers, consumers and others are exposed; whether the exposure occurs through inhalation or other means, such as skin absorption; and the amount and duration of the exposure. For environmental exposure, EPA needs to know such things as whether the chemical is being released in the air, water or land; how much is being released; and the extent of the area affected. Another important factor in environmental exposure is chemical fate, that is, how the chemical acts and is ultimately disposed of in the environment. EPA must rely on its estimates for most of this information because actual measurements of exposure in the environment, workplace, and home, for the thousands of chemicals in use are not practicable because of the monitoring equipment and staff resources that would be required. Once EPA has made the required findings, the agency can issue a proposed rule for public comment, consider the comments it receives, and promulgate a final rule ordering chemical testing. EPA officials told us that finalizing rules under section 4 of TSCA can take from 2 to 10 years and require the expenditure of substantial resources. Given the time and resources required, the agency has issued rules requiring testing for only 185 of the approximately 82,000 chemicals in the TSCA inventory. Because EPA has used section 4 so sparingly, it has not continued to maintain information on the cost of implementing test rules. However, in our October 1994 report on TSCA, we noted that EPA officials told us that issuing a rule under section 4 can cost between about $68,500 and $234,000. Given the difficulties involved in requiring testing, EPA officials do not believe that TSCA’s authorities under section 4 provide an effective means for testing a large number of chemicals. They believe that EPA could review substantially more chemicals in less time if they had authority to require chemical companies to conduct testing and provide test data on chemicals once they reach a substantial production volume, assuming EPA has also determined that testing is necessary in order to obtain these data. Even when EPA has toxicity and exposure information on existing chemicals, the agency stated that it has had difficulty demonstrating that harmful chemicals pose an unreasonable risk and that they should be banned or have limits placed on their production or use. Since the Congress enacted TSCA in 1976, EPA has issued regulations under the act to ban or limit the production or restrict the use of five existing chemicals or chemical classes. The five chemicals or chemical classes are polychlorinated biphenyls (PCB), fully halogenated chlorofluoroalkanes, dioxin, asbestos, and hexavalent chromium. (See app. V for additional information on these five chemicals). In addition, for 160 existing chemicals, EPA has required chemical companies to submit notices of any significant new uses of the chemical, providing EPA the opportunity to review the risks posed by the new use. In order to regulate an existing chemical under section 6(a) of TSCA, EPA must find that there is a reasonable basis to conclude that the chemical presents or will present an unreasonable risk of injury to health or the environment. Before regulating a chemical, the EPA Administrator must consider and publish a statement regarding the effects of the chemical on human health and the magnitude of human exposure to the chemical; the effects of the chemical on the environment and the magnitude of the environment’s exposure to the chemical; the benefits of the chemical for various uses and the availability of substitutes for those uses; and the reasonably ascertainable economic consequences of the rule, after consideration of the effect on the national economy, small business, technological innovation, the environment, and public health. Further, the regulation must apply the least burdensome requirement that will adequately protect against such risk. For example, if EPA finds that it can adequately manage the unreasonable risk of a chemical through requiring chemical companies to place warning labels on the chemical, EPA could not ban or otherwise restrict the use of that chemical. Additionally, if the EPA Administrator determines that a risk of injury to health or the environment could be eliminated or sufficiently reduced by actions under another federal law, then TSCA prohibits EPA from promulgating a rule under section 6(a) of TSCA, unless EPA finds that it is in the public interest considering all aspects of the risk, the estimated costs of compliance, and the relative efficiency of such action to protect against risk of injury. According to EPA, it has found it difficult to meet all of these requirements for rulemaking. Finally, EPA must also develop substantial evidence in the rulemaking record in order to withstand judicial review. Under TSCA, a court reviewing a TSCA rule “shall hold unlawful and set aside…if the court finds that the rule is not supported by substantial evidence in the rulemaking record.” According to EPA officials, the economic costs of regulating a chemical are usually more easily documented than the risks of the chemical or the benefits associated with controlling those risks, and it is difficult to show by substantial evidence that EPA is promulgating the least burdensome requirement. EPA’s 1989 asbestos rule illustrates the evidentiary requirements that TSCA places on EPA to control existing chemicals. In 1979, EPA began exploring rulemaking under TSCA to reduce the risks posed by exposure to asbestos. Based upon its review of over 100 studies of the health risks of asbestos as well as public comments on the proposed rule, EPA concluded that asbestos was a potential carcinogen at all levels of exposure. In 1989, EPA promulgated a rule under TSCA section 6 prohibiting the future manufacture, importation, processing, and distribution of asbestos in almost all products. Some manufacturers of asbestos products filed suit against EPA, arguing, in part, that the rule was not promulgated on the basis of substantial evidence regarding unreasonable risk. In October 1991, the U.S. Court of Appeals for the Fifth Circuit agreed with the chemical companies, concluding that EPA had failed to muster substantial evidence to justify its asbestos ban and returning parts of the rule to EPA for reconsideration. In its ruling, the court concluded that EPA did not present sufficient evidence to justify the ban on asbestos because it did not consider all necessary evidence and failed to show that the control action it chose was the least burdensome regulation required to adequately protect human health or the environment. EPA had not calculated the risk levels for intermediate levels of regulation, as it believed there was no asbestos exposure level for which the risk of injury or death was zero. As articulated by the court, the proper course of action for EPA, after an initial showing of product danger, would have been to consider each regulatory option, beginning with the least burdensome, and the costs and benefits of each option. The court further criticized EPA’s ban of products for which no substitutes were currently available stating that, in such cases, EPA “bears a tough burden” to demonstrate, as TSCA requires, that a ban is the least burdensome alternative. Since the court’s 1989 decision, EPA has only exercised its authority to ban or limit the production or use of an existing chemical once (for hexavalent chromium). However, EPA officials said that they had started the process for promulgating the rule for hexavalent chromium years prior to the asbestos decision. As the court noted, TSCA is not a zero-risk statute. EPA generally is required to choose the least burdensome regulatory action and the Congress has indicated its intent that EPA carry out TSCA “in a reasonable and prudent manner the environmental, economic, and social impact of any action.” While concerns about the potential economic and social impacts of EPA’s regulations are legitimate, according to EPA officials, requiring EPA to satisfy before taking regulatory action that the regulation uses the least burdensome approach to mitigate unreasonable risks and that its rulemaking is supported by substantial evidence has proven difficult for EPA to meet. Canada and the EU have recently taken action to prioritize and review existing chemicals. The Canadian legislation (CEPA), enacted in 1999, requires the Minister of the Environment and the Minister of Health to compile, and from time to time amend, a Priority Substances List specifying those substances that the ministers believe should be given priority for assessing whether they are toxic or capable of becoming toxic. Within 7 years of the act, the ministers are to categorize existing chemicals for the purpose of identifying substances that, in their opinion, and on the basis of available information, (1) may present to individuals in Canada the greatest potential for exposure or (2) are persistent or bioaccumulative in accordance with the regulations, and inherently toxic to human beings or to nonhuman organisms, as determined by laboratory or other studies. The ministers shall then conduct screening assessments for such chemicals. The EU is currently considering a proposed regulation that, among other things, would require chemical companies to register and submit information on chemicals produced or imported in volumes of 1 metric ton or more per year, and would require submission of a chemical safety report documenting an assessment of chemicals manufactured or processed in quantities of 10 metric tons or more per year. Under CEPA and the proposed EU regulation, U.S. chemical companies may be required to provide information on some existing chemicals that are manufactured or processed in, or exported to, Canada and the EU. Under current EPA regulations, these U.S. chemical companies generally would not be required to submit the same information to EPA, although section 8 of TSCA provides the EPA Administrator authority to promulgate rules requiring chemical companies to submit such existing information on chemicals manufactured in or imported into the United States. While EPA officials told us that they are aware of the agency’s authority to require the submission of at least some of the types of information that U.S. chemical companies may be required to submit to Canada and the EU, they have not decided whether or when to use such authority. For example, these officials said that while the concept of obtaining copies of the information that U.S. chemical companies submit to foreign countries has merit, they might be able to obtain the information through voluntary arrangements with the foreign governments. Furthermore, EPA officials told us that any requirement for chemical companies to provide EPA a copy of the information they submit to Canada and the EU would have to meet the requirements under the Paperwork Reduction Act of 1995. Under this act, federal agencies must, among other things, conduct a review of the proposed information collection and obtain Office of Management and Budget approval before requesting most types of information from the public. EPA officials acknowledged that exchanging information through voluntary arrangements with foreign governments would have limitations, such as EPA’s inability to provide other countries with confidential business information. EPA officials also acknowledged that requiring copies of the submissions directly from the companies would produce a substantial amount of information that EPA could use to improve its models for assessing and predicting chemical risks. They told us that, given the recency of the Canadian chemical control changes and the pending nature of the EU regulation, EPA has not assessed all options or decided on a preferred approach for obtaining the data that U.S. chemical companies may be required to submit to foreign governments. EPA officials told us that the agency does not currently have a strategy or milestones for identifying resource needs and making decisions regarding future agency efforts to obtain such data. Chemical industry representatives told us that the industry would have no objections to EPA using its authority to require that chemical companies submit to EPA the same information that they provide to Canada, the EU, or other foreign governments. They indicated that few additional costs would be incurred by providing this information, but that companies could face additional burdens depending on the specific requirements governing the submission of data. For example, it would be easier for the chemical companies to provide the information periodically, such as annually, rather than concurrently along with the submissions to foreign governments. EPA’s ability to make publicly available the information that it collects under TSCA is limited. Chemical companies may claim some of the information they provide to EPA under TSCA as confidential business information. EPA is required under the act to protect trade secrets and privileged or confidential commercial or financial information against unauthorized disclosures, and this information generally cannot be shared with others, such as state health and environmental officials and foreign governments. However, some state officials believe this information would be useful for informing and managing their environmental risk programs. While EPA believes that some claims of confidential business information may be unwarranted, challenging the claims is resource-intensive. Lacking the resources needed to challenge claims on a wide basis, EPA identified several possible changes aimed at discouraging the submission of unwarranted claims of confidential business information under TSCA, but few were adopted. When companies submit information to EPA through premanufacture notices, many claim a large portion of the information as confidential. According to EPA, about 95 percent of premanufacture notices contain some information that chemical companies claim as confidential. Under EPA regulations, information that is claimed as confidential shall generally be treated as such if no statute specifically requires disclosure. Exceptions include if the information is required to be released by some other federal law or order of a court, if the company submitter voluntarily withdraws its confidential claim, or if the EPA Office of General Counsel makes a final administrative determination that the information does not meet the regulatory criteria substantiating a legal right to the claim. Officials who have various responsibilities for protecting public health and the environment from the dangers posed by chemicals believe that having access to confidential TSCA information would allow them to examine information on chemical properties and processes that they currently do not possess and could enable them to better control potential risks from harmful chemicals. For example, on the basis of a study performed by the state of Illinois with the cooperation of chemical companies and EPA, Illinois regulators found that toxicity information submitted under TSCA was useful in identifying chemical substances that should be included in contingency plans in order to alert emergency response and planning personnel to the presence of highly toxic substances at facilities. Additionally, the availability of this information could assist the states with environmental monitoring and enforcement. For instance, using TSCA data, Illinois regulators identified potential violations of state environmental regulations, such as cases where companies had submitted information to EPA under TSCA but failed to submit such information to the states as required. Likewise, the general public may also find information provided under TSCA useful. Individual citizens or community groups may have a specific interest in information on the risks of chemicals that are produced or used in nearby facilities. For example, neighborhood organizations can use such information to engage in dialogues with chemical companies about reducing chemical risks, preventing accidents, and limiting chemical exposures. EPA has not performed any recent studies of the appropriateness of confidentiality claims, although a 1992 EPA study indicated that problems with inappropriate claims were extensive. This study examined the extent to which companies made confidential business information claims, the validity of the claims, and the impact of inappropriate claims on the usefulness of TSCA data to the public. While EPA may suspect that some chemical companies’ confidentiality claims are unwarranted, they have no data on the number of inappropriate claims. EPA officials also told us that the agency does not have the resources that would be needed to investigate and, as appropriate, challenge claims to determine the number that are inappropriate. Consequently, EPA focuses on investigating primarily those claims that it believes may be both inappropriate and among the most potentially important—that is, claims relating to health and safety studies performed by the chemical companies involving chemicals currently used in commerce. The EPA official responsible for initiating challenges to confidentiality claims told us that EPA challenges about 14 such claims each year, and that the chemical companies withdraw nearly all of the claims challenged. During the early 1990s, the EPA Office of General Counsel led an agency wide review of EPA’s confidential business information regulations, but this review did not lead to substantial changes. Subsequent to this effort, EPA developed a plan involving various voluntary and regulatory measures to reduce industry’s use of TSCA confidentiality claims. These measures included exploring ways to make confidential information available to states, having senior corporate officials certify that the information claimed as confidential meets applicable statutory and regulatory requirements, and requiring companies to reassert their claims at a future date when confidentiality may no longer be necessary. While most of these changes were not implemented, EPA officials said they did make some changes to TSCA confidential business information regulations as a result of this review such as requiring up-front substantiation requirements for claiming plant site identity as confidential. EPA serves as an intermediary between chemical companies and state agencies that wish to have access to TSCA confidential information and, according to EPA, in recent years, state agencies have not been very aggressive in requesting such information. EPA believes, based on informal discussions with state officials, that obtaining such information may no longer be a high priority of the states, although the agency has not fully analyzed this issue. In addition, EPA officials said that chemical companies had expressed concerns about the costs of changing confidentiality procedures and have suggested that providing this information to states could increase the risk that some confidential information could be revealed to competitors. However, as noted previously, chemical industry representatives told us that chemical companies would not object to revising TSCA to enable states to obtain access to the confidential business information that companies provide to EPA—provided that adequate safeguards exist to ensure that the information would be used only for legitimate reasons and would be protected from inappropriate disclosures. EPA would need to ensure that the states receiving confidential information have policies and procedures similar to those that EPA uses to protect confidential information from improper disclosures. For example, when EPA provides confidential TSCA information to other federal agencies as permitted under the act, EPA ensures that the agencies have policies and procedures for protecting the information. In this regard, among other things, the agencies provide security briefings to those handling the confidential information, take steps to prevent the information from being stored on electronic systems open to the Internet, and require that such information is kept locked away when not in use. Chemical company representatives also told us that, in principle, they have no concerns about revising TSCA or EPA regulations to require that confidentiality claims be reasserted at a future date. They said that chemical companies make bona fide claims at the time the information is submitted to EPA, but this information may not need to be kept confidential after a certain date because confidentiality may no longer be necessary in order to protect trade secrets. However, EPA has no mechanism for determining when information no longer needs to be protected as confidential. Chemical company representatives said that companies sometimes choose to inform EPA that the information is no longer confidential, but neither TSCA nor EPA regulations require them to do so. Chemical industry representatives said that a requirement to reassert claims of confidentially at some later date would not be disruptive to the industry if the effective date of the requirement occurred after a considerable period had passed, such as 5 years or more after the information was initially claimed as confidential. While TSCA allows EPA to require the testing of existing chemicals through the rulemaking process, EPA has found it difficult and costly to make the findings necessary to promulgate rules, including findings that a chemical may pose unreasonable risks or that the chemical will be produced in substantial quantities, and that there is or may be substantial human or environmental exposure to the chemical. Consequently, to obtain the test information needed on existing chemicals, EPA relies extensively on the chemical industry to perform specific tests of certain chemicals under (1) consent agreements negotiated with chemical companies and (2) voluntary industry efforts under the HPV Challenge Program. Although the agency believes that the negotiated agreements are enforceable and consistent with EPA's authority under TSCA section 4, the enforceable consent agreements have never been tested in court, and EPA believes that explicit reference to the agreements in TSCA would be beneficial. Chemical companies have begun voluntarily providing some test data that EPA needs to assess chemical risks through the HPV program. However, in cases where the industry does not agree to voluntarily perform testing in an adequate and timely manner, EPA believes that requiring such testing is the only practical way to ensure that testing is performed. In this regard, while the chemical industry believes that EPA can use its existing authority under TSCA to promulgate testing rules and require testing as needed on a case-by-case basis, EPA notes its relative lack of experience in promulgating large multichemical test rules and that the testing authorities may prove difficult to implement on a large number of chemicals. For example, EPA has pointed out that, despite notable voluntary efforts regarding high-production-volume chemicals, (1) chemical companies have not agreed to test 300 chemicals identified by EPA as high-production-volume chemicals, (2) additional chemicals will become high-production chemicals in the constantly changing commercial chemical marketplace, and (3) chemicals without a particularly high-production volume may also warrant testing based on their toxicity and the nature of exposure to them. Furthermore, although the chemical industry may be willing to take action even before EPA has the evidence required for rulemaking under TSCA, the industry is nonetheless large and diverse, and it is uncertain that all companies will always take action voluntarily. While the protection of confidential business information is obviously a legitimate concern, TSCA currently prohibits EPA from disclosing much of this data for useful and important purposes such as providing complete information to state environmental management agencies and assisting international efforts to develop and validate, for regulatory purposes, SAR models or to harmonize chemical assessment approaches by sharing information with foreign governments—a goal generally shared by government and industry. Both EPA and the chemical industry believe that revising TSCA to allow the sharing of such information would be beneficial and appropriate provided that EPA ensures that recipients have in place policies and procedures designed to prevent inappropriate disclosures of the information. In addition, EPA and the chemical industry agree that the need to protect industry data often diminishes over time, and thus it would be appropriate to revise TSCA regulations to require companies to periodically reassert the confidentiality of business information. Largely because of limitations in the amounts and types of test data provided with new chemical notifications, over the past decades EPA has moved toward innovative approaches to assessing new chemicals and to obtaining test data needed to assess chemicals. Most notably, these approaches include the development and extensive use of models to assess new chemicals and voluntary chemical testing approaches to obtain test data needed to assess some existing chemicals. While of many of EPA’s models have not been validated for regulatory purposes, EPA believes that they are useful screening tools that have supported EPA’s actions to control the production or use of about 3,500 of the more than 32,000 new chemicals reviewed under TSCA. Nonetheless, EPA recognizes that, given the central role that these models play in the chemical review process, the agency needs a multifaceted strategy for improving the models, which includes obtaining additional information on chemical properties necessary to further develop and validate the models for regulatory purposes. Likewise, EPA is encouraged by the early results of the HPV voluntary chemical testing program for existing chemicals, which has already produced substantial amounts of basic test data. The agency has moved toward, but has not yet implemented, a methodology necessary for using the data to prioritize chemicals for further review and identify the specific additional data needed to determine whether and what controls should be placed on their production or use. The impact of EPA’s programs could be substantially enhanced as a result of additional information that companies may be required to provide to Canada and the EU. By promulgating a rule requiring U.S. companies and their subsidiaries to submit to EPA the same information that they submit to foreign governments, the agency could acquire substantial additional basic test data and health and safety studies, at little, if any, additional cost to the chemical companies. To improve EPA’s ability to assess the health and environmental risks of chemicals, the Congress should consider amending TSCA to provide explicit authority for EPA to enter into enforceable consent agreements under which chemical companies are required to conduct testing; give EPA, in addition to its current authorities under section 4 of TSCA, the authority to require chemical substance manufacturers and processors to develop test data based on substantial production volume and the necessity for testing; and authorize EPA to share with the states and foreign governments the confidential business information that chemical companies provide to EPA, subject to regulations to be established by EPA in consultation with the chemical industry and other interested parties, that would set forth the procedures to be followed by all recipients of the information in order to protect the information from unauthorized disclosures. To improve EPA’s management of its chemical review program, we recommend the EPA Administrator develop and implement a methodology for using information collected through the HPV Challenge Program to prioritize chemicals for further review and to identify and obtain additional information needed to assess their risks; promulgate a rule under section 8 of TSCA requiring chemical companies to submit to EPA copies of any health and safety studies, as well as other information concerning the environmental and health effects of chemicals, that they submit to foreign governments on chemicals that the companies manufacture or process in, or import to, the United States; develop a strategy for improving and validating, for regulatory purposes, the models that EPA uses to assess and predict the risks of chemicals and to inform regulatory decisions on the production, use, and disposal of the chemicals; and revise its regulations to require that companies reassert claims of confidentiality submitted to EPA under TSCA within a certain time period after the information is initially claimed as confidential. We provided EPA a draft of this report for its review and comment. EPA did not disagree with the report’s findings and recommendations. EPA, however, offered two substantive comments. Regarding our recommendation to the Administrator to promulgate a Section 8 rule to obtain data submitted by chemical manufacturers to foreign governments, EPA commented that, while such a reporting rule may bring useful information, other targeted approaches for collecting information which are directed at EPA’s domestic priorities, rather than foreign government mandates, may be more prudent. We believe that having access to the information submitted to foreign governments would provide EPA with an important source of information that would be useful for assessing the risks of existing chemicals and improving the models that EPA uses to assess new chemicals. EPA could tailor this rule more narrowly, however, if it saw good reason to do so, such as to avoid duplication of information it already possesses. Regarding the matter for Congressional consideration that Congress consider amending TSCA to explicitly recognize enforceable consent agreements, EPA stated that it believes that there is currently strong legal authority for these agreements. As we noted in our report, TSCA does not explicitly authorize EPA to enter into these agreements and a court could find that EPA lacked discretion to require testing other than through promulgation of a test rule. EPA’s comments are reproduced in appendix VI. 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 congressional committees with jurisdiction over EPA and its activities; the Administrator, EPA; and the Director, Office of Management and Budget. 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 have any questions about this report, please contact me at (202) 512-6225 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 VII. The Environmental Protection Agency (EPA) has initiated voluntary programs to help gather data to assess chemical risks and to promote the use of more environmentally safe chemicals. The following information does not offer an exhaustive account of EPA’s voluntary programs but rather a discussion of three specific programs that are designed to complement EPA’s efforts to assess and control chemicals under the Toxic Substances Control Act (TSCA) and to encourage pollution prevention under the Pollution Prevention Act (PPA). In response to several studies that showed that there were relatively few U.S. High-Production-Volume (HPV) chemicals for which an internationally agreed upon set of hazard screening data was available to the public, EPA, in cooperation with industry, environmental groups, and other interested parties, officially launched the HPV Challenge Program in late 1998. The program was created to ensure that a baseline set of data on approximately 2,800 high-production-volume-chemicals would be made available to the public. HPV chemicals are manufactured or imported in amounts equal to or greater than 1 million pounds per year and were identified for this program through data reported under TSCA Inventory Update Rule (IUR). Under the HPV Challenge Program, EPA invited chemical companies to voluntarily sponsor the approximately 2,800 chemicals. As part of their commitment to the HPV Challenge Program, sponsors submit data summaries of existing information along with a test plan that proposes a strategy to fill data gaps for either individual chemicals or for a category of chemicals. Sponsors could fill data gaps by (1) using existing scientifically adequate data, (2) using an estimation technique such as Structured Activity Analyses (SAR), or (3) proposing new testing. Testing will only be conducted when there are inadequate existing data or when other approaches, such as SAR, are not adequate to meet the need. EPA requested that companies perform a self-assessment on the quality of information they are providing to EPA. EPA officials believe that the early results of the HPV Challenge Program are promising. Nonetheless, several problems remain. While chemical companies collectively have agreed to sponsor, or provide data for, most of the chemicals that are produced at a high-production-volume, about 300 chemicals, called, “orphans,” have not been sponsored by any chemical company. EPA has issued a proposed rule under section 4 of TSCA requiring chemical companies to conduct tests on and provide data for 37 orphan chemicals in 2000, but has not yet finalized these rules. According to EPA officials, due in part to the difficulty and cost in developing and issuing such rules, EPA has not determined how to proceed on obtaining data on the remaining orphan chemicals. EPA officials do not know if they can make the findings necessary to issue test rules for the additional unsponsored chemicals. In addition, since 1990, other chemicals are produced at or above the high-production-volume threshold. Although EPA has not developed a plan to address these new HPV chemicals, several chemical associations have announced a joint initiative to extend industry’s work to chemicals that meet the HPV threshold as of 2002 and to provide use and exposure information for chemicals sponsored through EPA’s and industry’s programs. Finally, while the HPV Challenge Program looks promising in that, if successful, it will provide EPA and the public with information not previously available on the properties of chemicals produced at large volumes in the United States, this program may not provide enough information for EPA to use in making risk assessment decisions. While the data in the HPV Challenge Program may help EPA prioritize chemicals of concern, the data may not present sufficient evidence for EPA to determine whether a reasonable basis exists to conclude that the chemical presents an unreasonable risk of injury to health or the environment and that regulatory action is necessary. The Voluntary Children’s Chemical Evaluation Program (VCCEP) is a pilot program developed by EPA to ensure that there is adequate publicly available toxicity and exposure information to assess the potential risks to children posed by 23 specific chemicals. The pilot VCCEP was announced in a Federal Register notice in December 2000. EPA is running a pilot of the VCCEP in order to gain insight into how best to design and implement the program in order to effectively provide the agency and the public with the means to understand the potential health risk to children associated with certain chemical exposures. EPA intends the pilot to be the means of identifying efficiencies that can be implemented in future VCCEPs. EPA asked companies that produce and/or import 23 specific chemicals to volunteer to sponsor their chemical in the first phase of a pilot of the VCCEP. Chemical companies have volunteered to sponsor 20 of the 23 chemicals in the VCCEP. Chemical companies volunteering to sponsor a chemical under the program make chemical-specific public commitments to make certain hazard, exposure, and risk assessment data and analyses publicly available. EPA is pursuing a three-tiered approach for gathering information, with Tier 3 conducting more detailed toxicology and exposure studies than Tier 2, and Tier 2 conducting more detailed toxicology and exposure studies than Tier 1. After the submission of Tier 1 information and its review by a peer consultation group consisting of scientific experts with extensive and broad experience in toxicity testing and exposure evaluations, EPA reviews the sponsor’s assessment and develops a response focusing primarily on whether any additional information is needed to adequately evaluate the potential risks to children. If additional information is needed to assess a chemical’s risk to children, EPA will indicate what information should be provided in Tier 2. Companies will then be given an opportunity to sponsor chemicals at Tier 2. EPA plans to repeat this process for determining if Tier 3 information is needed. Information from all three tiers may not always be necessary to adequately evaluate the risk to children. According to EPA officials, since the program’s inception, sponsors have submitted six assessments on chemicals to EPA and the consultation group. EPA officials believe that they will collect Tier I data for all 20 sponsored chemicals within the next 4 to 5 years. According to EPA officials, as of December 2004, three assessments are in the peer consultation stage, and industry has indicated that three or four assessments will be ready for peer consultation in 2005. Although EPA has not currently assessed the effectiveness of VCCEP, it plans to have an interim evaluation in 2005, and a final evaluation in 2007. In December 2002, EPA announced the Sustainable Futures Program, a voluntary program designed to help industry develop new chemicals that are sustainable economically and environmentally. Industry participants in the program are offered (1) hands on training on some of EPA’s chemical risk screening models, (2) regulatory relief in the form of expedited review, (3) small business assistance, (4) technical assistance, and (5) public recognition. In Sustainable Futures, EPA has sought to reduce the likelihood of harmful new chemicals entering into commerce by making its screening tools available to chemical companies. EPA provides companies training for and access to the same chemical risk screening models that EPA uses in screening and evaluating the risks of new chemicals. Use of these tools may enhance companies’ ability to identify concerns and halt or redirect work on a potentially risky chemical early in the research and development phase. This approach can save a company the resources it might otherwise invest in a chemical that ultimately may encounter problems during EPA’s review process for new chemicals. By getting early feedback on the potential hazards of a new chemical, a company can reduce regulatory uncertainty, lower development and production costs, and make production decisions that consider a broader array of factors other than the potential profitability of a new chemical. Additionally, by using these screening tools, companies may choose not to produce chemicals that could be regulated by EPA, thus, potentially reducing EPA's regulatory burden. Canada and the European Union (EU) have inventories of chemicals already in the marketplace and require chemical companies to notify regulators about the manufacture or importation of new chemicals. Officials we spoke with identified several notable aspects of the Canadian and EU chemical legislation that differ from the Toxic Substances Control Act (TSCA). First, in the EU, chemical companies must notify regulators prior to marketing new chemicals, which is after production has already begun. Second, Canadian law requires chemical companies to conduct testing of new chemicals based on production or import volume, while EU legislation requires testing based on marketed volume. Finally, the EU is considering changes to its basic chemical legislation that would require chemical companies to submit testing information on existing, as well as new, chemicals. A chart generally describing some of the provisions of TSCA and chemical control legislation in the EU and Canada, along with the proposed EU Registration, Evaluation and Authorization of Chemicals (REACH) regulation, is provided in table 2. Canadian Environmental Protection Act (CEPA) regulations and EU legislation require chemical companies to submit certain test data on new chemicals before they enter commerce. Canada defines new chemicals as those chemicals that are not on Canada’s Domestic Substances List—a list of all known substances that were in commercial use in Canada between January 1, 1984, and December 31, 1986, were manufactured in or imported into Canada by any person in a quantity of 100 kilograms or more in any calendar year during that period, or that have subsequently been fully notified and assessed under CEPA. Under CEPA regulations, chemical companies must submit certain information and test data to the government when production or importation volumes reach specified levels. The information required for new chemicals differs depending on whether the new chemical is listed on the Non-Domestic Substances List— a list that is based on the TSCA Chemical Substances Inventory. Chemicals that are on the Non-Domestic Substances List are subject to notification requirements at higher volume thresholds than are applicable to other new chemicals and are exempt from certain information submission requirements. In addition, the requirements to submit test data for low volume chemicals are less extensive and complex than those for high volume chemicals. According to Canadian officials, a new chemical is generally not added to the existing chemical inventory until a certain level of production or import has been reached, and specified testing for that level has been performed without conditions being placed on the chemical’s manufacture or import. The EU currently maintains a separate inventory for new chemicals, which are subject to additional testing and review before they are marketed in volumes starting at 10 kilograms. Existing chemicals are not subject to the same testing requirements. However, under the proposed EU REACH chemical regulation, according to officials, this distinction between new and existing chemicals would largely be eliminated. All chemical companies would generally be required to register substances they produce or import in volumes of 1 metric ton or more per year. REACH would require chemical companies to gather and submit information on the properties of their substances and where necessary perform tests to generate health and safety data. For all substances subject to registration manufactured or imported by the registrant in quantities of 10 metric tons or more per year, REACH would require submission of a chemical safety report, documenting a chemical safety assessment including, among other things, human health and environmental health hazard assessments. Substances would not be allowed to be manufactured or imported in the European community unless they met the registration requirements. Thus, according to EU officials, REACH would reverse the burden of proof that is now placed on public authorities to manage the risks and uses of particular existing chemicals. CEPA and EU legislation allow chemical companies to make confidentiality claims. However, according to officials we spoke with, these countries place some greater restrictions than TSCA does on the types of data that may be claimed as confidential. In Canada, information that companies request be treated as confidential is not to be disclosed except in certain circumstances. The Minister of the Environment may disclose certain information upon giving 24 hours notice to the company, if (a) the disclosure is in the interest of public health, public safety or the protection of the environment and (b) the public interest in the disclosure (1) outweighs in importance any material financial loss or prejudice to the competitive position of the person who provided the information or on whose behalf it was provided and (2) any damage to the privacy, reputation or human dignity of any individual that may result from disclosure. However, CEPA maintains certain protections for information protected under Canada’s Privacy Act, Access to Information Act, and Hazardous Materials Information Review Act. EU legislation also allows chemical companies to make confidentiality claims. However, according to an EU official we spoke with, the EU places some greater restrictions on the types of data that may be claimed as confidential than TSCA does. In the EU, a company may indicate that information is commercially sensitive and that disclosure may be harmful to the company industrially and commercially and, therefore, that the company wishes to keep the information secret from all persons other than the competent authorities and the European Commission. Secrecy, however, shall not apply to the trade name of the substance, certain physicochemical data concerning the substance, possible ways of rendering the substance harmless, the interpretation of the toxicological and ecotoxicological tests and the name of the body responsible for the tests, and certain recommended methods and precautions and emergency measures. The authority receiving the information is to decide on its own responsibility what information is covered by commercial and industrial secrecy. The company can go to court and appeal the authority’s decision. Under REACH, as currently proposed, one of the objectives of the new system for the management of industrial chemicals would be to make information on chemicals more widely available. Whenever a request for access to documents held by the proposed European Chemicals Agency is made, the agency would be required to inform the registrant of the chemical or other party concerned of the request. That party would have 30 days to submit a declaration identifying information considered to be commercially sensitive and disclosure of which might harm the party commercially that the party wishes to be kept confidential. The agency would consider the information and decide whether to accept the declaration. The party could appeal this decision. The following information would be among the types of information that would not be treated as confidential: the trade name(s) of the substance; physicochemical data concerning the substance and on pathways and environmental fate, the result of each toxicological and ecotoxicological study, if essential to classification and labeling, the degree of purity of the substance and the identity of impurities and/or additives which are known to be dangerous, guidance on safe use, and information contained in the safety data sheet (except for the name of the company or otherwise accepted as confidential in REACH). The following information would be treated as confidential, even if the company did not claim it as confidential: details of the full composition of a preparation, the precise use, function, or application of a substance or preparation, the precise tonnage of the substance or preparation manufactured or placed on the market, and links between a manufacturer or importer and his downstream users. However, in exceptional cases where there are immediate risks to human health, safety or the environment, REACH would authorize the proposed European Chemicals Agency to disclose this information. As requested, we identified a number of options that could strengthen the Environmental Protection Agency’s (EPA) ability under the Toxic Substances Control Act (TSCA) to assess chemicals and control those found to be harmful. These options are those that we previously identified in an earlier GAO report on ways to make TSCA more effective. Representatives of environmental organizations and subject matter experts subsequently concurred with a number of these options and commented on them in congressional testimony. These options are not meant to be comprehensive but illustrate actions that the Congress could take to strengthen EPA’s ability to regulate chemicals under TSCA. The Congress could amend TSCA to reduce the evidentiary burden that EPA must meet to take regulatory action under the act by (1) amending the unreasonable risk standard that EPA must meet to regulate existing chemicals under section 6 of TSCA, (2) amending the standard for judicial review that currently requires a court to hold a TSCA rule unlawful and set it aside unless it is supported by substantial evidence in the rulemaking record, or (3) amending the requirement that EPA must choose the least burdensome regulatory requirement. Currently, under TSCA section 6, EPA may only regulate existing chemicals if it finds that there is a reasonable basis to conclude that the chemical “presents or will present an unreasonable risk of injury to health or the environment.” Several options are available to amend this standard. For example: The Congress could authorize EPA to regulate existing chemicals when it identifies “significant,” rather than “unreasonable,” risks of injury to health or the environment. “Significant risk” is the standard under TSCA section 4(f) by which EPA is to identify chemicals for priority review. EPA officials view the term “significant risk” as a very high threshold for action. However, they believe that demonstrating significant risk would be less demanding than demonstrating unreasonable risk. While “significant risk” implies a finding that the risks are substantial or serious, EPA believes that a finding of “unreasonable” risk requires an extensive cost-benefit analysis. When reviewing EPA’s asbestos rule, the United States Court of Appeals for the Fifth Circuit stated that in evaluating what risks are unreasonable EPA must consider the costs of any proposed actions; moreover, the court noted that TSCA’s requirement that EPA impose the least burdensome regulation reinforces the view that EPA must balance the costs of its regulations against their benefits. The Congress could amend TSCA to require that EPA demonstrate that a chemical “may present” an unreasonable risk, rather than requiring a demonstration that a chemical “presents or will present” an unreasonable risk. Such a change would still require EPA to develop documentation of evidence supporting its assessment, although to a lesser extent than is currently required under TSCA. In addition, TSCA currently requires a court to hold unlawful and set aside a TSCA rule if it finds that the rule is not supported by substantial evidence in the rulemaking record. As several courts have noted, the substantial evidence standard is more rigorous than the arbitrary and capricious standard normally applied to rulemaking under the Administrative Procedure Act. The Congress could amend the standard for judicial review to instead reflect a rational basis test to prevent arbitrary and capricious administrative decisions. Finally, TSCA currently requires that EPA choose the least burdensome requirement when regulating existing chemicals. As we noted earlier, in its ruling that EPA had failed to muster substantial evidence to justify its asbestos ban, the United States. Court of Appeals for the Fifth Circuit concluded that EPA did not present sufficient evidence to justify the ban on asbestos because it did not consider all necessary evidence and failed to show that the control action it chose was the least burdensome regulation required to adequately protect human health or the environment. EPA had not calculated the risk levels for intermediate levels of regulation, as it believed there was no asbestos exposure level for which the risk of injury or death was zero. As articulated by the court, the proper course of action for EPA, after an initial showing of product danger, would have been to consider each regulatory option, beginning with the least burdensome, and the costs and benefits of each option. Congressional testimony has indicated that, under this court decision, the process “is not merely onerous; it may well be impossible.” The Congress could amend or repeal this requirement. TSCA could be revised to require companies to test their chemicals and submit the results to EPA with their premanufacture notices. Currently, such a step is only required if EPA makes the necessary findings and promulgates a testing rule. A major drawback to testing is its cost to chemical companies, possibly resulting in a reduced willingness to perform chemical research and innovation. To ameliorate such costs, or to delay them until the new chemicals are produced in large enough quantity to offset the cost of testing, requirements for testing could be based on production volume. For example, in Canada and the EU, testing requirements for low-volume chemicals are less extensive and complex than for those for high-volume chemicals. Another option would be to provide EPA with greater authority to require testing targeted to those areas in which EPA’s structure activity relationship (SAR) analysis does not adequately predict toxicity. For example, EPA could be authorized to require such testing if it finds that it cannot be confident of the results of its SAR analysis (e.g., when it does not have sufficient toxicity data on chemicals with molecular structures similar to those of the new chemicals submitted by chemical companies.) Under such an option, EPA could establish a minimal set of tests for new chemicals to be submitted at the time a chemical company submits a premanufacture notice for the chemical for EPA’s review. Additional and more complex and costly testing could be required as the new chemical’s potential risks increase, based on production or environmental release levels. According to some chemical companies, the cost of initial testing could be reduced by amending TSCA to require EPA to review new chemicals before they are marketed, rather than before they are manufactured. In this regard, according to EPA, about half of the premanufacture notices the agency receives from chemical companies are for new chemicals that, for various reasons, never enter the marketplace. Thus, requiring companies to conduct tests and submit the resulting test data only for chemicals that are actually marketed would be substantially less expensive than requiring them to test all new chemicals submitted for EPA’s review. TSCA’s chemical review provisions could be strengthened by requiring the systematic review of existing chemicals. In requiring that EPA review premanufacture notices within 90 days, TSCA established a firm requirement for reviewing new chemicals, but the act contains no similar requirement for existing chemicals unless EPA determines by rule that they are being put to a significant new use. TSCA could be amended to establish a time frame for the review of existing chemicals, putting existing chemicals on a more equal footing with new chemicals. However, because of the large number of existing chemicals, EPA would need the flexibility to identify which chemicals should be given priority. TSCA could be amended to require individual chemical companies or the industry as a whole to compile and submit chemical data, such as that included in the HPV Challenge Program to EPA, for example, as a condition of manufacture or import above some specified volume. Given the thousands of chemicals in use and the many ways that exposures and releases to the environment can occur, TSCA’s chemical-by-chemical approach means that the act is unlikely to address more than the most serious chemical risks. The process of collecting information on chemical effects and exposures to support regulatory actions under TSCA is a resource intensive and time-consuming process. A different approach would be to set goals for reducing the use of toxic chemicals overall. Under this approach, legislation could establish national goals for reductions in the use of toxic chemicals and provide EPA with various tools, such as pollution taxes and other economic incentives to encourage chemical companies to engage in risk reduction activities. This approach differs from a command-and-control approach in which the regulator specifies how pollution must be reduced or what pollution control technology must be used. An approach employing economic incentives gives companies more flexibility in choosing how to reduce pollution and could lead to more cost-effective solutions to pollution problems. An approach employing economic incentives can take several forms, including systems under which firms can buy and sell emission reduction credits and pollution taxes. A pollution tax is a tax on the emissions of a pollutant or on harmful products or substances. Such a tax would have to be carefully designed and implemented to be effective in achieving environmental and economic benefits. Because of their inherently greater flexibility, market-based incentives may be both a less costly and a more effective means of controlling pollution. More chemicals could also be addressed under TSCA if the Congress were to amend TSCA to expand the types of circumstances under which EPA could take action under the act to specifically include situations in which (1) it identifies pollution prevention opportunities, such as when safer chemical substitutes can be shown to exist at a reasonable cost, or (2) the use of a toxic chemical cannot be shown to pose a current problem, but its continued use could be a long-term problem because it persists in the environment or accumulates in plant or animal tissue. To better support EPA’s pollution prevention initiatives, TSCA could also be amended to expand the range of regulatory control options available to EPA to reduce chemical risks. Such additional options could include the authority to require the use of safer chemical substitutes or manufacturing processes that result in less exposure or fewer environmental releases. Our objectives were to review the Environmental Protection Agency’s (EPA) efforts to (1) control the risks of new chemicals not yet in commerce, (2) assess existing chemicals used in commerce, and (3) publicly disclose information provided by chemical companies under the Toxic Substances Control Act (TSCA). In addressing these issues we also obtained information on EPA’s voluntary chemical control programs that complement TSCA, the chemical control programs of Canada and the European Union (EU), and identified some legislative options that GAO and others have previously noted could strengthen EPA’s authority to assess and regulate chemicals under TSCA. To review the extent to which EPA has assessed the risks of new and existing chemicals and has made information obtained under TSCA public, we reviewed the relevant provisions of TSCA, identified and analyzed EPA’s regulations on how the new and existing chemical review and control programs work, including the handling of confidential information, and determined the extent of actions taken by EPA to control chemicals. These efforts were augmented by interviews with EPA officials and representatives of the American Chemistry Council (a national chemical manufacturers association), Environmental Defense (a national, nonprofit, environmental advocacy organization), and the Synthetic Organic Chemical Manufacturer’s Association (a national, specialty chemical manufacturer’s association). We also obtained and reviewed documentation provide to EPA by the states on the usefulness of confidential business information to states. We interviewed several EPA officials to assess the reliability of data related to assessment and control of new chemicals. We determined the data were sufficiently reliable for the purposes of this report. To understand efforts EPA has taken to assess and control the risks of new and existing chemicals, we identified several voluntary programs designed to promote environmentally safer chemicals and to gather information to assess the risks of chemicals, in particular, EPA’s Sustainable Futures Program, Voluntary Children’s Chemical Evaluation Program (VCCEP), and the High Production Volume (HPV) Challenge Program. We selected Sustainable Futures because it is a risk assessment tool used to complement EPA’s other pollution prevention programs. Sustainable Futures represents a pollution prevention program that impacts manufacturer’s chemical decision-making process for chemicals not yet in commerce; while other pollution prevention programs focus on chemicals already in commerce. We selected the HPV Challenge Program and VCCEP because they represent significant data collection efforts to provide information for EPA’s assessment of existing chemicals. To enhance our understanding, we interviewed EPA officials and representatives at American Chemistry Council, Environmental Defense, and the Synthetic Organic Chemical Manufacturer’s Association; we also attended EPA’s National Toxic and Pollution Prevention Advisory Committee meetings. Finally, we obtained and reviewed agency documents related to these programs. To understand other chemical control regulation, we collected documentation and interviewed individuals knowledgeable about (1) the Toxic Substances Control Act and (2) foreign chemical control laws or proposed legislation: (a) the Canadian Environmental Protection Act 1999 and (b) the European Union’s Chemical Directives and proposed Registration, Evaluation and Authorization of Chemicals. The EU and Canada were chosen because they have recently taken action to revise their chemical legislation. In 1999, Canada revised its chemical control law and in 2003, the EU proposed a new regulation. The EU and Canada were also selected because they have characteristics that are similar to those of the United States: Canada and the EU member countries are industrialized nations and have extensive experience with the review and control of chemical substances. In addition, Canada and the EU produce a considerable amount of chemicals. Furthermore, EPA officials and chemical industry representatives recommended these countries for comparison with TSCA. For each of the countries, we obtained laws, technical literature, and government documents that describe their chemical control programs. We also interviewed foreign officials responsible for implementing the chemical substances control laws in Canada and for representing the European Commission in the United States. Our descriptions of these countries’ laws are based on interviews with government officials and written materials they provided. To identify potential options to strengthen EPA’s ability to assess and regulate chemical risks under TSCA, we (1) interviewed officials at EPA, the American Chemistry Council, Environmental Defense, EPA’s National Toxic and Pollution Prevention Advisory Committee, and the Synthetic Organic Chemical Manufacturer’s Association; (2) reviewed pertinent literature, including prior GAO reports and congressional hearings on TSCA; (3) attended various public meetings and conferences sponsored by EPA and others; and (4) reviewed chemical legislation in Canada and and proposed legislation in the EU. This report does not discuss all possible options for revising TSCA. Those options that are discussed were selected because they have been identified as addressing constraints in EPA's authority under the act. Our selection of these options reflects (1) our knowledge of EPA’s implementation of TSCA obtained during this and previous reviews of the agency’s toxics programs, (2) foreign countries’ approaches to reviewing and controlling harmful chemicals, and (3) views provided by U.S. government officials and representatives of the chemical industry and environmental groups. Our review was performed between June 2004 and April 2005 in accordance with generally accepted government auditing standards. The Environmental Protection Agency (EPA) has promulgated rules under section 6 of the Toxic Substances Control Act (TSCA) to place restrictions on five existing chemicals or chemical categories and four new chemicals. The five existing chemicals/chemical categories are polychlorinated biphenyls (PCB), fully halogenated chlorofluoroalkanes, dioxin, asbestos and hexavalent chromium. The four new chemicals are all used in metal working fluids that, when combined with nitrites, could cause the formation of a cancer causing substance. EPA’s rules for the four new chemicals were immediately effective, unlike EPA’s rules for existing chemicals, which required a comment period. Because the Congress believed that PCBs posed a significant risk to public health and the environment, section 6(e) of TSCA prohibited the manufacture, processing, distribution in commerce, or use of PCBs other than in a totally enclosed manner after January 1, 1978, unless otherwise authorized by EPA rule. Under TSCA, EPA may, by rule, authorize the manufacture, processing, distribution in commerce or use of any PCB in a manner other than a totally enclosed manner if EPA finds that it will not present an unreasonable risk of injury to health or the environment. EPA was also required by July 1977 to promulgate rules to (1) prescribe methods for PCB disposal and (2) require PCBs to be marked with clear and adequate warnings and instructions with respect to their processing, distribution in commerce, use, or disposal. EPA has issued various rules to implement these statutory requirements and provide for some exemptions to the PCB prohibitions. About 50 percent of PCBs were used in electrical, heat transfer, and hydraulic equipment. PCBs were also used in numerous other applications, including plasticizers and fire retardants. Approximately half of the PCBs manufactured were disposed of or released into the environment prior to EPA promulgating rules for the disposal requirements under TSCA. PCBs are toxic and very persistent in the environment. When released into the environment, they decompose very slowly and can accumulate in plants, animals, and human tissue. Laboratory tests show that they cause cancer in rats and mice and that they have adverse effects on fish and wildlife. In 1978, EPA banned nonessential uses of fully halogenated chlorofluoroalkanes as propellants in aerosol spray containers. EPA took this action because of concerns that these chemicals were destroying the upper atmosphere’s ozone layer, which shields the earth from ultraviolet radiation. Increased exposure to ultraviolet radiation has been linked to increased skin cancer. Depletion of the ozone layer is also thought to lead to climate changes and other adverse effects. Chlorofluorocarbons, halons, and other fully halogenated chlorofluoroalkanes have been relied upon for applications including air conditioning, refrigeration, fire suppression, insulation, and solvent cleaning. According to EPA officials, in advance of its obligations under the Montreal Protocol, the United States began phasing out production of the most potent ozone depleting chemicals in 1994 and is now gradually phasing out hydrofluorocarbon production as well. According to EPA officials, other industrialized countries have followed the U.S. lead, and developing countries with assistance from the Multilateral Fund are now complying with the protocol phase out requirements. The regulation of fully halogenated chlorofluoroalkanes was eliminated in 1995 by an EPA final rule because EPA had banned such chlorofluorocarbons propellants under the Clean Air Act, making the TSCA rule obsolete. In 1980, EPA promulgated a rule prohibiting Vertac Chemical Company and others from removing for disposal certain wastes containing 2,3,7,8- tetrachlorodibenzo-p-dioxin (TCDD) stored at Vertac’s Jacksonville, Arkansas, facility. The rule also required any persons planning to dispose of TCCD contaminated wastes to notify EPA 60 days before their intended disposal. TCDD, one of the most toxic of the about 75 dioxins in existence and an animal carcinogen, is a contaminant or waste product formed during the manufacture of certain substances. EPA concluded that it was likely to result in adverse human health effects. This TSCA action was superseded by a 1985 Resource Conservation and Recovery Act regulation. Asbestos, which refers to several minerals that typically separate into very tiny fibers, is a known human carcinogen that can cause lung cancer and other diseases if inhaled. Asbestos containing materials were used widely for fireproofing, thermal and acoustical insulation, and decoration in building construction and renovation before the adverse effects of asbestos were known. Asbestos also has numerous other applications, for example, in friction products such as brake linings. After initially regulating asbestos under the Clean Air Act in the early 1970s, EPA issued a final rule under TSCA to ban the manufacturing, importing, and processing of nearly all asbestos products in July 1989. The rule was to begin phasing out asbestos-containing products in August 1990, and complete the phaseout by 1997. EPA’s rule was challenged in federal court by asbestos product manufacturers, and in October 1991, the United States Court of Appeals for the Fifth Circuit vacated most of the rule—the rule continued to apply to asbestos products no longer in commerce—and remanded it to the agency for further consideration. In 1990, EPA banned the use of hexavalent chromium-based water treatment chemicals in comfort cooling towers (CCT) and the distribution of them in commerce for use in CCTs on the basis of health risks associated with human exposure to air emissions. According to EPA, hexavalent chromium was being released from a large number of unidentified cooling towers. At the time, hexavalent chromium was a known human carcinogen. EPA could have issued an emissions standard under the Clean Air Act. However, the agency believed that regulation under TSCA would be more efficient and effective because the act could be used to regulate use and distribution of hexavalent chromium-based water treatment chemicals. EPA issued proposed rules to impose certain controls on four new chemicals: (1) mixed mono and diamides of an organic acid, (2) triethanolamine salts of a substituted organic acid, (3) triethanolanime salt of tricarboxylic acid, and (4) tricarboxylic acid. The agency determined these chemicals would pose an unreasonable risk to human health or the environment. According to EPA, adding nitrites or other nitrosating agents to the substances causes the formation of a substance known to cause cancer in laboratory animals. EPA promulgated the rules regulating these chemicals in 1984 to prohibit adding any nitrosating agent, including nitrites, to metal working fluids that contain these substances. EPA promulgated the rules under TSCA section 5(f). Under this section of TSCA, if EPA determines that there is a reasonable basis to conclude that the manufacturing, processing, distribution in commerce, or disposal of a new chemical presents or will present an unreasonable risk of injury to health or the environment before EPA can promulgate a rule under TSCA section 6, EPA may limit the amount or impose other restrictions via an immediately effective proposed rule. The restrictions on these chemicals remain in place today. In addition to the individual named above, David Bennett, John Delicath, Richard Frankel, Ed Kratzer, Malissa Livingston, Jean McSween, Marcella Phelps, and Amy Webbink made key contributions to this report. | Chemicals play an important role in everyday life, but some may be harmful to human health and the environment. Chemicals are used to produce items widely used throughout society, including consumer products such as cleansers, paints, plastics, and fuels, as well as industrial solvents and additives. However, some chemicals, such as lead and mercury, are highly toxic at certain doses and need to be regulated because of health and safety concerns. In 1976, the Congress passed the Toxic Substances Control Act (TSCA) to authorize the Environmental Protection Agency (EPA) to control chemicals that pose an unreasonable risk to human health or the environment. GAO reviewed EPA's efforts to (1) control the risks of new chemicals not yet in commerce, (2) assess the risks of existing chemicals used in commerce, and (3) publicly disclose information provided by chemical companies under TSCA. EPA's reviews of new chemicals provide limited assurance that health and environmental risks are identified before the chemicals enter commerce. Chemical companies are not required by TSCA, absent a test rule, to test new chemicals before they are submitted for EPA's review, and companies generally do not voluntarily perform such testing. Given limited test data, EPA predicts new chemicals' toxicity by using models that compare the new chemicals with chemicals of similar molecular structures that have previously been tested. However, the use of the models does not ensure that chemicals' risks are fully assessed before they enter commerce because the models are not always accurate in predicting chemical properties and toxicity, especially in connection with general health effects. Nevertheless, given the lack of test data and health and safety information available to the agency, EPA believes the models are generally useful as screening tools for identifying potentially harmful chemicals and, in conjunction with other information, such as the anticipated potential uses and exposures of the new chemicals, provide a reasonable basis for reviewing new chemicals. The agency recognizes, however, that obtaining additional information would improve the predictive capabilities of its models. EPA does not routinely assess the risks of all existing chemicals and EPA faces challenges in obtaining the information necessary to do so. TSCA's authorities for collecting data on existing chemicals do not facilitate EPA's review process because they generally place the costly and time-consuming burden of obtaining data on EPA. Partly because of a lack of information on existing chemicals, EPA, in partnership with industry and environmental groups, initiated the High Production Volume (HPV) Challenge Program in 1998, under which chemical companies began voluntarily providing information on the basic properties of chemicals produced in large amounts. It is unclear whether the program will produce sufficient information for EPA to determine chemicals' risks to human health and the environment. EPA has limited ability to publicly share the information it receives from chemical companies under TSCA. TSCA prohibits the disclosure of confidential business information, and chemical companies claim much of the data submitted as confidential. While EPA has the authority to evaluate the appropriateness of these confidentiality claims, EPA states that it does not have the resources to challenge large numbers of claims. State environmental agencies and others are interested in obtaining confidential business information for use in various activities, such as developing contingency plans to alert emergency response personnel of the presence of highly toxic substances at manufacturing facilities. Chemical companies recently have expressed interest in working with EPA to identify ways to enable other organizations to use the information given the adoption of appropriate safeguards. |
The use of information technology (IT) to electronically collect, store, retrieve, and transfer clinical, administrative, and financial health information has great potential to help improve the quality and efficiency of health care and is important to improving the performance of the U.S. health care system. Historically, patient health information has been scattered across paper records kept by many different caregivers in many different locations, making it difficult for a clinician to access all of a patient’s health information at the time of care. Lacking access to these critical data, a clinician may be challenged to make the most informed decisions on treatment options, potentially putting the patient’s health at greater risk. The use of electronic health records can help provide this access and improve clinical decisions. Interoperability—the ability to share data among health care providers—is key to making health care information electronically available. Interoperability enables different information systems or components to exchange information and to use the information that has been exchanged. This capability is important because it allows patients’ electronic health information to move with them from provider to provider, regardless of where the information originated. If electronic health records conform to interoperability standards, they can be created, managed, and consulted by authorized clinicians and staff across more than one health care organization, thus providing patients and their caregivers the necessary information required for optimal care. Unlike paper-based health records, electronic health records can provide decision support capabilities, such as automatic alerts about a particular patient’s health, or other advantages of automation. Interoperability depends on the use of agreed-upon standards to ensure that information can be shared and used. In the health IT field, standards may govern areas ranging from technical issues, such as file types and interchange systems, to content issues, such as medical terminology. DOD and VA have agreed upon numerous common standards that allow them to share health data. They have also participated in numerous standards- setting organizations tasked to reach consensus on the definition and use of standards. For example, DOD and VA officials serve as members and are actively working on several committees and groups within the Healthcare Information Technology Standards Panel. The panel identifies and harmonizes competing standards and develops interoperability specifications that are needed for implementing the standards. Interoperability can be achieved at different levels. At the highest level, electronic data are computable (that is, in a format that a computer can understand and act on to, for example, provide alerts to clinicians on drug allergies). At a lower level, electronic data are structured and viewable, but not computable. The value of data at this level is that they are structured so that data of interest to users are easier to find. At still a lower level, electronic data are unstructured and viewable, but not computable. With unstructured electronic data, a user would have to search through uncategorized data to find needed or relevant information. Beyond these, paper records also can be considered interoperable (at the lowest level) because they allow data to be shared, read, and interpreted by human beings. According to DOD and VA officials, not all data require the same level of interoperability, nor is interoperability at the highest level achievable in all cases. For example, unstructured, viewable data may be sufficient for such narrative information as clinical notes. Figure 1 shows the distinction between the various levels of interoperability and examples of the types of data that can be shared at each level. DOD and VA have been working to exchange patient health information electronically since 1998. We have previously described their efforts on three key projects: The Federal Health Information Exchange (FHIE), begun in 2001 and enhanced through its completion in 2004, enables DOD to electronically transfer service members’ electronic health information to VA when the members leave active duty. The Bidirectional Health Information Exchange (BHIE), established in 2004, was aimed at allowing clinicians at both departments viewable access to health information on shared patients—that is, those who receive care from both departments. For example, veterans may receive outpatient care from VA clinicians and be hospitalized at a military treatment facility. The interface also allows DOD sites to see previously inaccessible data at other DOD sites. The Clinical Data Repository/Health Data Repository (CHDR) interface, implemented in September 2006, linked the department’s separate repositories of standardized data to enable a two-way exchange of computable outpatient pharmacy and medication allergy information. These repositories are a part of the modernized health information systems that the departments have been developing—DOD’s AHLTA and VA’s HealtheVet. In its ongoing initiatives to share information, VA uses its integrated medical information system—the Veterans Health Information Systems and Technology Architecture (VistA)—which was developed in-house by VA clinicians and IT personnel. All VA medical facilities have access to all VistA information. DOD currently relies on its AHLTA, which comprises multiple legacy medical information systems that the department developed from commercial software products that were customized for specific uses. For example, the Composite Health Care System (CHCS), which was formerly DOD’s primary health information system, is still in use to capture pharmacy, radiology, and laboratory order management. In addition, the department uses Essentris (also called the Clinical Information System), a commercial health information system customized to support inpatient treatment at military medical facilities. Not all of DOD’s medical facilities yet have this inpatient medical system. As previously noted, the National Defense Authorization Act for Fiscal Year 2008 called for DOD and VA to jointly develop and implement, by September 30, 2009, electronic health record systems or capabilities that allow for full interoperability of personal health care information that are compliant with applicable federal interoperability standards. To facilitate compliance with the act, the departments’ Interagency Clinical Informatics Board, made up of senior clinical leaders who represent the user community, began establishing priorities for interoperable health data between DOD and VA. In this regard, the board is responsible for determining clinical priorities for electronic data sharing between the departments, as well as what data should be viewable and what data should be computable. Based on its work, the board established six interoperability objectives for meeting the departments’ data sharing needs. According to the former acting director of the interagency program office, DOD and VA considered achievement of these six objectives, in conjunction with capabilities previously achieved (e.g., FHIE, BHIE, and CHDR), to be sufficient to satisfy the requirement for full interoperability by September 2009. The six objectives are listed in table 1. Also since April 2008, the departments have been working to set up an interagency program office to be accountable for their efforts to implement fully interoperable electronic health record systems or capabilities by the September deadline. In January 2009, the office completed its charter, articulating, among other things, its mission and functions with respect to attaining interoperable electronic health data. The charter further identified the office’s responsibilities in carrying out its mission, in areas such as oversight and management, stakeholder communication, and decision making. Among the specific responsibilities identified in the charter was the development of a plan, schedule, and performance measures to guide the departments’ electronic health record interoperability efforts. Subsequent to an April 2009 Presidential announcement, the departments approved a new version of the interagency program office’s charter in September to expand the office’s responsibilities to include coordination and oversight of the development of a Virtual Lifetime Electronic Record (VLER). Still in the planning stages, VLER is intended to enable access to all electronic records for service members as they transition from military to veteran status, and throughout their lives. According to the Director of the DOD/VA Interagency Program Office, VLER is to expand the departments’ existing electronic health record capabilities by enabling access to private sector health data as well. The revised charter describes that the office is responsible for developing and maintaining a master plan, integrated master schedule, and performance metrics for the VLER initiative. Our prior reports on DOD’s and VA’s efforts to develop fully interoperable electronic health record systems or capabilities noted their progress and highlighted issues that the departments needed to address to achieve electronic health record interoperability. Specifically, our July 2008 report noted that the departments were sharing some, but not all, electronic health information at different levels of interoperability. At that time the departments’ efforts to set up the interagency program office were in the early stages. Leadership positions in the office were not permanently filled, staffing was not complete, and facilities to house the office had not been designated. Accordingly, we recommended that the Secretaries of Defense and Veterans Affairs expedite efforts to put in place permanent leadership, staff, and facilities for the program office. The departments agreed with this recommendation and have taken actions to address it. Our January 2009 report noted that the departments had defined plans to further increase their sharing of electronic health information; however, the plans did not contain results-oriented (i.e., objective, quantifiable, and measurable) performance goals and measures that could be used as a basis to track and assess progress. We recommended the departments develop and document such goals and performance measures for the six interoperability objectives, to use as the basis for future assessments and reporting of interoperability progress. DOD and VA agreed with our recommendation and stated that the departments intended to include results-oriented goals in their future plans. We also reported and testified in July 2009 that the departments were continuing to take steps toward achieving full interoperability by the September 2009 deadline. Specifically, we noted that they had identified six interoperability objectives and had fulfilled three of the six. For the remaining three objectives, DOD and VA had partially achieved planned capabilities but additional work was needed to meet the objectives. Moreover, our report and testimony also noted that the departments’ interagency program office was not effectively positioned to function as a single point of accountability for achievement of full interoperability because it did not yet have fundamental IT management capabilities and was not fulfilling key responsibilities, including establishment of performance measures, a project plan, or a detailed schedule. As a result, we recommended that the departments improve management of their interoperability efforts by establishing a project plan and a complete and detailed integrated master schedule. DOD and VA have achieved planned capabilities for the three remaining objectives (expand questionnaires and self-assessment tools, expand Essentris in DOD, and demonstrate initial document scanning). Having now met all six of their interoperability objectives, the departments’ officials, including the co-chairs of the group responsible for representing the clinician user community, believe they have satisfied the September 30, 2009, requirement for developing and implementing systems or capabilities that allow for full interoperability. Nevertheless, the departments are planning additional actions to further increase their interoperable capabilities, recognizing that clinicians’ needs for interoperable electronic health records are evolving. The following describes the departments’ activities with respect to the three remaining objectives. Expand questionnaires and self-assessment tools: The departments intended to provide all periodic health assessment data stored in the DOD electronic health record to VA in a format that associates questions with responses. Health assessment data are collected from two sources: questionnaires administered at military treatment facilities and a DOD health assessment reporting tool that enables patients to answer questions about their health. Questions relate to a wide range of personal health information, such as dietary habits, physical exercise, and tobacco and alcohol use. While the departments had established the capability for VA to view questions and answers from the questionnaires collected by DOD at military treatment facilities, they had not yet achieved the capability for VA to view information from the second source—DOD’s health assessment reporting tool. Since our last review, the departments have established this capability and have therefore met their objective. Expand Essentris in DOD: DOD intended to expand Essentris to at least one additional site for each military service and to increase the percentage of inpatient discharge summaries that it shares electronically with VA. While the departments had previously expanded the system to two Army sites, they had not yet expanded to the remaining two military departments (Air Force and Navy). Since we last reported, the departments have met this objective by successfully deploying Essentris to an additional Air Force and Navy site. In addition, the departments expanded the system to two more Army sites and are sharing inpatient discharge summaries from 59 percent of DOD inpatient beds. Demonstrate initial document scanning: The departments intended to demonstrate an initial capability to scan service members’ medical documents into the DOD electronic health record and share the documents electronically with VA. Since our last review, the departments have met this objective by successfully demonstrating the capability in a joint test environment. Specifically, DOD has demonstrated the capability to scan a medical document, associate the document with a test patient, and save the document into the patient’s electronic health record; and VA demonstrated the capability to search and retrieve the scanned document associated with that patient. While the departments have met the remaining three objectives and believe they have met the September 30, 2009, deadline for achieving full interoperability as required by the act, they are planning additional work to further increase their interoperable capabilities. These actions reflect the departments’ recognition that clinicians’ needs for interoperable electronic health records are not static. Currently, the departments are focusing their efforts to meet clinicians’ evolving needs for interoperable capabilities in the following areas. Clinicians have identified additional needs with respect to social history and physical exam data that have emerged since existing capabilities were made available in those areas. To meet these needs, the departments are planning additional efforts to provide, for example, the capabilities to search, sort, and filter patient social history and physical exam data based on criteria such as date, location of care, and type of document. DOD plans to further expand the implementation of Essentris to sites beyond those achieved as of September 2009. In this regard, the department has established a goal of making the inpatient system operational for 90 percent of its inpatient beds by January 31, 2011. In December 2009, DOD began limited user testing of the document scanning capability that was demonstrated in September 2009. According to department officials, this testing entails use of test data by a limited number of users at nine sites and is expected to be completed in March 2010. After that, further testing of the document scanning capability using actual data is expected at sites and dates that are to be determined. Beyond these ongoing efforts to meet their clinicians’ evolving interoperability needs, the departments have begun planning their efforts to define and build VLER. For example, in mid-December 2009, VA and a private health care provider in San Diego, California, began a pilot project to demonstrate that clinical information such as patient demographic, allergy, and active medication information can be securely sent and received. DOD plans to be added to this pilot on January 31, 2010. Further, the departments are working in cooperation with the interagency program office and the Interagency Clinical Informatics Board to define additional clinical information to be exchanged, additional functionality, and additional geographic areas of interest for future VLER deployment. The interagency program office is not yet positioned to function as a single point of accountability for the implementation of interoperable electronic health record systems or capabilities. Since we last reported, the departments have made progress in setting up the office by hiring additional staff, including a permanent director. In addition, consistent with our prior recommendations, the office has begun to demonstrate responsibilities outlined in its charter in the areas of scheduling, planning, and performance measurement. However, the office’s efforts to develop its capabilities in these areas are incomplete. Among the activities the departments identified in the September 2008 DOD/VA Information Interoperability Plan as necessary for setting up the interagency program office were appointing a permanent director and deputy director, as well as recruiting and hiring staff. Since we last reported in July 2009, DOD appointed a permanent director to lead the office, effective October 27, 2009. Also, VA filled the permanent deputy director position, effective January 17, 2010. According to the former acting deputy director, the departments have also filled 13 of 14 government staff positions, an increase of 3 staff since our last report. Additionally, this official stated the departments have taken steps to fill the remaining senior health program analyst position. He reported that a selection had been made to fill this remaining position, but a date for when this position would be filled remained to be determined. As previously noted, DOD, VA, and the interagency program office developed a new version of the office’s charter in September 2009. Consistent with the office’s original charter, the new version describes the office’s responsibilities in carrying out its mission and function associated with attaining interoperable electronic data. For example, it identifies the office’s responsibilities to develop an integrated master schedule, plan, and performance metrics to monitor the departments’ performance against interoperability goals. Since we last reported, the office has taken steps toward developing, but has not yet fully established, these management tools. We previously recommended in July 2009 that the program office establish a complete and detailed master schedule to improve its management of the departments’ efforts to achieve fully interoperable electronic health record systems. In response to our recommendation, the office has begun to develop an integrated master schedule that includes information about its ongoing interoperability activities, including VLER. For example, the schedule identifies the limited user testing of the document scanning capability that DOD plans between December 2009 and March 2010. However, the schedule does not include information about the tasks, resource needs, or relationships between tasks for the testing activity. The office’s acting deputy director stated that the program office is currently working to improve the schedule by including task dependencies to help in identifying the critical path for the office’s interoperability activities. Similarly, we recommended that the program office establish a project plan, which is an important tool for effective IT program management. The program office has concurred with the recommendation and has reported that it is developing a master program plan. In January 2010, department officials stated that this plan is undergoing review by the departments and is expected to be approved in February 2010. In January 2009 we recommended that DOD and VA take action to complete results-oriented (i.e., objective, quantifiable, and measurable) goals and performance measures to be used as a basis for the office to provide meaningful information on the status of the departments’ interoperability initiatives. In November 2009, program office officials stated that such goals and measures would be included in the next version of the VA/DOD Joint Executive Council Joint Strategic Plan (known as the joint strategic plan), which the office expects to be approved in February 2010. While the departments have agreed with our past recommendations and have indicated that they are working toward addressing them, officials stated that other priorities have prevented full implementation of our recommendations. Specifically, the office has been focused on verifying achievement of the six interoperability objectives. Moreover, according to the former interim director, the office was focused on providing briefings and status information on activities the office has undertaken to achieve interoperability, in addition to participating in the departments’ efforts to define VLER. In addition, the office director told us that it has taken the departments longer than anticipated to provide the detailed information that is needed by the office to prepare a schedule for joint interagency data sharing goals. While the interagency program office is nearly fully staffed and has begun to establish important management tools, it has not yet completed an integrated schedule, project plan, and results-oriented goals and measures. As a result, the interagency program office’s ability to effectively provide oversight and management, including meaningful progress reporting on the delivery of interoperable capabilities, is jeopardized. If the departments fully implement our recommendations, they will have the comprehensive picture that they need for effectively defining and managing progress toward meeting their interoperability objectives and goals, including VLER. Furthermore, implementation of our recommendations will also better position the office to function as a single point of accountability for the delivery of interoperable electronic health records, which are intended to improve service members’ and veterans’ health care. In written comments on a draft of this report, the DOD official who is performing the duties of the Assistant Secretary of Defense (Health Affairs), the VA Chief of Staff, and the Director of the DOD/VA Interagency Program Office concurred with our findings. Beyond its concurrence with our findings, the VA Chief of Staff provided information regarding the department’s efforts to address recommendations from our prior reports. For example, in response to our previous recommendation that the departments use results-oriented performance goals and measures as the basis for future assessments and reporting of interoperability progress, the Chief of Staff stated that the departments have prepared draft goals and measures for their joint strategic plan, which is to be finalized in February 2010. Additionally, in response to our prior recommendation that the departments establish a project plan and a compete and detailed integrated master schedule to improve management of their interoperability efforts, the Chief of Staff asserted that the interagency program office expects to have a draft project plan by the end of January 2010 and that VA meets monthly with DOD and the program office to coordinate input into an integrated master schedule. If the departments continue to implement our recommendations, they should be better positioned to effectively manage their ongoing efforts to increase their interoperable electronic health record capabilities. DOD and the interagency program office also provided technical comments on the draft report, which we incorporated as appropriate. Comments from the Departments of Defense and Veterans Affairs, and the DOD/VA Interagency Program Office are reproduced in appendixes II, III, and IV, respectively. We are sending copies of this report to the Secretaries of Defense and Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-6253 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. To determine the extent to which the Department of Defense (DOD) and the Department of Veterans Affairs (VA) developed and implemented electronic health record systems or capabilities that allowed for full interoperability by the September 30, 2009, deadline, we reviewed our previous work on DOD and VA efforts to develop health information systems, interoperable health records, and interoperability standards to be implemented in federal health care programs. We obtained and analyzed agency documentation and interviewed program officials to determine the departments’ progress toward achieving full interoperability by September 30, 2009, as required by the National Defense Authorization Act for Fiscal Year 2008. Specifically, we compared the departments’ interoperability plans, objectives, and requirements with the reported status of efforts to achieve full interoperability, corroborating officials’ statements about progress through analyses of available documentation including test results and status reports. In addition, we analyzed agency plans and interviewed cognizant DOD and VA officials to determine the work required to meet additional clinician requirements and increase interoperability of electronic health information beyond September 30, 2009. To determine whether the interagency program office was functioning as a single point of accountability for developing and implementing electronic health records, we obtained and reviewed program office documentation, including its new charter and its integrated master schedule. We compared the responsibilities identified in the charter with actions taken by the office to exercise the responsibilities. Additionally, we interviewed interagency program office officials to determine the status of filling leadership and staffing positions within the office and to examine the level to which the departments have addressed our prior recommendations to develop needed management tools including results-oriented (i.e., objective, quantifiable, and measurable) goals and performance measures, a complete and detailed master schedule, and a project plan. We conducted this performance audit at DOD offices and the DOD/VA Interagency Program Office in the greater Washington, D.C., metropolitan area from September 2009 through January 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, key contributions to this report were made by Mark Bird, Assistant Director; Rebecca Eyler; J. Michael Resser; and Kelly Shaw. | The National Defense Authorization Act for Fiscal Year 2008 required the Department of Defense (DOD) and the Department of Veterans Affairs (VA) to accelerate their exchange of health information and to develop capabilities that allow for interoperability (generally, the ability of systems to exchange data) by September 30, 2009. It also required compliance with federal standards and the establishment of a joint interagency program office to function as a single point of accountability for the effort. Further, the act directed GAO to semiannually report on the progress made in achieving these requirements. For this fourth report, GAO determined the extent to which (1) DOD and VA developed and implemented electronic health record systems or capabilities that allowed for full interoperability by September 30, 2009, and (2) the interagency program office established by the act is functioning as a single point of accountability. To do so, GAO analyzed agency documentation on project status and conducted interviews with agency officials. DOD and VA previously established six objectives that they identified as necessary for achieving full interoperability; they have now met the remaining three interoperability objectives that GAO previously reported as being partially achieved--expand questionnaires and self-assessment tools, expand DOD's inpatient medical records system, and demonstrate initial document scanning. As a result of meeting the six objectives, the departments' officials, including the co-chairs of the group responsible for representing the clinician user community, believe they have satisfied the September 30, 2009, requirement for full interoperability. Nevertheless, DOD and VA are planning additional actions to further increase their interoperable capabilities and address clinicians' evolving needs for interoperable electronic health records. Specifically, (1) DOD and VA plan to meet additional needs that have emerged with respect to social history and physical exam data; (2) DOD plans to further expand the implementation of its inpatient medical records system to sites beyond those achieved as of September 2009; and (3) DOD and VA plan to test the capability to scan documents, in follow-up to their demonstration of an initial document scanning capability. Additionally, in response to a Presidential announcement, the departments are beginning to plan for the development and implementation of a virtual lifetime electronic record, which is intended to further increase their interoperable capabilities. The interagency program office is not yet positioned to function as a single point of accountability for the implementation of interoperable electronic health record systems or capabilities. The departments have made progress in setting up their interagency program office by hiring additional staff, including a permanent director. In addition, consistent with GAO's previous recommendations, the office has begun to demonstrate responsibilities outlined in its charter in the areas of scheduling, planning, and performance measurement. However, the office's effort in these areas does not fully satisfy the recommendations and are incomplete. Specifically, the office does not yet have a schedule that includes information about tasks, resource needs, or relationships between tasks associated with ongoing activities to increase interoperability. Also, key IT management responsibilities in the areas of planning and performance measurement remain incomplete. Among the reasons officials cited for not yet completing a schedule, plan, or performance measures were the office's need to focus on verifying achievement of the six interoperability objectives and participating in the departments' efforts to define the virtual lifetime electronic record. Nonetheless, if the program office does not fulfill key management responsibilities as GAO previously recommended, it may not be positioned to function as a single point of accountability for the delivery of future interoperable capabilities, including the development of the virtual lifetime electronic record. |
USDA is one of the largest civilian federal government departments, with more than 100,000 employees as of the end of fiscal year 2012. It is composed of 17 agencies and a number of departmental offices. FSA, NRCS, and RD are collectively referred to as USDA’s service center agencies. They provide financial and technical assistance to agricultural producers and rural communities. Specifically, FSA provides payments and loans to agricultural producers through various programs, including farm commodity and crop disaster assistance programs authorized in the 2008 Farm Bill. NRCS provides, among other things, technical and financial assistance to private landowners to implement conservation practices on their land. NRCS’s Soil Science Division, along with other federal agencies, states, and other entities, makes and maintains an inventory of the soil resources of the United States and disseminates the results for both nonfarm and farm uses. RD provides loans, grants, and technical assistance to rural residents, businesses, and other entities. The workforces of USDA’s service center agencies are located in national headquarters operations, which include specialized offices in various locations, as well as in extensive field office structures, which include USDA service center locations. As of the end of fiscal year 2012, FSA’s workforce was located in more than 2,100 offices, with a total of about 13,600 employees—about 1,300 in FSA’s headquarters operations and about 12,300 in field locations. NRCS’s workforce was located in approximately 2,900 offices, with a total of about 11,800 employees— about 1,200 in NRCS’s headquarters operations and about 10,600 in field locations. RD’s workforce was located in more than 400 offices, with a total of about 5,100 employees—about 1,400 in its headquarters operations and about 3,700 in field locations. USDA’s Blueprint for Stronger Service is a departmental initiative announced by the Secretary of Agriculture in January 2012 that is intended to streamline operations and cut costs across the department. This initiative encompasses a number of efforts at the departmental and agency levels. Office closures announced under the initiative in fiscal year 2012 resulted in the closure of more than 200 offices, facilities, and labs in eight USDA agencies, including at USDA’s service center agencies. As part of this initiative: FSA closed 125 offices (out of about 2,100 total offices) in 32 states. Based on information from FSA, these closures resulted in estimated net savings, starting in fiscal year 2013, of about $2.1 million. In choosing which offices to close, FSA officials told us they were guided by provisions in the 2008 Farm Bill, which requires that, to the maximum extent practicable, the agency must close offices with two or fewer permanent full-time employees and that were less than 20 miles from another office before closing any office located more than 20 miles from another office. FSA officials also reported that they closed unstaffed offices regardless of their distance from another office. In addition to closing offices, FSA offered four rounds of buyout or early retirement incentives to its employees in fiscal year 2012. With limited exceptions, three of the four rounds were offered to staff in both headquarters operations and field locations, in some cases subject to a priority order. The fourth offer was limited to employees in offices selected for closures in fiscal year 2012. In response to these incentives, OPM and USDA data indicate that 682 FSA employees accepted buyout or early retirement incentives, which, according to FSA officials, resulted in about $20 million in cost savings in fiscal year 2012. NRCS closed 24 soil survey offices (out of about 160 soil survey offices and about 2,800 offices overall) in 21 states. According to NRCS officials, these closures resulted in estimated savings of about $1.3 million in fiscal year 2013. NRCS officials told us that to determine which local soil survey offices to close, they reviewed offices’ funding, workload, and proximity to specific universities. For regional office closure determinations, officials told us they considered workload, proximity to transportation corridors, and equitable distribution of local offices in each region. In addition to closing offices, NRCS offered buyout and early retirement incentives to employees affected by the soil survey office closures. According to NRCS officials, 18 NRCS employees accepted buyout incentives, and a subset of those individuals also accepted early retirement incentives associated with its soil survey office closures in fiscal year 2012. The savings NRCS attributed to employees accepting those incentives was approximately $470,000 in fiscal year 2012. RD closed 43 offices (out of more than 400 total offices) in 17 states. According to RD officials, these closures resulted in estimated net savings, starting in fiscal year 2013, of about $710,000. In choosing which offices to close, RD officials told us that they used focus groups and weighed multiple criteria, including whether (1) an office location was in an isolated community, (2) a particular location served tribal lands, and (3) other USDA agencies were contemplating a closure in the same location. In addition, prior to the office closures, RD offered buyout and early retirement incentives to all optional and early retirement eligible employees, except for employees in two occupations. OPM data indicate that 599 RD employees accepted buyout or early retirement incentives in fiscal year 2012, which RD officials told us resulted in about $25 million in cost savings in fiscal year 2012. Prior to this initiative, USDA’s service center agencies have closed offices. For example, FSA officials told us that the agency has closed hundreds of offices in the last 10 years as a result of staff reductions and workload changes. OPM provides guidance to federal agencies on human capital management topics. For example, OPM issued the Human Capital Assessment and Accountability Framework, which includes five systems that provide a framework for human capital management for the federal government. This guidance states, among other things, that an effectively implemented workforce planning system results in the right balance of supervisory and nonsupervisory positions to best support the agency mission based on an analysis of customer needs and workload distribution. OPM also provides guidance to agencies on classification of grades and positions. For example, under the General Schedule, agencies use a uniform set of OPM-issued standards to classify positions into occupation series within five occupational groups, including (1) professional and scientific positions, (2) administrative and management positions, (3) technical and medical support positions, (4) clerical and administrative support positions, and (5) other. At USDA, the Office of Human Resources Management directs implementation of the Human Capital Assessment and Accountability Framework and evaluates human capital management policies, among others, to determine how effectively they support human capital efforts to achieve program results. Among other things, and as follows, the office: Assists in the implementation of USDA’s Cultural Transformation, a set of initiatives launched in 2010 to promote, among others, diversity, inclusion, and high-performance. For example, the office issues a monthly report that tracks progress on various measures, including the diversity of the USDA workforce, performance management, and communication with employees. Provides guidance and oversight to USDA agencies on human capital planning and management. For example, the office has developed a draft human capital planning guide to aid its agencies in developing human capital plans. As part of its oversight of human capital management, the office oversees the implementation of a 2010 USDA policy on the ratio of supervisors to employees that, among other things, outlines a process for agencies to annually calculate their supervisory ratios and provide the results to USDA. USDA has a policy on organizational changes. Among other things, it states that USDA’s Secretary or Assistant Secretary for Administration must approve organizational changes that include, among other things, the closure of an office. The policy also states that proposals for organizational changes such as office closures include a variety of detailed information, including (1) the circumstances giving rise to the proposal; (2) human resource management, financial, and facilities impacts; (3) a copy of an internal analysis on civil rights impact; and (4) verification from agency management that internal control requirements have been met. In our past work, we have established leading practices for consolidation initiatives such as office closures. Specifically, such practices include the following: Identify and agree upon goals. The key to any consolidation initiative is the identification of and agreement on specific goals. Defining goals can also help agency leaders clarify the benefits associated with a consolidation and describe a future that will be both different from and better than the past. Present a business-case or cost-benefit analysis. Such an analysis can help agencies show stakeholders why a particular initiative is being considered and the range of alternatives considered to ensure they are using public funds most effectively. Identify stakeholders and develop a two-way communications strategy. Since stakeholders often view consolidation as working against their own interests, it is critical that agencies identify the relevant stakeholders and develop a two-way communications strategy that both addresses stakeholder concerns and conveys the rationale for and overarching benefits associated with the consolidation. Implement consolidations using change management practices. Implementing a consolidation requires the concentrated efforts of both leadership and employees. Agencies should have an implementation plan for the consolidation that includes, among other things, essential change management practices such as active, engaged leadership at the highest possible levels; a dedicated implementation team that can be held accountable for change; and a strategy for documenting best practices and measuring progress toward the established goals of the consolidation. In our past work, we have also established leading practices for implementing staff reductions through the use of buyout and early retirement incentives. Such practices include the following: Identify the reshaping goals of the agency. This will assist agencies in linking buyout and early retirement incentives to specific organizational objectives. Develop workforce reshaping strategies that fully consider alternative methods. This will help agencies identify whether alternatives to buyout and early retirement incentives may more effectively meet agency reshaping goals and could work in conjunction with these tools. Design buyout and early retirement incentives that demonstrate a clear relationship to the agency’s workforce reshaping goals and overarching strategic goals. This will help ensure that employees critical to the mission of an agency are retained. Design buyout and early retirement incentives that consider employees’ needs. Programs that do not do so may cause damage to the agency’s reputation or negatively affect employee morale and productivity. Develop a communications strategy early in the process. Regular communication with employees increases transparency in the process used to determine which positions may be eliminated. This in turn increases employee trust and maintains employee morale. Establish an evaluation system to identify and report relevant data on recipients of buyout and early retirement incentives. Agencies can use these data to assess how well the buyout and early retirement incentives are meeting or have met reshaping goals and whether they need to adjust their strategies. Of the six practices above, five are generally reinforced in the provisions of the Chief Human Capital Officers Act and OPM regulations implementing it. The one practice above that is not reflected in statutory and OPM requirements relates to establishing an evaluation system to identify and report relevant data on recipients of buyout and early retirement incentives. From fiscal years 2003 to 2012, the size of the workforces decreased at all three USDA service center agencies and the average number of employees per supervisor decreased at two of them. The decrease in the size of the workforces of USDA’s service center agencies accelerated in fiscal year 2012 (see figs. 1 and 2). Specifically, in each of the last 10 years, the average decrease was approximately 4.5 percent in FSA, 1.4 percent in NRCS, and 3.3 percent in RD. From fiscal years 2011 to 2012, the decrease was 9.2 percent in FSA, 3.8 percent in NRCS, and 14 percent in RD. Other characteristics of their workforces, such as grade levels and occupation types, largely remained the same during this period. At USDA’s service center agencies, workforce decreases were smaller in headquarters operations than in field locations and smaller for career permanent employees than for employees with other appointments, such as temporary employees (see table 1). Specifically, from fiscal years 2003 to 2012, the size of the workforce of each of the agencies’ headquarters operations decreased at a slightly slower average annual rate than the workforce of the agencies’ field locations. According to agency officials, workforce decreases over this 10-year period were attributed to various factors. At FSA, these decreases were due to budget constraints; at NRCS, officials said they were due to changes associated with the Farm Security and Rural Investment Act of 2002 (2002 Farm Bill) and the 2008 Farm Bill; and at RD, officials said they were due to the need to stay within appropriated funding levels while other expenses increased, such as those associated with information technology, office space rental costs, and staff pay. We also reviewed the percentage change in the size of the service center agencies’ workforces from fiscal years 2011 to 2012 and found that the workforce decreases were smaller in headquarters operations than in the field for FSA and RD, but they were larger in headquarters operations than in the field for NRCS. Based on our analysis, some of these changes may be due to staff reduction efforts undertaken by the agencies, while others may be attributed to natural attrition. As it relates to the average annual decline in the number of employees by appointment type, the number of career permanent employees, which make up the majority of the agencies’ workforces, was less than the average annual decline in the number of other employees, such as temporary employees. This was also the case for the percentage change in the size of the workforces from fiscal years 2011 to 2012. Most of the agencies’ temporary employees were in field locations in fiscal year 2012. FSA officials told us that their temporary workers perform many of the same functions as their career permanent employees. For example, program technicians who implement procedures, regulations, and operations of a county office’s administrative program area, can be temporary or career permanent employees. From fiscal years 2003 to 2012, the average number of employees per supervisor, characterized in a supervisor-to-employee ratio, decreased at FSA and RD but remained relatively constant at NRCS (see fig. 3). NRCS officials told us that their supervisory ratio has not declined in the past 10 years because of restructuring and additional responsibilities assumed by its workforce as a result of the 2002 Farm Bill. During this 10-year period, there were more employees per supervisor in FSA’s headquarters operations compared with its field locations. At NRCS and RD, there were generally fewer employees per supervisor at their headquarters operations than at their field locations. For example, in fiscal year 2012, the supervisor-to-employee ratio in FSA’s headquarters operations was approximately 1:5 compared with 1:4 in its field locations. At NRCS, the supervisor-to-employee ratio in its headquarters operations was approximately 1:6 compared with 1:14 in its field locations. At RD, the supervisor-to-employee ratio in its headquarters operations was approximately 1:6 compared with 1:8 in its field locations. The median pay grades of the workforces of USDA’s service center agencies remained relatively constant. Specifically, from fiscal years 2003 to 2012, the median pay grade for FSA stayed at pay grade 7, and for NRCS and RD it stayed at pay grade 11. The median pay grades for the service center agencies’ headquarters operations from fiscal years 2003 to 2012 were higher than in the field locations at FSA and NRCS but the same, at 11, at RD. For example, at NRCS, the median pay grade from fiscal years 2003 to 2012 was 12 or 13 in the agency’s headquarters operations and 11 in its field locations. With respect to the grade distribution of supervisors, these remained relatively constant at FSA and RD, but the pay grades of the majority of supervisors increased at NRCS. From fiscal years 2003 to 2012, the majority of supervisors at FSA were in pay grades 10 to 12, and at RD, the majority of supervisors were in pay grades 13 to 15. At NRCS, the majority of supervisors were in pay grades 10 to 12 in fiscal year 2003, but by fiscal year 2012, the majority were in pay grades 13 to 15. NRCS officials told us that the pay grades of the majority of supervisors have increased in the last 10 years due to the increasing complexity of the agency’s work, primarily driven by changes enacted in the 2002 Farm Bill. The occupational makeup of USDA’s service center agencies also remained relatively stable over the 10-year period (see fig. 4). Specifically, the majority of the FSA and RD workforces were employed in administrative and management occupations, such as loan specialists who provide loan servicing and counseling assistance to borrowers. The majority of the NRCS workforce was employed in professional and scientific occupations, such as civil engineers, some of whom were responsible for providing technical guidance and leadership in the overall planning, design, installation, and maintenance of the engineering phases of soil and water conservation projects. Additional information on the workforces of USDA’s service center agencies in fiscal year 2012, such as ethnicity and race, mission-critical occupations, length of service, and retirement eligibility, is available in appendix II. In fiscal year 2012, USDA policy on supervisory ratios, which targeted a uniform supervisory ratio of one supervisor for at least nine employees at all USDA agencies, did not align with OPM guidance. OPM’s guidance states that analyzing customer needs and workload distribution can help agencies achieve the right balance of supervisory and nonsupervisory positions to support their missions. USDA policy, issued in October 2010, did not reflect such an approach, but rather it stated that all agencies should aim for a target ratio of one supervisor for at least nine employees (1:9). USDA officials were not able to provide us with a documented basis for this target ratio. In fiscal year 2012, our analysis showed that NRCS’s supervisory ratio, at 1:12, met the USDA target of one supervisor for at least nine employees, but FSA and RD—at 1:4 and 1:7, respectively—did not. FSA and RD officials told us that they made improving their supervisory ratios a management goal, but that meeting USDA’s target may be difficult. Specifically, FSA officials told us that it may not be feasible for FSA to meet the department’s target ratio because, due to staff reductions, more county executive directors were involved in direct program delivery in addition to supervising others performing that work. RD officials told us that managing the supervisory ratios in accordance with the USDA target was difficult as RD downsized its workforce in recent years. However, the service center agencies were striving to meet a target that may not have supported their missions because USDA’s policy did not ask agencies to determine a supervisory ratio target based on a documented analysis of their customer needs and workload distribution. In addition, USDA did not ensure that the service center agencies followed its guidance when calculating their specific supervisory ratios. Regardless of what ratio agencies are aiming to achieve, federal internal control standards state that managers should exercise control to achieve reasonable assurance that the objectives of the agency are being achieved. USDA’s guidance to its agencies on implementing its policy on supervisory ratios specified the formula agencies should use when calculating supervisory ratios, such as the type of employees to consider as supervisors. However, none of USDA’s service center agencies followed the departmental guidance. Specifically, the service center agencies considered more types of employees as supervisors than those identified in the USDA guidance. USDA officials could not provide documentation that the guidance was communicated to the service center agencies but told us the guidance would have been circulated at the time of the policy’s issuance, in 2010, to the mission areas’ human resources directors. Further, USDA officials told us that supervisory ratios are one of several measures that could be used to inform reorganization efforts. However, because the service center agencies did not follow the USDA guidance, their calculated supervisory ratios—a workforce analytic that department management could use to help make human capital decisions—were not comparable to one another. Without comparable information on supervisory ratios, USDA cannot have a reasonable assurance that the data it uses to support its human capital objectives, such as those regarding reorganizations, are sound. In fiscal year 2012, USDA’s service center agencies followed or partially followed four leading practices when closing offices. In addition, FSA was subject to specific office closure provisions in the 2008 Farm Bill, and officials provided information related to those provisions for its fiscal year 2012 office closure decisions. FSA and NRCS followed or partially followed six leading practices when using buyout and early retirement incentives, and RD followed or partially followed five of those six. USDA’s service center agencies partially or fully followed all four leading practices we reviewed for successful office closures. Specifically, NRCS fully followed three of the four leading practices and partially followed one. FSA and RD fully followed two of the four leading practices and partially followed two others. Figure 5 lists these leading practices and the extent to which each service center agency followed them when implementing fiscal year 2012 office closures. All three service center agencies identified and agreed upon goals for their office closures (FSA reported, defining goals can help decision makers understand what problems need to be fixed, how to balance differing objectives, and how to achieve long-term goals. The broad goals of each agency’s fiscal year 2012 office closures were defined by USDA’s Blueprint for Stronger Service initiative, which officials said is intended to streamline operations, cut costs, and make more effective use of USDA’s employees to improve service to USDA customers and increase efficiency. In addition, each of the service center agencies defined other goals for their fiscal year 2012 office closures. Specifically, FSA officials told us that the agency aimed to improve service by having fewer but better-staffed offices. NRCS , as shown in fig. 5). As we previously documented specific goals associated with its closures, such as improving its technical services and recruiting a more diverse workforce while retaining current employees by ensuring offices were in more desirable locations. At RD, officials told us that their goals included streamlining operations in small offices and better leveraging resources. NRCS followed and FSA and RD partially followed the leading practice of presenting a business-case or cost-benefit analysis (FSA , NRCS , RD , as shown in fig. 5). According to the National Research Council, a business-case analysis can make clear underlying assumptions, alternatives considered, the full range of costs and benefits, and the potential consequences for an organization and its missions. OMB guidelines for agencies to consider when conducting a cost-benefit analysis of federal programs say that such analysis should include a policy rationale, explicit assumptions, an evaluation of the alternatives, and a plan to verify program results. Further, federal internal control standards call for federal agencies to document key decisions and to manage and maintain the documentation and make it available for examination. USDA has a policy on making organizational changes that requests agencies to submit information on proposed closures that include some elements of a business-case analysis, such as a detailed explanation of the circumstances giving rise to the proposed closure and verification from agency management that internal control policies have been met. However, according to a USDA official, the Secretary of Agriculture waived the department’s requests for such proposals for the fiscal year 2012 office closures associated with the department’s Blueprint for Stronger Service, saying that agencies had already done work to assist in making decisions on the closures. In addition, the policy does not ask agencies to document other elements of a business-case analysis, such as underlying assumptions and alternatives considered. NRCS prepared a written business-case analysis that explained its decision making. This analysis included information that outlined the current state of the agency’s Soil Science Division; reasons for proposed organizational changes; and options considered, including pros and cons for each. According to NRCS officials, the agency had prepared documentation describing the case for office closures before USDA waived its request for such documentation. NRCS officials used its business-case documentation to aid in communication by sending the document to external stakeholders to explain the rationale behind their decisions. Unlike NRCS, FSA and RD officials told us that they considered a variety of office closure options to achieve their stated goals, but FSA officials told us that no business-case or cost-benefit analyses were prepared, and RD officials stated that due to leadership turnover they could not locate any analyses that may have been prepared. For example, FSA officials told us the agency considered alternatives, such as closing more offices than were eventually closed. RD officials told us they considered several factors in their decision regarding selecting offices for closures, such as the type of communities where offices were located and whether other USDA agencies were planning to close offices at that location, and consulted with focus groups. However, neither FSA nor RD documented these considerations in a business-case or cost-benefit analysis. A USDA official said the agencies did not prepare written analyses because USDA waived the policy for the office closures associated with the department’s Blueprint for Stronger Service. The policy that was waived was USDA’s policy on making organizational changes. However, this policy does not include all elements of a business-case or cost-benefit analysis, such as considering alternatives and documenting underlying assumptions. Without presenting business-case or cost-benefit analyses, FSA and RD cannot demonstrate to their workforces, agricultural producers, and other stakeholders the alternatives they considered in their decision making and the steps they took to make effective use of public funds in support of their missions. For example, representatives of employee unions at RD told us that it was unclear how RD management chose offices to close. At FSA, employee group representatives raised questions about why the agency was choosing to close field offices rather than consolidate offices above the field office level. In addition, employee group representatives and those commenting on the proposed closures during public meetings raised questions about whether the decisions made sense from a budgetary perspective or whether criteria used to close FSA’s unstaffed offices took into account factors such as workload or the number of beginning, older, and disadvantaged producers served by these offices. FSA officials acknowledged that producing a formal business-case or cost-benefit analysis would have provided a stronger basis for the agency’s decision making. The three service center agencies fully followed the leading practice of identifying relevant stakeholders and developing a two-way communications strategy (FSA , NRCS , RD , as shown in fig. 5). We have reported that stakeholders often view actions such as office closures as working against their own interests, and that it is critical for agencies to identify the relevant stakeholders and develop an ongoing two-way communications strategy that addresses stakeholder concerns but also conveys a rationale for and benefits of the closures. Specific stakeholder groups varied for each agency, but all agencies identified local officials and affected employees as stakeholders. To communicate with stakeholders, each agency used specific procedures as follows: FSA officials told us that the primary takeaway from the agency’s office closures in 2006 was the importance of clear, consistent, and thorough communication throughout the closure process. For its 2012 closures, FSA advertised and held public meetings in each county where an office was proposed for closure. At its public meetings, FSA provided information on the reasons for the proposed office closures, noted the concerns of stakeholders about the closures, and allowed for questions and answers. To communicate with internal stakeholders, according to information provided by FSA officials, state executive directors sent memos to affected employees and invited them to contact their state executive director with any questions or concerns. NRCS officials told us that prior to the office closure announcement, they discussed the possibility of office closures with selected internal and external stakeholders to gather their input. Following the announcement, officials told us that they communicated with internal stakeholders largely through regular teleconferences such as weekly telephone meetings to keep them updated on the status of the closures. NRCS officials said a few stakeholders expressed concern with the closures or provided alternatives, but the agency was not able to fully respond to their input due to lack of time. Officials acknowledged that giving stakeholders an opportunity to participate in the process can be helpful in enhancing their partnerships. RD officials said that state leaders used various means to communicate with both internal and external stakeholders. For example, prior to making closure decisions, RD officials told us they used focus groups to gather input from stakeholders and, following the announcements, state leaders shared information about the closures through town hall meetings, local media, and written communications. RD officials also told us that their state leaders were in close contact with union representatives and that they did not need to formally bargain with the unions or address grievances. USDA’s service center agencies partially followed the leading practice of using change management practices (FSA , NRCS , RD , as shown in fig. 5). The leading practices state that to minimize the duration and the significance of any reduced productivity and effectiveness, agencies should use change management practices such as having (1) active, engaged leadership at the highest possible levels; (2) a dedicated implementation team; and (3) a strategy for measuring progress toward goals and using lessons learned. The service center agencies followed most of these practices, but they did not measure progress toward all goals. Departmental and agency leaders were actively involved in the service center agencies’ fiscal year 2012 office closures. At the departmental level, the Secretary announced all proposed closures in January 2012. In addition, leaders such as FSA’s administrator and deputies, and RD officials told us that their state directors and other senior leaders were directly involved. As our leading practices for office closures state, having such leadership involvement can help set the direction, pace, and tone of the closures, and provide a clear, consistent rationale for agency staff. Each service center agency also used an implementation team to manage the work of the closures. FSA officials told us they had an implementation team consisting of representatives from most of FSA’s divisions and several departmental offices, including officials from FSA’s field operations, Information Technology Services Division, and USDA’s Office of Civil Rights. At NRCS, officials told us that they assembled teams of senior leaders to develop proposals for and implement the closures. At RD, officials told us that their property management directors, among others, were part of their implementation team, and that those directors met monthly with their counterparts at FSA and NRCS to plan for the closings and the possible impact on the service center agencies. Each agency documented that they tracked cost savings—a major goal of the office closures. However, the service center agencies did not have specific strategies in place to measure progress toward other stated office closure goals such as NRCS’s goal to improve technical services or FSA’s goal to improve service. For example, NRCS provided us with information showing that the number of activities it has undertaken associated with its technical soil services steadily increased from fiscal years 2011 to 2013. However, these activities were only partially related to work performed by soil survey offices, and NRCS did not provide us with information on how those metrics were affected by its soil survey office closures. At RD, officials told us that closing offices had helped them with their goals to leverage resources and streamline operations, but they could not demonstrate these benefits using specific metrics. Similarly, FSA officials said that overall, agricultural producers’ participation in FSA programs has not decreased following the office closures, but they did not provide specific participation information in areas where offices had closed. USDA’s policy on making organizational changes asks agencies to detail the circumstances giving rise to the proposed changes, but it does not ask agencies to measure progress toward office closure goals. However, our leading practices for office closures state that agencies closing offices should have metrics of success that should show progress toward achieving an intended level of performance or results. In addition, standards for internal control in the federal government call for agencies to ensure that performance measures and indicators have been established and that actual performance data are compared and analyzed against goals. Without metrics, officials may lack information to help them make any needed midcourse corrections, improve policy and operational effectiveness following the closures, or inform stakeholders on progress or outcomes. Officials from all three agencies told us they used lessons learned from prior rounds of office closures to execute their fiscal year 2012 office closures. As we previously reported, using lessons learned is a leading practice that can aid in successful office consolidations such as office closures. FSA officials used a checklist that the agency created as part of its 2006 office closures to help implement the closures and ensure specific steps were taken. FSA officials told us that using this checklist helped smooth the closure process. NRCS officials stated that the agency used experiences from 2011 office closures in its Resource Conservation and Development Division to inform elements of its fiscal year 2012 closures such as devising a placement strategy for affected employees. RD officials told us that they close offices on a regular basis and have extensive knowledge of how to do so. They also told us that they worked to capture lessons learned by, for example, helping to update USDA’s Real Property Leasing Handbook to better address leasing issues related to office closures based in part on lessons learned from the fiscal year 2012 closures. In fiscal year 2012, FSA’s office closure decisions were subject to section 14212(b) of the 2008 Farm Bill, which specifies an order for FSA office closures and requires public meetings and congressional notifications of proposed office closures. Under section 14212(b), offices that have two or fewer permanent full-time employees and that are located less than 20 miles from another FSA office are required, to the maximum extent practicable, to be closed before closing any office located more than 20 miles from another FSA office. We found that FSA decided to close 125 offices in fiscal year 2012. Of the 125 offices closed, 27 had no permanent full-time employees and were located more than 20 miles from another FSA office. The 98 other closed offices had two or fewer permanent full-time employees and were located less than 20 miles from another office but were not necessarily closed first. FSA officials told us that the agency determined the timing of office closures based on information collected from state directors on when the offices could notify employees, schedule physical moves, and take other necessary actions to close. FSA held a public meeting within 30 days of announcing the proposed closure in each county where the office proposed for closure was located. FSA also provided us with documentation of notifications sent to congressional committees and members of the proposed office closures showing that they were sent more than 90 days before FSA made its final decision regarding the office closures. Additional information on the FSA office closures and applicable provisions in the 2008 Farm Bill can be found in appendix III. USDA’s service center agencies partially followed or fully followed most of the six leading practices we have identified for using buyout and early retirement incentives. FSA fully followed two of the leading practices and partially followed four others. NRCS fully followed five leading practices and partially followed one. RD fully followed four leading practices, partially followed one, and did not follow one. Figure 6 lists these leading practices and the extent to which each service center agency followed them when implementing fiscal year 2012 buyout and early retirement incentives. USDA’s service center agencies followed the leading practice of identifying reshaping goals when using buyout and early retirement incentives (FSA , NRCS , RD , as shown in fig. 6). As we previously reported, identifying reshaping goals can help agencies link buyout and early retirement incentives to specific organizational objectives. As was the case with office closures, all three agencies cited a need to address budget reductions as a primary goal in their decisions to offer buyout and early retirement incentives in fiscal year 2012. The agencies also stated additional goals. For example, in a request to USDA on the need to use the incentives in fiscal year 2012, FSA listed a number of organizational objectives, including reducing administrative complexity, optimizing service delivery, and increasing supervisory ratios. In its request to USDA, NRCS stated that using buyout and early retirement incentives could help the agency implement goals such as improving its science and technology support delivery systems by, among other things, reorganizing its Soil Survey Program. In its request to USDA, RD stated that using the incentives would assist them in eliminating unnecessary duplication of functions. USDA’s service center agencies followed the leading practice of developing strategies that fully consider alternative methods when using buyout and early retirement incentives (FSA shown in fig. 6). As we previously reported, considering alternatives to using buyout and early retirement incentives can help agencies identify whether the alternatives may more effectively meet their reshaping goals and how the incentives could work in conjunction with other options. In their proposals to use the incentives, all three agencies reported considering other options to address budget shortfalls and used incentives in conjunction with other options to achieve their workforce reshaping goals. Specifically, they reported considering such tools as furloughs and Reductions in Force and provided various reasons for choosing not to implement them. For example, RD officials told us that using buyout and early retirement incentives instead of furloughs and Reductions in Force helped them avoid negative impacts such as disruption to the workforce, decreased employee morale, and decreases in diversity that can happen when implementing a Reduction in Force. In addition to buyout and early retirement incentives, all three agencies reported using additional workforce reshaping options such as hiring freezes, reassigning employees, or reducing temporary positions. NRCS followed, FSA partially followed, and RD did not follow the leading practice of demonstrating a clear linkage to workforce reshaping or overall strategic goals when using buyout and early retirement incentives (FSA , as shown in fig. 6). We have reported that designing programs that demonstrate a clear relationship between an agency’s workforce reshaping goals helped agencies achieve those goals. NRCS presented clear linkages to its workforce reshaping goals by offering the buyout incentive only to employees directly associated with its soil survey reshaping plan. Specifically, NRCS’s proposal to use buyout and early retirement incentives discusses how using the incentives will create savings to help improve its science and technology delivery support systems by reorganizing its Soil Survey Program and reducing the number of Soil Survey Offices in operation. The request also discusses how workforce planning will help the agency address both a projected loss of positions and any impact on agency operations. Further, the agency’s fiscal year 2013-2017 workforce plan, which includes information on the fiscal year 2012 reorganization, projected that buyout and early retirement incentives might increase expected retirements, thereby creating a need to enhance mentoring and on-the-job training programs to assist in knowledge transfer. FSA partially linked its buyout and early retirement incentives to its workforce reshaping and overarching strategic goals using a selection priority that targeted certain locations and positions to help ensure its continued capacity to deliver core mission programs. However, while FSA completed a broad workforce analysis in 2011, it had not updated its human capital plan or workforce plan at the time it was making decisions to offer buyout and early retirement incentives, and agency officials told us that this analysis was not likely used to determine FSA’s selection priority. As a result, FSA could not demonstrate whether they had workforce goals that linked to their offerings, and they could not show whether the remaining workforce had the right balance of skills in the right locations to support its mission. FSA’s buyout and early retirement incentives may have created unintended shortages of employees with certain skills or created imbalances that could hamper mission accomplishment. For example, FSA officials told us that they are assigning new responsibilities to employees to redistribute work performed by employees who took the buyout and early retirement incentives. FSA officials also noted that because the incentives were voluntary, the agency did not have control over which employees accepted them. RD’s buyout and early retirement incentives were not linked to workforce reshaping or overarching strategic goals. Unlike the actions taken at FSA and NRCS, RD’s incentives were not targeted and were available to any staff member eligible for retirement or early retirement, except for employees in two occupations. According to our analysis of OPM data, there were about 2,400 RD employees eligible for retirement or early retirement, and RD exempted approximately 100 employees from the incentives, or about 4.2 percent of those eligible. In addition, RD officials did not have a human capital or workforce plan to clearly document links between its incentives and its workforce reshaping goals. RD officials told us that the agency needed to reduce its workforce by as many people as possible to address significant budget decreases. However, by offering incentives to much of its workforce, RD lost a significant portion of its ability to control the makeup of its workforce, which could impact its ability to accomplish its mission. Specifically, without linking buyout and early retirement incentives to workforce reshaping or broader strategic goals, RD could not show whether its remaining workforce has the right balance of skills in the right locations to support its mission. For example, our analysis of OPM data indicates that, of the approximately 600 employees who accepted buyout or early retirement incentives in fiscal year 2012, approximately 455 employees served in occupations defined by RD as mission critical. NRCS and RD followed and FSA partially followed the leading practice of considering employees needs when using buyout and early retirement incentives (FSA , RD , NRCS , as shown in fig. 6). As we have reported, designing programs that consider employees’ needs can help employees cope with changes. Officials told us that employees from the three service center agencies were able to take department-wide retirement training. In addition, RD officials told us they hosted their own counseling sessions to help their employees decide whether to accept the incentives. FSA and NRCS also requested to use buyout and early retirement incentives in conjunction with office closures. Officials from NRCS told us that the agency attempted to relocate employees to locations that would not pose undue hardship. In addition, NRCS conducted a Civil Rights Impact Analysis to review office closures and noted that using buyout and early retirement incentives was intended to mitigate negative impacts on affected employees. FSA officials said that unions expressed some concerns about the agency’s notification procedures, their ability to bargain on some issues, and the short period of time that employees were given to decide whether to accept the incentives. FSA officials told us that they were not able to offer much time for employees to make decisions because the agency needed to separate employees as early as possible in the fiscal year. However, FSA officials said they built more time into the process when using the incentives in fiscal year 2013. Officials from all three agencies reported that no grievances were filed as a result of their buyout and early retirement incentives. NRCS and RD fully followed and FSA partially followed the leading practice of developing a communications strategy early in the process when using buyout and early retirement incentives (FSA , NRCS , RD , as shown in fig. 6). Prior to receiving authority to use buyout and early retirement incentives, USDA management notified union representatives, including those represented by the service center agencies, that it had applied to OPM for the authority to offer buyout and early retirement incentives. Once the department received the authority to use the incentives, and the service center agencies finalized their incentive offers, each agency issued a notice to its employees that included key information such as answers to frequently asked questions and information on how employees could contact human resources staff for more details. NRCS officials told us that they held regular telephone and videoconference meetings with staff eligible for the incentives and provided updates via e-mail. RD officials said they met with employees who expressed interest in the incentives and conducted multiple sessions with eligible retirees to ensure that they were aware of their options. FSA provided uniform notices to employees ahead of each buyout and early retirement offering that described who was eligible and included responses to frequently asked questions, but it did not have specified strategies for communicating on a regular basis with its employees. Employee group representatives said they were confused or had concerns about the incentives. For example, FSA’s notice to employees regarding its incentives did not provide the reasons behind its selection priority for determining employees’ eligibility, and union representatives told us that some employees expressed concern that they were excluded from eligibility for nonmission related reasons or that their location was being targeted for downsizing. We have reported that developing a communications strategy early in the process can build an understanding of the purpose of planned changes, which can improve transparency, increase employee trust and help maintain employee morale. Subsequent to fiscal year 2012, FSA has improved its communications to employees in this area. For example, in its fiscal year 2013-2017 human capital plan, FSA discusses how it determines buyout eligibility, and that the agency would likely need to use early retirement incentives to mitigate future funding reductions. Officials from all three agencies noted that no grievances were filed in relation to their buyout and early retirement incentives. USDA’s service center agencies partially followed the leading practice of establishing an evaluation system when using buyout and early retirement incentives (FSA , NRCS , RD , as shown in fig. 6). We have reported that establishing an evaluation system to review the use of such incentives after they have been offered and implemented can help agencies assess the longer-term effectiveness of using the incentives. For example, agencies could compare the length of service for employees with employee decisions about accepting buyout and early retirement incentives. Agencies could then use that information to determine the composition and timing of future offers. In addition, agencies could analyze whether the savings generated by buyout and early retirement incentives would likely provide the best use of resources in the future compared with other separation strategies, such as involuntary staff reductions. USDA’s service center agencies kept track of how many employees took advantage of the incentives and how much money was saved. They also reported some additional information to the department on their results. For example, NRCS reported that its incentives, offered in conjunction with its fiscal year 2012 office closures, helped the agency manage any negative impact of the closures and lower the total number of employees needing placement in other positions, and RD reported to USDA that the use of buyout and early retirement incentives helped achieve budget savings and that enhanced training may be needed to offset the loss of institutional knowledge created by departing employees. However, the agencies did not conduct a broader evaluation of their use of the incentives or report on the extent to which the buyout and early retirement incentives met other stated goals to support their missions. For example, FSA officials told us that they did not evaluate how the incentives impacted nonbudgetary goals cited in their agency’s request to use buyout and early retirement incentives, such as improving supervisory ratios. NRCS officials told us that they did not establish an evaluation system due to lack of time, but they acknowledged that such information would be helpful in understanding, among other things, the impact such incentives have on employees. In addition, because the agencies did not examine, for example, the length of service of employees who accepted incentives, how the savings generated by the incentives compared with other options, such as Reductions in Force, or what effects the use of incentives had on stated workforce reshaping goals, agency managers cannot use resulting information to inform future decisions. When issuing its policy on supervisory ratios, USDA has taken important steps to consider how these ratios relate to the effective management of human capital. However, because this policy established a uniform supervisory ratio target for all agencies across the department, it did not align with OPM guidance on supervisory ratios. Adopting OPM’s guidance would allow the service center agencies to identify supervisory ratio targets that would support their unique missions, based on a documented analysis of their customer needs and workload distribution. Further, federal internal control standards state that managers should exercise control to achieve reasonable assurance that the objectives of their agency are being achieved, but USDA did not exercise control to ensure that the service center agencies followed its guidance on calculating supervisory ratios. USDA has not communicated the guidance on how to calculate supervisory ratios to the service center agencies since 2010. Ensuring that the service center agencies provide comparable information on supervisory ratios would allow the department to use this information to help determine whether its human capital objectives are being met. Facing fiscal year 2012 budget realities, USDA’s service center agencies needed to make difficult decisions to close field offices. In doing so, the agencies followed or partially followed many leading practices associated with effective implementation of office closures. Nevertheless, given ongoing budget pressures, agencies may again face similar situations. USDA’s policy governing organizational changes does not direct agencies to fully follow leading practices such as presenting all elements of a business-case or cost-benefit analysis or measuring progress toward stated goals. Following these practices could improve transparency and decision making while also helping the agencies meet internal control standards in support of their missions. Specifically, asking agencies to follow the leading practice of presenting a business-case or cost-benefit analysis could help agencies clearly communicate the rationale for their decisions to all stakeholders and show that they are aiming to make effective use of public funds as they work to implement their missions. It could also help them meet internal control standards to document key decisions. Similarly, asking agencies to follow the leading practice of measuring progress toward goals could help agencies meet internal control standards to establish and use performance measures, while also helping them to make any needed midcourse corrections, improve effectiveness following office closures, or inform stakeholders on their progress or outcomes. USDA’s service center agencies also made important decisions to reduce staff in fiscal year 2012 by using buyout and early retirement incentives and, in doing so, they followed most leading practices associated with the effective use of such tools. However, ongoing budget constraints may again require considering the use of these incentives. In such instances, FSA and RD might find it easier to avoid unintended shortages or imbalances of employees with certain skills that could hamper accomplishment of their missions if they clearly linked their buyout and early retirement incentives to their workforce reshaping goals or overall strategic goals. In addition, establishing and using a system to identify and evaluate relevant data on use of the incentives would allow USDA’s service center agencies to better understand whether the incentives they offer are the best use of their limited resources, which could help to inform future actions in support of their missions. We are making the following five recommendations to the Secretary of Agriculture: To ensure appropriate levels of employees’ supervision and guidance for the workforces of USDA’s service center agencies, we recommend that the Secretary of Agriculture, through the Chief Human Capital Officer, take the following two actions: Consistent with OPM guidance, revise departmental policy targeting a uniform supervisory ratio so that the service center agencies can identify appropriate supervisory ratios based on a documented analysis of their specific customer needs and workload distribution. Consistent with federal internal control standards, communicate to the service center agencies the departmental guidance for calculating supervisory ratios and ensure its use. To help USDA’s service center agencies effectively implement office closures and meet internal control standards, we recommend that the Secretary take action to amend USDA’s policy on organizational changes to include such leading practices as presenting a business-case or cost- benefit analysis and using the change management practice of measuring progress toward stated goals. To improve the use of buyout or early retirement incentives, we recommend that the Secretary of Agriculture direct its service center agencies to take the following two actions: FSA and RD to document clear links between their buyout and early retirement incentives and their reshaping or overall strategic goals. FSA, NRCS, and RD to establish a system for identifying and evaluating relevant data on buyout and early retirement incentive recipients. We provided USDA with a draft of this report for comment. USDA provided written comments, which are summarized below and reproduced in appendix IV. In its comment letter, USDA generally agreed with some of the findings and disagreed with one finding and recommendation. USDA did not explicitly comment on other recommendations. USDA generally agreed with our findings on the use of leading practices when closing offices and reducing staff in fiscal year 2012, and did not comment specifically on our associated recommendations. USDA stated that actions taken by its service center agencies to close offices and reduce staff were in response to significant budget cuts and needed to be implemented in a relatively short time frame. USDA further stated that the agencies followed requirements in taking these actions, and did an excellent job linking their workforce decisions to mission. We adjusted our report’s title to reflect that we believe USDA’s workforce decisions could benefit from implementation of our findings and recommendations. USDA did not agree with our finding that USDA’s policy on supervisory ratios did not align with OPM guidance and our associated recommendation that USDA revise this policy. USDA stated that OPM’s guidance on supervisory ratios is written purposefully broad and that the policy allows the department to hold supervisors and managers accountable for the responsible stewardship of resources. We agree that OPM’s guidance is broad and that it allows agencies discretion. As we reported, it also states that an effective balance of supervisory and non- supervisory positions is achieved when agencies analyze their customer needs and workload distribution to support their missions. USDA was not able to provide us with evidence that its policy targeting a ratio of 1 supervisor to at least 9 employees was based on such an analysis or on other information suggesting that a uniform target was appropriate for all of the service center agencies given their diverse missions, customer needs, and workload distribution. Further, USDA stated that its policy allows agencies to document the reasons for instances in which the supervisory ratio does not meet the departmental target of 1 supervisor to at least 9 employees by considering factors such as job complexity and diversity of assigned functions. However, documenting such deviations requires that USDA’s agencies show why it is appropriate for them to deviate from a department-wide policy as opposed to factoring such analysis into their supervisory ratios initially. Finally, USDA notes that the policy was effectively communicated to all agencies and staff offices, along with supplemental guidance on how to calculate supervisor-to- employee ratios. During our review, USDA officials provided us a guidance document on how to calculate supervisory ratios and said that they had provided it to the mission areas’ human resources directors in 2010. However, as discussed in our report, USDA officials could not provide documentation that the guidance was communicated to the service center agencies, and none of the service center agencies followed this guidance. Therefore, we continue to believe that USDA needs to revise departmental policy targeting a uniform supervisory ratio, communicate to the service center agencies guidance for calculating supervisory ratios, and ensure its use. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Agriculture, the Director of the Office of Personnel Management, and the appropriate congressional committees. 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 V. This report examines: (1) how the workforces of USDA’s service center agencies changed from fiscal year 2003 to fiscal year 2012, (2) the extent to which USDA’s policy on supervisory ratios aligned with Office of Personnel Management (OPM) guidance in fiscal year 2012, and (3) the extent to which USDA’s service center agencies followed leading practices when closing offices and reducing staff in fiscal year 2012. We chose the three USDA service center agencies—the Farm Service Agency (FSA), Natural Resources Conservation Service (NRCS), and Rural Development (RD)—because, of the eight USDA agencies that had announced they would close offices and programs in fiscal year 2012, these agencies had the largest staffing level percent reductions. We chose to report workforce data for 10 years, starting with fiscal year 2003, because this period (1) provided a historical context for the changes that occurred in fiscal year 2012 and (2) encompassed the agencies’ operations under two farm bills: the Farm Security and Rural Investment Act of 2002 and the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill). To determine how the workforces of USDA’s service center agencies changed from fiscal year 2003 to fiscal year 2012, we analyzed workforce data from OPM’s Enterprise Human Resources Integration database and USDA’s National Finance Center; reviewed available reports, plans, and guidance from OPM and USDA related to human capital management; and interviewed OPM and USDA officials. Using the OPM and USDA data, we determined the changes in the workforces of USDA’s service center agencies, including the General Schedule, Senior Executive Service, as well as county office employees, who are not federal employees and are, therefore, not captured in OPM’s database. For county office employees, we obtained their workforce data from USDA directly. Our analysis focused on career permanent employees on a full- or part-time year-round schedule. We generally excluded temporary and term-limited employees and schedules other than full- and part-time (such as intermittent or seasonal) because these employees are generally not eligible for civil service benefits and represent a more transient workforce. When reporting data on employees by location, we defined headquarters operations to include the Washington, D.C., locality pay area and other duty stations that are considered to be part of the headquarters operations. For FSA, these locations include Kansas City, Missouri; St. Louis, Missouri; and Salt Lake City, Utah. For NRCS, these include Fort Collins, Colorado; Fort Worth, Texas; Greensboro, North Carolina; Lincoln, Nebraska; Little Rock, Arkansas; and Portland, Oregon. For RD, this includes St. Louis, Missouri. For the purpose of this report, employees in all other duty stations are considered to be in field locations. We calculated supervisory ratios by comparing the number of supervisors or managers with the number of nonsupervisors or managers, as defined by OPM, in accordance with the USDA’s Office of Human Resources Management’s guidance. We did not independently check the agencies’ coding of supervisors. We completed additional analyses on the workforces of USDA’s service center agencies at the end of fiscal year 2012 because, during that year, USDA announced the Blueprint for Stronger Service, an initiative that included office closures and resulted, in some cases, in the offerings of buyout and early retirement incentives. Such actions could affect the size and composition of the workforces of USDA’s service center agencies. We analyzed USDA’s service center agencies’ ethnicity and race, gender, pay grade levels, mission-critical occupations, length of federal service, and retirement eligibility. We used OPM’s standard categories for our analysis of ethnicity and race and gender. Our analysis of pay grade levels included employees on the General Schedule, as well as county office employees, whose grade levels are comparable to the General Schedule pay plan. We grouped grade levels into three categories; the middle range covers the median grades of NRCS’s and RD’s workforces, as well as the FSA headquarters workforce. To analyze mission-critical occupations, we obtained a list of these occupational series from the agencies’ workforce plans or agency officials. To provide more detailed information about mission-critical occupations, we obtained position descriptions from USDA’s service center agencies. We grouped length of federal service into five categories based on typical attrition patterns. To determine the current and projected retirement eligibility, we used employees’ age at hire, federal government service start date, birth date, and retirement plan coverage to calculate the date they would become eligible for voluntary retirement with an unreduced annuity. We took several steps to ensure the reliability of the data and analytical process. We discussed the reliability of the USDA data with knowledgeable officials and collected additional data reliability information on both OPM and USDA data through interviews with FSA, NRCS, and RD. In our analysis of OPM and USDA data, we checked for outliers or obvious errors and followed up with USDA when such issues were identified. In addition, where we identified anomalies or significant change in trends in our detailed analysis of the size of the workforces and supervisory ratios, we corroborated these findings with agency human capital staff and published reports. Lastly, the programming code for this analysis was reviewed by an independent specialist to verify its technical and logical accuracy. To determine the extent to which USDA policy on supervisory ratios aligned with OPM guidance in fiscal year 2012, we reviewed OPM guidance on its Human Capital Assessment and Accountability Framework and compared it with USDA’s policy on supervisory ratios; analyzed workforce data from OPM and USDA databases on supervisory ratios; reviewed reports from USDA’s service center agencies on their supervisory ratios and compared them with USDA guidance on calculating supervisory ratios, as well as standards for internal control in the federal government; and interviewed officials from OPM, USDA, and USDA’s service center agencies. To determine the extent to which USDA’s service center agencies followed leading practices to close offices and reduce staff in fiscal year 2012, we identified leading practices for both office closures and staff reductions through the use of buyout and early retirement incentives. For office closures, we reviewed previous GAO work on consolidating physical infrastructure to identify four leading practices for successful office closures. These include: (1) identify and agree upon goals, (2) present a business-case or cost-benefit analysis, (3) identify stakeholders and develop a two-way communications strategy, and (4) implement consolidations using change management practices. For staff reductions, we reviewed provisions of the Chief Human Capital Officers Act of 2002 that revise the use of voluntary early retirement authority and voluntary separation incentive payments, regulations and guidance from OPM on the use of buyout and early retirement incentives, and leading practices from previous GAO work to identify six leading practices for implementing buyout and early retirement incentives. These include: (1) identify reshaping goals, (2) develop strategies that fully consider alternative methods, (3) demonstrate a clear linkage to workforce reshaping and overarching strategic goals, (4) consider employees’ needs, (5) develop a communications strategy early in the process, and (6) establish an evaluation system. We also reviewed standards for internal control in the federal government. We gathered information on agency actions by collecting documentation and interviewing officials from FSA, NRCS, and RD. We also interviewed representatives of unions and employee associations at FSA and RD. We assessed each agency’s reported actions against the identified leading practices to determine the extent to which each agency’s actions aligned with these practices. Because the leading practices are not requirements, we did not perform a compliance review. To communicate the results of our review, we used the terms, “followed,” “partially followed,” and “did not follow” to reflect in plain language the extent to which each agency’s actions aligned with identified leading practices. A determination of “followed” means that the agency provided evidence that it had taken major actions in alignment with that leading practice. A determination of “partially followed” means that the agency provided evidence that it had taken some actions in alignment with that leading practice. A determination of “did not follow” means that the agency did not provide evidence that it had taken any actions in alignment with that leading practice. To determine the number and type of service center agency staff members who accepted buyout and early retirement incentives, we used information provided by each agency and analyzed workforce data from OPM’s Enterprise Human Resources Integration database. Eligibility for retirement or early retirement is based on age at hire, birth date, service computation date, and retirement plan. Because the OPM data we have did not include the specific day of the month for each employee’s service computation date and birthday, these results may be off by up to 1 month. To review FSA’s fiscal year 2012 decisions related to office closures and requirements in the 2008 Farm Bill, we compared provisions in the 2008 Farm Bill with information from FSA on each office that closed as a result of the USDA announcement made in fiscal year 2012 related to: (1) location and distance from the nearest FSA office; (2) the number and type of employees; (3) the location and date of public meetings; (4) the dates of congressional notifications; and (5) the actual date closed. To determine the locations and distances of each closed office, we used USDA-provided addresses to independently calculate the latitude and longitude for each street address of each closed office and its next closest office as identified by USDA. Using these addresses, we independently calculated the distances between the closed and nearest offices using our calculated latitude and longitude. In instances where automated tools could not determine a specific location for a given address, our analysis relied on manual determination of geocoordinates. We did not assess whether FSA complied with the 2008 Farm Bill’s office closure provisions. We conducted this performance audit from October 2012 to March 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In fiscal year 2012, the headquarters and field workforces of the USDA service center agencies were different from each other with respect to ethnicity, race, gender, and pay grade. As it relates to race and ethnicity, workforces were more diverse in headquarters operations than field locations of the service center agencies. In terms of pay grades, a greater proportion of the workforces in headquarters operations were at pay grades 13-15 than was the case in field locations of the service center agencies. USDA and its service center agencies identified a number of mission-critical occupations, which applied across their headquarters operations and field locations. Across all locations, over 40 percent of the workforces of USDA’s service center agencies had 20 or more years of service. In general, a higher proportion of supervisors was eligible, or projected to become eligible, for retirement compared with all employees of USDA’s service center agencies. In fiscal year 2012, the career permanent workforces of USDA’s service center agencies’ headquarters operations were more diverse than their field locations. As shown in figure 7, white employees constituted about one-half or two-thirds of the headquarters operations of the workforces of the three agencies but about 80 percent or more of their field locations’ workforces. In general, African American or black employees made up the second largest percentage of the workforce in the service center agencies’ headquarters operations and field locations. For all of the service center agencies, they made up a larger proportion of the workforces in headquarters operations than those in field locations. With respect to gender, women comprised the majority of the career permanent workforces of Farm Service Agency (FSA) and Rural Development (RD) (72 percent and 65 percent, respectively), and about 35 percent of the career permanent workforce of Natural Resources Conservation Service (NRCS). However, women made up a smaller proportion of supervisors than their share of the workforces of all three service center agencies—making up about 36 percent of supervisors at FSA, 28 percent at NRCS, and 39 percent at RD. With respect to women’s share of the workforce in headquarters operations as compared with field locations, the service center agencies differed from each other. At FSA, women made up a smaller portion of the headquarters operations workforce as compared with the field locations workforce (58 percent and 74 percent, respectively). At NRCS, women made up a higher share of the workforce at headquarters operations compared with the field locations (44 percent and 34 percent, respectively). At RD, women’s share of the workforce was approximately the same at both headquarters operations and field locations (67 percent and 64 percent, respectively). In fiscal year 2012, a greater proportion of the career permanent workforces of USDA’s service center agencies in headquarters operations were at pay grades 13-15 than those in field locations (as shown in fig. 8). In field locations, the majority of FSA employees were in pay grades 1-9; in NRCS and RD, more employees were at pay grades 10-12 than other grades. In fiscal year 2012, USDA designated three mission-critical occupations (MCO) as its overall departmental MCOs based on considerations related to recruitment and retention challenges. They are (1) Human Resources Management (0201), (2) Contracting (1102), and (3) Informational Technology Management (2210). In addition, in fiscal year 2012, in response to USDA’s request, each service center agency reported between three and five MCOs to USDA as listed below. In fiscal year 2012, FSA reported five MCOs to USDA. Approximately 37 percent of employees in headquarters operations and 92 percent of employees in field locations were classified in one of these occupations. All of these occupations are classified as administrative and management. Table 2 lists the MCOs for FSA as reported to USDA in fiscal year 2012, including occupation codes, titles, and examples of position descriptions. In fiscal year 2012, NRCS reported three MCOs to USDA. Approximately 21 percent of employees in headquarters operations and 49 percent of employees in field locations were classified in one of these MCOs. All of these MCOs are classified as professional and scientific occupations. Table 3 lists the MCOs for NRCS as reported to USDA in fiscal year 2012, including occupation codes, titles, and examples of position descriptions. In fiscal year 2012, RD reported five MCOs to USDA. Approximately 61 percent of employees in headquarters operations and 79 percent of employees in field locations were classified in one of these MCOs. All of RD’s reported MCOs, except for Accounting (0510), which is classified as a professional and scientific occupation, are classified as administrative and management. Table 4 lists the MCOs for RD as reported to USDA in fiscal year 2012, including occupation codes, titles, and examples of position descriptions. The proportion of the career permanent workforces of USDA’s service center agencies with 20 or more years of federal service in fiscal year 2012 was over 50 percent at FSA, over 40 percent at NRCS, and over 45 percent at RD (as shown in fig. 9). Employees may be eligible for early retirement incentives once they have 20 or more years of service and are over the age of 50 or have 25 or more years of service regardless of age. The mean length of service of FSA employees was 19 years, for NRCS it was 16 years, and for RD it was 18 years. At FSA and NRCS, employees in headquarters operations have, on average, more federal service years than those in field locations. At FSA, the mean length of federal service for the headquarters operations workforce was 21 years and, for the field locations, it was 18 years. Similarly, at NRCS, the mean length of service for the headquarters operations workforce was 19 years, and for the field locations, it was 16 years. At RD, the headquarters operations and field locations workforces had the same mean length of service of 18 years. About 15 percent of the career permanent workforces of USDA’s service center agencies were eligible to retire in fiscal year 2012, as shown in figure 10. For supervisors, the proportion was higher: at FSA it was 19 percent, at NRCS it was 24 percent, and at RD it was 22 percent. Over the next 5 years, an additional 17 percent or more of the workforces of each of the service center agencies and 25 percent or more of their supervisors will become retirement-eligible for the first time. Section 14212(b) of the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) prescribes an order for closure of Farm Service Agency (FSA) offices after June 18, 2010, and requires public and congressional notification of proposed closures. Specifically, under section 14212(b), if the Secretary of Agriculture closes FSA offices after June 18, 2010, offices that have two or fewer permanent full-time employees and are located less than 20 miles from another FSA office are required, to the maximum extent practicable, to be closed before closing offices located more than 20 miles from another FSA office. In addition, the Secretary must (1) hold a public meeting in the county where the office is located within 30 days of proposing its closure and (2) notify the relevant congressional committees and delegations of a proposed office closure after the public meetings and not less than 90 days before approving the office’s closure. On January 9, 2012, the Secretary of Agriculture initially proposed closing 131 FSA offices. The list included both offices with two or fewer permanent full-time employees that were located less than 20 miles from another FSA office and offices located more than 20 miles from another FSA office. The offices located more than 20 miles from another office had no employees. To determine the number of employees in each office, FSA officials told us that they counted permanent, full-time General Schedule or county office employees. State-level and temporary employees did not count toward the total number of employees in an office. To determine the distances between offices, FSA officials said they used a mapping software program to determine whether or not an office was located within 20 miles of another FSA office. FSA officials stated that they calculated the shortest distance between offices rather than driving distance. However, according to FSA officials, their software defaulted to the center of the zip code if a street could not be found, so FSA used a proxy in those instances rather than an actual address. FSA held public meetings and accepted comments on the proposed closures. Between January 19, 2012, and February 8, 2012—within 30 days of proposing the office closures—FSA held a public meeting in each county where the offices proposed for closure were located. FSA officials told us that they publicized meetings through newspaper advertisements and mailers to agricultural producers, among others. During these public meetings, FSA recorded public comments, and officials said that concerns were incorporated into their office closure decisions. For example, public meeting participants said that FSA program participation would decline as a result of the office closures, particularly among beginning, elderly, and disadvantaged producers who may endure extra hardships from traveling greater distances to the next-closest FSA office. Participants also said that the distances calculated by FSA did not accurately reflect the amount of time it takes producers to reach FSA offices. As a result of public meeting participant concerns, FSA officials told us that in the event that producers could not reach an FSA office—for example, if producers were elderly or disabled—FSA would send an FSA employee to meet them at more convenient locations. In addition, FSA accepted written comments for up to 10 days after the date of the meeting from those who could not attend in person. FSA provided us with documentation of notifications sent to congressional committees and members of the proposed office closures on February 27, 2012. The scope of our review did not include an assessment of whether the notifications met the requirements of section 14212(b) of the 2008 Farm Bill. On May 29, 2012, 92 days after the date on the congressional notifications FSA provided us, the Secretary announced the closure of 125 FSA offices. Six offices that had been proposed for closure were not closed because, based on concerns raised during the public meetings, FSA recalculated the distance between these offices and the next closest FSA offices and found the distance was more than 20 miles. FSA closed 125 offices between June 1, 2012, and March 1, 2013. FSA officials told us that the timing of office closures was based on information that state executive directors provided in surveys on when the offices could notify employees, schedule physical moves, and take other necessary actions to close. Of the 125 offices closed, 98 offices had two or fewer permanent full-time employees and were located less than 20 miles from another FSA office. However, we found that, in two instances, FSA used an office that was slated to be closed as the nearest office in calculating the distance rather than an office that would remain open. Specifically, FSA identified the Shelby County, Texas, and San Augustine County, Texas, offices as being less than 20 miles from each other, and then closed both. As a result, the nearest open FSA office, according to our analysis, is in Nacogdoches County, Texas, over 30 miles from each of these offices. FSA officials told us that these offices were closed because both offices had one or two employees and were located less than 20 miles from another office. The other 27 closed offices had no permanent full-time employees and were located more than 20 miles from another FSA office. However, the offices located less than 20 miles from another office were not closed before the offices located more than 20 miles from another office were closed. We did not assess whether FSA complied with section 14212(b). In addition to the individual named above, Thomas M. Cook (Assistant Director), Karen Jones (Assistant Director), Cheryl Arvidson, Candace Carpenter, David Garcia, Armetha Liles, Rebecca Shea, Jeanette Soares, and Ruth Solomon made key contributions to this report. | FSA, NRCS, and RD, USDA's service center agencies, interact directly with agricultural producers and rural communities through extensive field office structures. Achieving their missions depends in part on sustaining workforces with the necessary knowledge and skills. In fiscal year 2012, FSA, NRCS, and RD closed field offices and offered buyout and early retirement incentives to employees. GAO was asked to review aspects of USDA's human capital management. This report examines: (1) how the workforces of USDA's service center agencies changed from fiscal year 2003 to fiscal year 2012, (2) the extent to which USDA's policy on supervisory ratios aligned with OPM guidance in fiscal year 2012, and (3) the extent to which USDA's service center agencies followed leading practices when closing offices and reducing staff in fiscal year 2012. GAO analyzed workforce data from OPM and USDA, reviewed documents, interviewed relevant officials, and compared leading practices with the actions agencies took to close offices and reduce staff in fiscal year 2012. From fiscal years 2003 to 2012, the size of the workforces declined at the U.S. Department of Agriculture's (USDA) service center agencies—the Farm Service Agency (FSA), Natural Resources Conservation Service (NRCS), and Rural Development (RD). The size of USDA's service center agencies declined by a higher percentage from fiscal years 2011 to 2012 than the average annual percent decline from fiscal years 2003 to 2012 (see fig.). In fiscal year 2012, USDA policy on supervisory ratios did not align with Office of Personnel Management (OPM) guidance that states that an analytical approach can help agencies achieve the right balance of supervisory and nonsupervisory positions to support their missions. Instead, USDA's policy stated that all its agencies, regardless of their missions, should aim for a target ratio of one supervisor for at least nine employees (1:9). USDA officials were not able to provide a documented basis for this target ratio. In addition, USDA did not ensure that the service center agencies calculated their supervisory ratios the same way. As a result, USDA did not receive comparable information on supervisory ratios. In fiscal year 2012, USDA's service center agencies generally followed or partially followed leading practices that GAO has identified when closing offices and using buyout and early retirement incentives as follows: In closing offices, NRCS fully followed, and FSA and RD partially followed, the practice to present a business-case or cost-benefit analysis. USDA's policy on organizational changes did not direct agencies to follow leading practices to demonstrate to stakeholders they considered information such as underlying assumptions and other alternatives. In using buyout and early retirement incentives, all three agencies fully followed practices to identify reshaping goals and to develop strategies that consider alternatives. However, NRCS followed, FSA partially followed, and RD did not follow the practice to link incentives to workforce reshaping or overall strategic goals. FSA and RD did not have human capital or workforce plans to clearly document how these strategies linked with broader efforts and could not show whether their remaining workforces had the right balance of skills in the right locations to support their missions. GAO recommends, among other things, that USDA take actions to revise its supervisory ratios policy; amend its policy on organizational changes to follow leading practices; and require RD and FSA to document links between various incentives and reshaping or strategic goals. USDA generally agreed with GAO's findings but disagreed with one finding and recommendation on supervisory ratios. GAO continues to believe in the need for a revised supervisory ratios policy. |
We developed the information in this report from numerous interviews of OMB managers and staff and reviews of budget documents for fiscal years 1995 and 1996. In total, we interviewed 87 OMB officials and staff, representing over 15 percent of all OMB employees. However, because the interviews were not a random sample drawn from all components of OMB, the information obtained from them is not generalizable to all OMB employees. We reviewed budget documents that related to four executive departments and one agency: the Departments of Veterans Affairs, Labor, Justice, Housing and Urban Development, and the Environmental Protection Agency. To obtain access to OMB’s internal budget review documents, we agreed to keep the information the documents contained confidential and to describe examples from them that illustrated the changes before and after OMB 2000 in a general manner. In contrast to our 1989 general management review of OMB, this review focused on a specific reorganization initiative. As agreed with your offices, our review was descriptive rather than evaluative in nature because, at the time we started our review, it was too early to evaluate this complex and significant reorganization of OMB. Moreover, it was very difficult to separate the influence of OMB 2000 from concurrent management reform initiatives, such as the Government Performance and Results Act of 1993 (GPRA) or other components of NPR. We did our work in Washington, D.C., from November 1994 through July 1995 in accordance with generally accepted government auditing standards. Appendix I provides additional details on our objectives, scope, and methodology. We provided a draft of this report to the Director of OMB for her review and comment on November 28, 1995. OMB’s comments are presented and evaluated on page 28 of this report, and a copy of OMB’s comments is in appendix V. Management and budget issues have long competed for attention and resources within the Executive Office of the President, with management concerns commonly subordinated to the exigencies of the budget process. During the past 50 years, a number of presidential advisory groups have recommended changes designed to strengthen the Office’s central management leadership. In response to the recommendations of one of these groups, the Bureau of the Budget was reorganized in 1970 and renamed OMB, thereby signaling the intent to heighten the management focus in the agency. However, the creation of OMB did not produce an institutionalized capacity for governmentwide management leadership. OMB’s budget role continued to dominate management responsibilities, and its capacity to provide management direction for the executive branch remained a persistent concern. Observers have debated how to best ensure that management issues are not overwhelmed by budgeting pressures. Some observers have advocated integrating the two functions, while others have proposed the creation of dedicated offices, or even a separate agency to provide governmentwide management leadership. Previous OMB reorganizations have reflected these different points of view, alternating between integrating management into the budget review process and creating separate management offices. Proponents of integrating management into the budget review process believed doing so could increase the attention both OMB examiners and agencies give to management issues by linking these issues to budgetary consequences. However, budget issues have tended over time to squeeze out management issues and erode attempts to dedicate specific resources to management. On the other hand, proponents of creating separate management offices believed the separation of management and budget functions could help ensure a consistent level of attention to specific management issues. However, these offices may have marginal impact in leading changes at the agencies without the influence of potential budgetary consequences. Our 1989 report on OMB examined the agency’s repeated reorganizations and management improvement efforts and concluded that OMB had been unable to coordinate its management and budget functions effectively and had not established a stable management capacity. We found that OMB’s short-term, budget-driven focus often made it difficult for the agency to address long-term management problems. We recommended that OMB (1) establish a systematic process within the annual budget cycle for identifying and overseeing agency progress on key management issues, (2) give budget divisions the responsibility and resources to oversee agency implementation of management policy, (3) improve coordination between management and budget staff, and (4) consider creating the position of Deputy Director for Management (DDM). Congress has used its legislative power for the past two decades to help direct OMB’s governmentwide management leadership. For example, the Federal Managers Financial Integrity Act of 1982 required OMB to help establish guidelines agencies could use to evaluate their internal control systems. To increase attention to certain management problems, Congress created three separate statutory offices in OMB focused on specific management areas: the Office of Federal Financial Management (OFFM) to guide the establishment of systems and controls needed for agencies’ financial management; the Office of Federal Procurement Policy (OFPP) to provide overall direction for executive agencies’ procurement policies, regulations, and procedures; and the Office of Information and Regulatory Affairs (OIRA) to direct and oversee agencies’ management of information resources and reduction of unnecessary paperwork. In addition, in the Chief Financial Officers Act of 1990, Congress established the DDM position to strengthen federal management in general. In 1993, Congress also required OMB to lead the implementation of GPRA, which was designed to improve the efficiency and effectiveness of federal programs by establishing in each agency a system for setting goals for program performance and measuring results. Congress did not create a separate office in OMB for GPRA, but OMB initially placed responsibility for that function in its General Management Division, where responsibility for other governmentwide management initiatives was housed. OMB 2000 altered OMB’s organizational structure and the responsibilities of units within that structure. As a result of OMB 2000, the RMOs were created and made responsible for all agency-specific reviews, and the statutory offices continued to be responsible for developing governmentwide policy. Each RMO consists of at least one division, with several branches in each division. OMB 2000 created new staff positions, moved staff to different units within the new structure, and made other staffing changes. Overall, the RMOs were assigned about 26 percent more staff than the former budget program areas had, although OMB’s total fiscal year 1994 staffing allocation (556 full-time equivalents) was unchanged. (App. II shows OMB’s staffing profile before and after OMB 2000.) OMB 2000 created five RMOs from five former budget program areas, which had examined agency budget requests and made funding recommendations to OMB’s Director. OMB 2000 redistributed some former budget program area assignments in order to balance the workload within and among RMOs. Before OMB 2000, OMB had separate management offices that examined agencies’ implementation of management initiatives. OMB had a General Management Division prior to OMB 2000 that was responsible for, among other things, performance measurement, program evaluation, and federal personnel and property management issues. In addition, OMB has three management-related offices that were created by statute: OFFM, OFPP, and OIRA. OMB reassigned staff from both the former budget program areas and the management offices to the RMOs to examine agencies’ specific management, budget, and policy issues. Figure 1 shows OMB’s organization before OMB 2000. The National Security and International Affairs and the Natural Resources, Energy, and Science budget program areas became RMOs with comparable agency coverage. The Health budget program area became the Health and Personnel RMO and acquired responsibility for the Department of Veterans Affairs, the Office of Personnel Management, the Executive Office of the President, and the Postal Service. Some of the Human Resources budget program area’s examining responsibilities (such as responsibility for the Department of Veterans Affairs) were moved elsewhere. Coincident with these changes, the Human Resources budget program area became an RMO. Finally, the Economics and Government budget program area became the General Government and Finance RMO, maintaining responsibility for the Departments of Commerce, Justice, Housing and Urban Development, Transportation, and Treasury; and federal financial institutions; and adding responsibility for the General Services Administration. (The RMOs’ organizational structure and examining responsibilities are illustrated in app. III in figs. III.1 through III.5.) Figure 2 shows OMB’s organization after OMB 2000. The RMOs were also given responsibility for overseeing agencies’ implementation of governmentwide management policies—a responsibility that had formerly been assigned to OMB’s management offices (the statutory offices and the General Management Division). For example, OMB made the RMOs responsible for examining agencies’ audited financial statements and for assessing agencies’ high-risk, procurement, and information resources management (IRM) issues. OMB eliminated OFFM’s Credit and Cash Management Branch and the Special Studies Divisions that had been associated with three of the five budget program areas. The Special Studies Divisions, which had originally been established to provide management expertise within the budget program areas, had most recently focused on longer term policy analysis. The General Management Division was eliminated when two of its three branches (the Federal Services and Federal Personnel Policy Branches) were moved to RMOs and the third branch (Evaluation and Planning) was eliminated. The movement of the Division’s responsibilities for examining the other two central management agencies (the General Services Administration and the Office of Personnel Management) reversed a previous initiative to give the General Management Division some budget examining responsibilities. OMB assigned most of the responsibilities and staff from these units to the RMOs. For example, the two staff members who coordinated OMB Circular A-76 activities and credit and cash management responsibilities were moved from the General Management Division and OFFM, respectively, to the General Government and Finance RMO. The staff member who coordinated GPRA responsibilities was transferred initially from the General Management Division to the Human Resources RMO. In May 1995 OMB relocated the individuals responsible for coordinating GPRA and OMB Circular A-76 initiatives from the RMOs to its Budget Review Division, because it determined that these crosscutting issues could be better handled centrally. OMB attempted to reassign staff with specific expertise from the pre-OMB 2000 management offices to areas where they could continue to use their skills. For example, OMB assigned two former OFPP staff to an RMO branch that works on Department of Defense procurement issues and a former OFFM staff member to an RMO branch that works on housing loan issues. However, competing priorities prevented OMB from assigning some staff to areas related to their expertise and also prevented some RMO branches from receiving any new staff. Following the initial OMB 2000 staff reassignments, it was up to each branch chief to determine what, if any, technical skills the branch needed to fulfill its new responsibilities and to develop those skills within given staffing allocations. No specific guidance or technical support was provided toward this end, and we observed no organized assessment on OMB’s part to identify required skills or any deficiencies. The branches within the RMOs were given discretion to decide how they would address management issues, and the methods they used varied. Some RMO branches used former management staff primarily as management specialists, while others assigned them program examiner responsibilities to examine specific agency accounts. For example, the Housing and Urban Development/Federal Emergency Management Agency Branch of the General Government and Finance RMO assigned two former management staff a lighter load of agency examining responsibilities than other examiners in the branch, allowing them to spend at least half of their time on management issues. In contrast, the Income Maintenance Branch of the Human Resources RMO assigned a former financial management staff member a workload similar to that assigned to the other program examiners in the branch, with responsibility for examining budget, policy, and management issues within specific program areas. Before OMB 2000, budget examiners were responsible for budget review and program oversight for an assigned agency or agency program. As a result of OMB 2000, OMB replaced its budget examiner positions with program examiner positions and reassigned staff from the budget program areas, the General Management and Special Studies Divisions, and the statutory offices to fill those positions in the RMOs. Program examiners are employed in the RMOs as federal General Schedule (GS) employees in grades GS-9 through GS-15, with GS-15 the full performance level. Program examiners’ position descriptions were expanded from those of budget examiners to more explicitly include responsibility for management issues. For example, before OMB 2000, budget examiners were to assist General Management Division staff in analyzing reorganization proposals; after OMB 2000, the program examiners were made responsible for conducting those reviews on their own. Program examiners were also given responsibility for planning and conducting studies on financial management and procurement. However, the position description does not explicitly mention IRM responsibilities. (See fig. IV.1 in app. IV for a comparison of examiners’ major duties before and after OMB 2000.) OMB also developed a new set of performance standards to cover all of its professional staff, including RMO and statutory office staff. Before OMB 2000, standards were individually tailored to particular positions. For example, previous performance standards for a budget examiner were focused specifically on budget formulation and review responsibilities. OFFM policy analyst standards included analyzing, coordinating, and monitoring financial systems issues; General Management Division policy analyst standards included analyzing the implementation of management initiatives, program evaluation, and long-range planning. OMB revised its performance standards to make them more uniform, to simplify them, and to encompass broader responsibilities, but the standards no longer identify specific responsibilities, including management responsibilities. (Fig. IV.2 in app. IV shows OMB’s new critical job elements and performance standards for professional staff.) As it has done traditionally, OMB primarily used on-the-job training to familiarize its examiners with their responsibilities. However, OMB also offered (but did not require) some formal training for the new responsibilities given to program examiners as a result of OMB 2000. For example, OMB offered training primarily on budget concepts, laws, and procedures for new program examiners who transferred from the management offices. OMB also invited all its staff to attend an OMB-wide “dialogue” on the fiscal year 1996 budget process and gave them the option of attending sessions designed for new OMB staff. The training included 1- to 2-hour sessions on such topics as the budget process; streamlining plans and the use of performance information (crosscutting issues that were emphasized in the fiscal year 1996 budget cycle); legislation; and initiatives related to certain statutory office responsibilities (e.g., procurement reform). OMB officials told us that 80 to 90 percent of OMB’s program examiners and statutory office staff attended these sessions. In addition, some of the statutory offices provided informal training or other guidance for program examiners and RMO branch chiefs on certain management issues. For example, OFFM conducted seminars on financial management issues, such as reviewing audited financial statements. As a result of OMB 2000, OMB reduced the number of authorized staff positions in each of its statutory offices and moved those staff to the RMOs.The size of the staff reductions varied by office. All the statutory offices retained their governmentwide policymaking roles, and OIRA retained its oversight responsibilities for regulatory and paperwork issues. However, the offices’ responsibilities for overseeing agencies’ implementation of other governmentwide management initiatives were transferred to the RMOs. Each statutory office followed a different approach in devolving these responsibilities. During our interviews, OMB staff identified a number of benefits that occurred as a result of changes to the statutory offices, such as enhanced coordination with agencies and the visibility of the financial management or procurement issues that became tied to the budget process. However, they also expressed some concerns about these changes, including concerns about how OMB 2000 had affected OMB’s capacity to address financial management and procurement issues. These issues are only a part of the many responsibilities of a program examiner; prior to OMB 2000, they had been the responsibility of a limited number of management staff dedicated specifically to these issues. As a result of OMB 2000, 21 of OFFM’s 41 authorized staff positions were shifted to the RMOs, including most of the staff of the Credit and Cash Management Branch, which was abolished. According to the March 1, 1994, memorandum announcing the reorganization, these staff were shifted from OFFM to increase the RMOs’ analytical capabilities. OFFM retained responsibility for developing and coordinating governmentwide financial management policies, but OMB transferred responsibility for assessing agencies’ implementation of these policies to the RMOs. RMO program examiners also were made responsible for assessing the status of agencies’ progress regarding high-risk issues and for reviewing agencies’ audited financial statements—functions that had been the responsibility of OFFM. Several RMO officials said that there was better coordination between OFFM and other parts of OMB following OMB 2000. For example, OFFM took steps to work jointly with the RMOs and increase RMO officials’ participation in the Chief Financial Officers Council. OFFM sent Council meeting agendas and minutes to RMO officials and solicited their input. OFFM also held several training sessions for RMO staff on a range of financial management issues, including accounting standards, the form and content of audited financial statements, and consolidated reporting. Despite these efforts to improve the RMOs’ knowledge and analytical capabilities, a number of OMB staff we talked to expressed concerns about the program examiners’ capacity to address financial management issues. They said some program examiners did not yet have the expertise they needed to carry out their agency-specific financial management oversight responsibilities, such as reviewing audited financial statements. They also said that they were uncertain how to address credit and cash management questions since responsibility had been devolved to the RMOs. OMB reallocated 10 of OFPP’s 30 authorized staff positions to the RMOs as a result of OMB 2000. Six of the 10 former OFPP staff became jointly managed under a “matrix management” approach in which they were made responsible for working on both the agency-specific issues in their RMOs and crosscutting procurement issues (e.g., electronic commerce) on an OFPP team. OFPP’s responsibilities for overseeing agency implementation of governmentwide procurement policies were reassigned to the RMOs. According to OFPP’s Administrator, the matrix approach was used to provide the structure needed to implement OMB’s statutory procurement responsibilities and provide the RMOs with the procurement expertise they needed to perform their oversight responsibilities. He said that RMO matrixed staff who worked on OFPP teams could also oversee the implementation of the teams’ ideas by the agencies for which they had responsibility. For example, he said that the RMO matrixed staff serving on OFPP’s research contracting team collaborated on this issue with several agencies on major research contracts, developed appropriate points of contact in the agencies, and worked jointly with OFPP staff and agency officials to address the issue. OFPP extended the matrix approach to include nonmatrixed staff from RMOs on the OFPP electronic commerce team. However, some of the OMB staff we interviewed said that OFPP’s matrix management approach caused difficulties for the matrixed staff because they reported to managers in two different organizations with different expectations. One reported difficulty was the attempt to integrate former OFPP staff as RMO program examiners when OFPP’s Administrator expected the matrixed staff to work solely on procurement issues. Most of the matrixed staff said it was difficult to sort out work priorities under this staffing arrangement. OIRA’s 56 authorized staff positions were relatively unchanged by OMB 2000, with only 4 authorized positions transferred to the RMOs. OIRA’s 12 IRM staff retained responsibility for establishing governmentwide IRM policies, but responsibility for overseeing agency implementation of those policies shifted to the RMOs. However, OMB’s program examiner position description does not explicitly include IRM oversight responsibilities. OIRA also continued to be responsible for all regulatory and paperwork reviews as well as statistical policy issues. According to the March 1, 1994, memorandum, OMB postponed any major reorganization of OIRA because of its responsibility for implementing Executive Order 12866 on regulatory planning and review. OIRA’s Administrator told us that as an alternative to decentralizing staff to the RMOs, OIRA used IRM teams, composed of RMO program examiners and OIRA staff. The teams were developed to enhance working relations between the groups and to ensure that RMOs were knowledgeable about IRM issues. The Administrator and some RMO staff said OIRA generally had a good working relationship with the examiners before OMB 2000 in both the regulatory and IRM areas, and that this relationship continued after the reorganization. Also, OIRA staff still concentrate on governmentwide and crosscutting issues. For example, a team composed of OIRA and GAO staff developed a best practices guide to help OMB program examiners and agency personnel identify important issues in oversight of information technology investments. Also, each IRM specialist in OIRA’s Information Policy and Technology Branch serves as a liaison to at least one interagency group, including groups on wireless communications, international trade data, electronic mail, wage tax reporting, and system benefits. The budget documents we reviewed and our interviews with OMB staff indicated that OMB’s attention to management issues changed following OMB 2000. The documents showed that the quantity and quality of information about management issues presented during the budget process increased after the reorganization. Many of the OMB staff we interviewed also reported that they believed there had been an increased focus on management issues in the budget process after OMB 2000 and said this focus had resulted in changes in their work. However, they also expressed some concerns regarding OMB’s attention and capacity to address certain issues. The budget documents we reviewed related to five selected agencies generally contained more substantive and detailed discussions of management issues for fiscal year 1996 than the previous year’s documents, although the information provided by agencies and the level of analysis by OMB staff varied. Changes in OMB’s management emphasis were apparent in three areas—OMB’s management priorities, issues related to OMB’s statutory offices, and other program-related management issues. OMB’s top management priorities for the fiscal year 1996 budget cycle were agencies’ streamlining plans and use of performance information. OMB budget preparation guidance published in July 1994 said agencies’ fiscal year 1996 budget submissions were to identify the key features of their streamlining plans (e.g., increased span of control, reduced organizational layers, and/or milestones for full-time equivalent reductions). The guidance also encouraged agencies to include performance goals and indicators in their budget justifications and to include output and outcome measures instead of workload and other process measures. During their review of agency budget submissions, RMO program examiners were expected to assess whether agencies’ streamlining plans were acceptable and, if not, to recommend changes. They were also asked to identify (1) whether performance information had been provided, (2) why such information was not provided or was limited, and (3) what additional information would be useful. In September 1994, the OMB Director and the DDM established more specific guidance for RMO program examiners to use when reviewing agency fiscal year 1996 budget submissions for these areas of emphasis. For example, guidance stated that the examiners’ reviews of streamlining plans should be more than a “numbers exercise” and that they should consider the quality, scope, and nature of each agency’s streamlining effort. The guidance instructed RMO program examiners to include performance measurement information, where available, in all their analyses of major issues. The budget documents we reviewed indicated that OMB’s priorities on streamlining plans and the use of performance information had a clear impact on the fiscal year 1996 agencies’ submissions and OMB’s internal budget review documents. Whereas the fiscal year 1995 documents discussed streamlining primarily in terms of the number of positions to be eliminated, the fiscal year 1996 documents also included discussions about how proposed staff reductions could affect the agencies’ performance. In the documents for one agency, RMO staff commented that its fiscal year 1996 plan was thorough and comprehensive and was designed to meet NPR’s targeted staffing levels while providing better customer service, cost savings, and an improved working environment for agency employees. OMB internal budget documents for another agency included a detailed analysis of the agency’s performance management system. The analysis noted that the resources the agency requested were justified in terms of activities to be funded but also said that the agency lacked a clear picture of the outcomes that would result from the requested funding. The documents also highlighted problems with the agency’s performance reporting system (e.g., lack of cost data and limited data quality and comparability), noting that the system did not contain enough information to identify underlying problems and did not link outcomes to reported outputs. RMO staff recommended specific performance measures that would be useful to OMB and identified problems that confronted the agency in designing an effective performance measurement system (including potential conflicts between federal agencies’ goals and missions, exogenous effects on outcomes, and linkages between social costs and outcomes). Issues related to OMB’s statutory offices were also generally discussed in greater depth in the fiscal year 1996 budget documents than they were in the fiscal year 1995 documents. For example, the discussion of financial management issues in internal OMB documents for one agency was much narrower before OMB 2000 than it was after the reorganization. The discussion in the fiscal year 1995 documents was limited to a statement that the agency faced challenges in such areas as contract management and financial systems. The fiscal year 1996 documents included an assessment of financial management issues at the agency, such as a review of the agency’s 5-year plan and how it related to reengineering and streamlining efforts. The fiscal year 1996 budget documents also included a broader discussion of other types of management issues than there was in the fiscal year 1995 documents. For example, in the fiscal year 1995 documents, both the Department of Justice and OMB raised the issues of prison overcrowding and the continuing growth in full-time equivalent requirements for the Department’s Bureau of Prisons as strictly resource issues. In contrast, in the fiscal year 1996 documents, OMB’s assessment extended beyond the resource issues to include information on trends in state and county prison systems, operating costs at the Bureau’s medium- and low-security facilities compared to private facilities, and issues involving the quality of confinement and the adequacy of security. In OMB’s review of the Department of Housing and Urban Development’s fiscal year 1995 budget request, OMB budget examiners discussed the Department’s credit management and asset disposition strategies. In OMB’s review of the Department’s fiscal year 1996 request, RMO staff again discussed these issues but also analyzed the relationship of improved credit management and asset disposition to budget savings, reduced administrative and full-time equivalent requirements, and improved customer service. In their analysis, the RMO staff included selected performance measures and identified specific actions that could be adopted on the basis of evidence from the Department’s financial statements, Federal Managers Financial Integrity Act and audit reports, and other sources. OMB not only increased its attention to certain management issues in the fiscal year 1996 budget cycle, it also changed the type of information it requested from the agencies under OMB Circular A-11 for high-risk and information systems reports. Although the individual high-risk programs were discussed in as much or more detail in the fiscal year 1996 documents, OMB required agencies to report on fewer high-risk programs and to concentrate their high-risk efforts on those operational improvements not requiring legislative authorization. OMB Circular A-11 guidance for the fiscal year 1996 budget process consolidated requirements for some financial management and financial systems reports and reduced the level of detail that agencies were required to report to OMB. In consolidating or reducing these requirements, OMB attempted to concentrate on financial and mixed systems critical to agencywide financial management, reporting, or control and no longer required data on nonfinancial reporting systems. The OMB staff we interviewed said that changes arising from OMB 2000 had mixed effects on OMB’s ability to address management issues. OMB staff expressed a widespread view that OMB’s attention to certain management issues, such as streamlining plans and the use of performance information, had increased in the fiscal year 1996 budget cycle. Former budget examiners generally said that they felt more responsible for management issues after OMB eliminated what some viewed as an artificial separation between management and budget. Some of the staff also said, however, that OMB’s attention to other management issues that were formerly statutory office or General Management Division responsibilities had decreased or varied across the RMO branches. RMO staff, both those who had formerly been management staff and those who had formerly been budget examiners, voiced specific concerns about the reorganization, although they generally expressed positive views about OMB 2000. Program examiners who were formerly budget examiners generally said that although they had looked at management issues before OMB 2000, the degree to which they emphasized those issues had increased since the reorganization. Many of the OMB staff we interviewed said that the Director and the DDM were clearly committed to improving federal management and that their commitment had raised the importance of management issues in OMB as a whole. However, because the management focus of OMB 2000 was so closely identified with these officials, some of the staff raised questions about whether that emphasis would survive when those officials left OMB. Several OMB staff also said that OMB and agencies were more likely to act on management issues when those issues were raised in the context of budget reviews. They said linking management and budget issues provided examiners with more leverage for change in the agencies. For example, an OFFM staff member cited financial management restructuring as an example of an area where agencies took action more quickly when the issue was raised by an RMO during the budget review process than when this issue was raised outside of budget discussions by OFFM. Some of the OMB staff we interviewed said that the discretion given to RMOs in overseeing agency implementation of management issues resulted in a more varied approach to addressing management issues within OMB than had been the case before OMB 2000. They said the RMO branches differed in both whether and how they treated management issues for which the statutory offices or the General Management Division were formerly responsible. RMO staff said that the particular management focus an RMO takes depends on the kinds of activities and issues at the agencies being examined. For example, procurement issues may be more prominent in OMB’s examination of agencies that do a lot of purchasing, such as the Department of Defense. One of the goals of OMB 2000 had been to realign resources so that program examiners could do more long-term “mid-range” analysis. However, RMO staff frequently said there had been an increase in their responsibilities as a result of OMB 2000, and their workload increased in response to such initiatives as reinventing government and congressional agency restructuring proposals. They also said they had not been told to eliminate any responsibilities or tasks as a result of OMB 2000. Because they had to balance competing responsibilities, several program examiners said that less emphasis had been placed on certain management issues—those that lacked a clear budgetary impact, did not require an immediate response to a short-term deadline, or did not reflect the administration’s priorities. In particular, they said the short-term pressures of the budget process left little time for long-term analysis. Although they felt more responsible for agency management issues, some program examiners said that they did not know how to address all of these issues. They also said that the reduction of centralized management expertise in the statutory offices and the elimination of the General Management Division left them with fewer sources of expertise and assistance. Because program examiners had little time to spend looking for the expertise that was available, they said that certain management issues were not addressed or received less attention. OMB staff were not always sure how various management issues related to each other and to the budget process. According to OMB’s Director and DDM, OMB is working to develop a unified framework to bring together the various management-related laws and initiatives with a performance focus. OMB initially planned to assess the OMB 2000 effort. However, the Associate Director for Administration said that OMB decided not to evaluate OMB 2000 in the spring of 1995 because the unprecedented pace of the fiscal year 1996 budget process left insufficient time to perform any evaluation. He said OMB no longer planned any formal assessment of the personnel and organizational changes in OMB 2000. However, a Special Assistant to the DDM said OMB intends to assess the effectiveness of OMB as a whole in response to GPRA requirements. Part of this assessment will be an evaluation of the integration of OMB’s management and budget responsibilities. The changes associated with OMB 2000 should be viewed in the context of OMB’s perennial challenge of carrying out its central management leadership responsibilities in an environment in which its budgetary role necessarily remains a vital mission. Previous congressional and OMB attempts to elevate the status of management and protect it from budgetary pressures by creating separate management units within OMB sought to ensure that a consistent level of effort was focused on management issues. However, these efforts were widely acknowledged to have been only marginally successful in affecting budget decisions and sustaining attention to OMB’s role of leading management improvement in the agencies. Sustained attention to management issues often remained subordinated to budget concerns and perspectives, and the leverage the budget could offer to advance management efforts was not directly available to the management units. OMB 2000 represents another OMB approach to try to strengthen its management leadership capacity and influence. Although policy development responsibilities were retained within its separate management offices, OMB attempted to elevate the importance of management by linking its management oversight and budget preparation responsibilities within newly created RMOs. In decentralizing responsibility for management issues throughout the RMOs, OMB 2000 increased reliance on the commitment of RMO managers and staff and coordination of their activities with the statutory offices. OMB’s initial experience with this approach during the 1996 budget process showed the clear support of top OMB officials and staff to enhance the treatment of certain management issues in the budget. Even though this was a particularly difficult budget cycle, there was a noticeable increase in the attention given to management issues that transcended immediate budgetary concerns. However, given the many issues competing for the attention of RMO officials and staff, top leadership direction will continue to be an important factor in ensuring consistent guidance across RMOs and continued concern for governmentwide management issues. At the time of our review only one budget cycle had elapsed since the inception of OMB 2000, so it remains an open question whether the heightened attention to management issues will be sustained after the current leadership leaves OMB. In addition, sustained congressional oversight of both management policies and reform initiatives will continue to play a vital role in ensuring a consistent focus on management issues within OMB. Some recent statutory management initiatives have, in fact, provided a new set of tools that may aid the integration of management issues in the budget process. The Chief Financial Officers Act requires agencies to produce, for the first time, audited financial data that can be used in the budget process to better measure the actual costs of programs and promote improved financial management of scarce resources by federal agencies. Under GPRA, agencies are required to generate performance measures and information that may help OMB better assess the management of program resources and achievement of program goals. A critical question facing OMB is whether its new approach toward integrating management and budgeting as well as its implementation of statutory management responsibilities can be sustained over the long term. Sustaining a management focus in budgeting relies on the capacity and expertise of the program examining staff to address management issues. These issues warrant continued attention and periodic assessment by OMB itself to help promote the organization’s long-term capacity to achieve an integrated approach to management as part of the budget process. OMB needs to periodically assess how well its RMOs and statutory offices are working together to address management issues. Such an assessment should most appropriately be undertaken as part of a broader assessment of OMB’s performance in formulating and implementing management policies for the government that address a larger range of issues affecting the effectiveness of OMB’s management role. This assessment could also inform the ongoing debate on how best to protect management from being overwhelmed by budgetary pressures—specifically, whether a separate office of management is needed. The most effective evaluation would be one where all stakeholders reached mutual agreement on the particular elements of the evaluation and the indicators used to measure performance. The GPRA strategic planning process offers an excellent opportunity for OMB to evaluate its own institutional capacity and to identify opportunities to strengthen leadership of management issues. Our review suggested a number of possible areas to consider for evaluation. For example: Although the OMB staff we spoke with were generally positive about the reorganization, they expressed some concerns about whether program examiners had sufficient time and expertise to adequately address certain management issues during their agency budget reviews. OMB could examine whether on-the-job training and a decentralized staffing approach are appropriate to develop the skills and abilities needed by RMOs to carry out management oversight responsibilities. OMB used three different approaches during the first year of OMB 2000 to structure RMOs’ relationships with statutory offices and to provide program examiners with access to management expertise: (1) direct transfer of responsibilities and resources to RMOs, as used in reorganizing certain general and financial management activities; (2) joint assignment of staff, as used in matrixing federal procurement policy and oversight responsibilities; and (3) use of “best practices” guidance, as developed for information resources management. OMB could evaluate each of these approaches to determine whether any of them are more effective than the others, or whether changes are needed in the way they have been implemented. OMB 2000 has clearly affected how the agency addresses management issues, but a broader assessment of OMB’s management strategies and approaches is the most appropriate context in which to consider how to best ensure the integration of management and budgeting. Accordingly, as part of its planned broader assessment of its role in formulating and implementing management policies for the government, OMB should consider the lessons learned from OMB 2000. Such a review should focus on specific concerns that need to be addressed to promote more effective integration, including (1) the way OMB currently trains its program examiners and whether this is adequate given the additional management responsibilities assigned to these examiners, and (2) the effectiveness of the different approaches taken by OMB in the statutory offices to coordinate with RMOs and provide program examiners with access to expertise. We provided copies of a draft of this report for review by OMB officials. On December 1, 1995, we met with OMB’s DDM and one of his special assistants, the Associate Director for Administration, and a staff assistant. They generally agreed with the facts presented and said they found the report useful. The OMB officials provided some additional information on the training OMB has provided and on OMB’s planned assessment of OMB as a whole. On December 10, 1995, the DDM provided written comments on this report (see app. V) in which OMB generally concurred with the report’s conclusions and recommendation. In its letter, OMB said that it found our report to be thorough, accurate, and constructive in describing the OMB 2000 changes. OMB agreed that the strategic planning process it will be working on in the coming year offers an excellent opportunity for OMB to evaluate its institutional capacity and to identify opportunities to strengthen leadership of critical governmentwide management issues. OMB’s letter stated that its planning effort will address the integration of management and budget responsibilities, including the adequacy of employee training and different approaches to integration and coordination among OMB’s various units. In addition, the DDM wrote that OMB’s Management Committee, consisting of the DDM and 13 other members from all levels within OMB, deals with the entire range of issues and initiatives pertaining to OMB’s organizational effectiveness, structure, and work practices. We cannot yet evaluate the adequacy of the actions OMB plans to take in the coming year. We are sending copies of this report to the Director and Deputy Director for Management, OMB; and other interested Members of Congress. We will also make copies available to others on request. Major contributors are shown in appendix VI. If you have any questions concerning this report, please call either of us. Nye Stevens can be reached on (202) 512-8676, and Paul Posner can be reached on (202) 512-9573. The objectives of our review were to describe (1) changes in OMB’s organizational structure, responsibilities, and staffing as a result of OMB 2000; (2) changes to OMB’s three statutory offices; (3) changes in the attention OMB gave to management issues in the budget formulation process before and after OMB 2000; and (4) how OMB planned to evaluate OMB 2000. To describe changes in OMB’s organization, responsibilities, and staffing as a result of OMB 2000, we reviewed OMB memoranda, personnel data, and other documents. We also interviewed OMB officials, including the Human Resources Manager, the Associate Director for Administration, and special assistants to the DDM. To describe changes in OMB’s statutory offices, we examined what OMB is required to do by statute and reviewed OMB documents that described these offices’ responsibilities. We also interviewed the top officials, selected branch chiefs, and other staff within the statutory offices—OFFM, OFPP, and OIRA. We determined changes in the attention OMB gave to management issues in the budget formulation process by comparing fiscal year 1995 and fiscal year 1996 budget guidance, agency budget submissions, internal OMB budget documents, and the President’s budget for fiscal years 1995 and 1996 related to five agencies: the Departments of Veterans Affairs, Labor, Justice, Housing and Urban Development, and the Environmental Protection Agency. For background information, we interviewed officials in each of the five selected agencies who were identified by their agencies as knowledgeable about the budget process and submissions for fiscal years 1995 and 1996. We selected these agencies for our review to provide examples of the agencies that the RMOs oversee (four of the five RMOs were included in our review: the Natural Resources, Energy and Science RMO; the General Government and Finance RMO; the Human Resources RMO; and the Health and Personnel RMO). The agencies were also selected to represent a mix of program activities (e.g., regulatory and grants); modes of service delivery (e.g., direct and third-party providers); and organizational structures (e.g., centralized and decentralized). We reviewed OMB’s budget preparation and submission guidance and other related OMB documents for fiscal years 1995 and 1996 and interviewed officials and staff from all the levels within the RMOs, including divisions and branches, who were responsible for examining these agencies. We also interviewed RMO program examiners from other branches who, before the OMB 2000 restructuring, were budget examiners, management staff, or Special Studies Division analysts. To determine how OMB planned to evaluate OMB 2000, we interviewed the DDM and other top OMB officials. We also asked OMB staff if they were aware of any formal performance measures or goals for OMB 2000 or if they knew of any OMB plans to evaluate OMB 2000. We asked all OMB staff and officials we interviewed a standard set of questions about OMB 2000, along with additional questions relevant to their positions or organizational location within OMB. Consequently, the number that constituted “some” of the respondents varied from question to question. The following figures illustrate each RMO’s organization and the agencies for which it has examining responsibilities. The listings of agencies for which the RMO has examining responsibilities are not comprehensive. The agencies listed represent those with statutory Inspectors General and are included to illustrate RMO program responsibilities. The following figures illustrate (1) the major job responsibilities of program examiners, comparing these duties with those of the former budget examiner position; and (2) the new critical job elements and performance standards that OMB has adopted for all OMB professional staff. ·Senior examiner, OMB expert and focal point for all matters pertaining to ·Senior examiner, OMB expert and focal point for all matters pertaining to specific area of assignment. ·Coordinates the formulation and execution of the budget. Develops, reviews, ·Coordinates the formulation and execution of the budget. Develops, reviews, and advises on the preparation of formal documents (e.g., Executive Orders and budget submissions). Participates in review of and is primary advisor on OMB recommendations relative to apportionments. and advises on the preparation of formal documents (e.g., Executive Orders and budget submissions). Participates in review of and is primary advisor on OMB recommendations relative to apportionments. ·Prepares materials for Director’s review, arranges and chairs hearings. ·Prepares materials for Director’s review, arranges and chairs hearings. Assists with internal administration and management of the office. Assists with internal administration and management of the office. ·Prepares letters from the White House and OMB. ·Within assigned program areas, assists in the review and clearance of ·Prepares letters from the White House and OMB. ·Within assigned program areas, assists in the review and clearance of legislative proposals and testimony. Presents the need for new legislation as well as changes in legislation. legislative proposals and testimony. Presents the need for new legislation as well as changes in legislation. ·Performs legislative, economic, policy, program, organizational, and ·Performs legislative, economic, policy, program, organizational, and management analyses; reviews issues needing special attention, as well as executive orders and regulations. management analyses; reviews issues needing special attention, as well as executive orders and regulations. ·Assists Management Division staff on reorganization proposals, clarification ·Plans, conducts, and completes analyses and studies on financial on relations among the integration of programs, and other management improvement items. management and procurement. ·Reviews major reorganization proposals. Studies personnel management and systems development to help develop and initiate long-range plans and goals. ·Develops and recommends strategies for approaches to improvement in the value and effectiveness of management systems, field administration, program operations, mid-range and strategic planning, and program evaluation. Determines the most efficient and cost- effective methods of management and program service delivery services as well as an assessment of performance and results. ·Provides leadership and procurement management direction. Participates in the development, implementation, and oversight of policies, regulations, and procedures followed by executive agencies in providing for the procurement of property and services and by recipients of federal grants and assistance. ·Reviews and analyzes agency submissions, studies, research materials, and other information related to assigned areas. Synthesizes highly complex and voluminous materials. Assists in the review and clearance of reports to Congress. ·Reviews, comments on, and leads negotiations on policy issues. Fully Successful Performance Standards: Demonstrates thorough knowledge of assigned program areas and applicable policies. Identifies relevant issues and options for analysis and develops appropriate recommendations for decisions. In the context of established time constraints, produces staff work on issues that is complete, concise, accurate, unbiased, creative, quantitative wherever possible, and analytically and logically sound. Evaluates significant existing program policies, plans, and performance to assess whether they achieve intended purposes cost effectively and consistent with administration priorities. Fully Successful Performance Standards: Assignments are completed accurately and on-time, provide meaningful information, conform to applicable requirements, are internally consistent, and properly reflect decisions that have been made. Analysis (legislative, regulatory, paperwork, policy, procurement, budget, and management) is completed in time for action by policy officials and taken to the appropriate organization level for resolution. Accurately identifies policy or program issues that contribute to improving program effectiveness; evaluates problems and remedial actions, such that appropriate policy decisions can be reached and actions taken. Fully Successful Performance Standards: Plans, schedules, and executes work assignments to be responsive to management needs. Displays initiative, creativity, resourcefulness, and collegiality in completion of assigned duties. Ensures broad integration and coordination of work within and outside OMB. Works well as a team leader or member with others within and outside OMB. Maintains positive, professional working relationship with staff in OMB, throughout the Executive Office of the President, and with agencies. Ann H. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the changes that have occurred at the Office of Management and Budget (OMB) as a result of OMB 2000, focusing on the: (1) changes in OMB organizational structure, responsibilities, staffing, and OMB statutory offices; and (2) attention OMB gave to management issues in the budget formulation process. GAO found that: (1) OMB 2000 created a new organizational structure for OMB by reorganizing and replacing former budget program areas with resource management offices (RMO) staffed by employees reassigned to new program examiner positions; (2) OMB shifted specific oversight responsibilities of the statutory offices to RMO, while responsibilities for governmentwide management policies remained in the statutory offices; (3) OMB total staffing allocation remained the same, despite RMO having about 26 percent more staff than previously budgeted; (4) the implementation of OMB 2000 resulted in greater attention to agency management issues in the budget process; (5) while some OMB staff were concerned about their ability to perform their expanded responsibilities, OMB staff generally had a positive view of OMB 2000; and (6) although OMB initially planned to evaluate OMB 2000 as a distinct management initiative, it plans a broader assessment of its overall effectiveness in formulating and implementing management policies for the government. |
In any acquisition, the contract type provides the foundation for incentivizing a contractor’s performance and is just one element of the contract, which may also include performance, cost, or delivery incentives, and other contract terms and conditions that incentivize performance. The type of contract used for any given acquisition inherently determines how risk will be distributed between the government and the contractor. Since the contract type and the contract price are interrelated, they must be considered together. The government’s objective is to negotiate a contract type and price (including cost and the contractor’s fee or profit) that will result in an acceptable level of risk to the contractor, while also providing the contractor with the greatest incentive for effective and efficient performance. Incentive contracts, which include award fee contracts, are designed to attain specific acquisition objectives by including incentive arrangements that (1) motivate contractor efforts that might not otherwise be emphasized, and (2) discourage contractor inefficiency and waste. One of the main characteristics of award fees and other incentives is how they are administered in the contract. Award fees are generally subjectively determined and incentive fees are generally objectively determined. When incentive arrangements are done properly, the contractor has profit motive to keep costs low, deliver a product on time, and make decisions that help ensure the quality of the product. Our prior work has shown, however, that incentives are not always effective tools for achieving desired acquisition outcomes and that, in some cases, there are significant disconnects between program results and incentives paid. Additionally, we have repeatedly found that some agencies did not have methods to evaluate the effectiveness of award fees. More recently, in March 2017, we found that fixed-price incentive shipbuilding contracts did not always lead to desired outcomes, and that the Navy had not assessed whether adding incentives improved contractor performance. We made recommendations to the Navy, including that it conduct a portfolio-wide assessment of its use of additional incentives on fixed-price incentive contracts across its shipbuilding programs. DOD agreed with our recommendations. Numerous contract types are available to the government to provide flexibility in acquiring the supplies and services agencies need, including satellite acquisitions. Table 1 provides an overview of typical contract types and how they may be used to acquire satellites. When determining the contract and incentive structure for satellite acquisitions, the government may consider a number of factors: Where the satellite is in the acquisition phase. Satellite contracts can include design, development, integration, and testing, and can cover more than 15 years. The government can tailor the contract type and fees to meet the specific circumstances of the acquisition, for example, the phase of the acquisition cycle. Figure 1 shows the notional acquisition phases for a satellite. During the design and development phase, when technology risks are higher, the government typically uses cost-reimbursement contracts. When the government is acquiring a “production-model” satellite, or a copy of a satellite with a proven design and build, a fixed-price contract may be used. In addition, for the on-orbit phase, the government typically negotiates with the contractor regarding the amount of incentives related to successful on-orbit performance. Which satellite component is being acquired. Satellites are generally comprised of the bus and the instruments or payloads. The bus is the body of the satellite. It carries the payload and is composed of a number of subsystems, like the power supply, antennas, telemetry and tracking, and mechanical and thermal control subsystems. The bus provides electrical power, stability, and propulsion for the entire satellite. The payload of a satellite, which is carried by the bus, refers to all the devices or instruments a satellite needs to perform its mission, and can differ for each type of satellite. Some examples include cameras to take pictures of cloud formations for a weather satellite, and transponders to relay television signals for a communications satellite. Generally, developing payloads is riskier than developing buses. Number of contracts used to acquire satellite components. The government can choose to award one contract for the development and production of the satellite bus and all associated payloads, or it can award separate contracts for the development and production of the bus and each individual instrument. In the contracts we reviewed, DOD typically awarded a single contract to a prime contractor for the development of the bus and payloads, and according to officials, the prime contractor often awards contracts to subcontractors to provide the various instruments and parts. In contrast, for the NASA contracts and orders we reviewed, NASA typically awarded separate contracts and orders to multiple contractors to develop the bus and each instrument. Number of space vehicles being acquired on a contract. The government can acquire a single satellite or multiple satellites under one contract, and one contract may also include components for multiple satellites. Further, depending on the mission, an agency may buy a single satellite (such as for scientific discovery) or blocks of satellites (such as for global communications). The quality and performance of a satellite—including whether it meets on- orbit requirements—usually cannot be determined until after it launches and reaches its intended orbit. Satellite development and production contracts may include on-orbit performance incentives aimed at ensuring that the satellite will meet performance requirements. Because the incentive is not earned until a satellite successfully demonstrates its performance on-orbit, an on-orbit performance incentive can be thought of as the dollar amount at risk if the contractor fails to meet the performance requirements specified in the contract (see figure 2). On-orbit incentives are typically documented in a satellite contract’s fee plans or in contract clauses. There are generally three mechanisms for on-orbit performance incentives: negative incentives, positive incentives, and withholding of milestone payments. Agencies can use a combination of these when designing on-orbit incentives, which are generally tied to objective performance criteria, such as successfully getting into the right orbit and achieving critical performance parameters once there. When using negative incentives, the government generally pays the contractor incentives as the contractor completes work during the development or production phase. The contractor would have to pay back some or all of the incentives if the satellite fails to meet on-orbit performance parameters. With positive incentives, the government assesses satellite performance in any given period, such as 6 or 12 months, to determine how much the contractor earns for that period. The amount at risk for the contractor could be the same for a positive incentive or a negative incentive. Firm-fixed-price contracts for satellite programs may have progress or performance-based payment plans that require fixed payments to be made upon successful completion of milestones, such as preliminary design review, final system test, and successful on-orbit check-out. If a satellite fails prior to check-out, the government may withhold the final milestone payment from the contractor. Because satellite acquisitions are unlike other acquisitions, the Air Force’s Space and Missile Systems Center (SMC) and NASA have tailored guidance on space acquisitions, and each specifically addresses on-orbit performance incentives. SMC’s March 2007 incentives guide states that on-orbit incentives should be clearly written to ensure enforceability, and require fully demonstrable performance in order to earn fee. The guidance also specifies that the contract should contain specific descriptions as to the rights of the parties in the event of a failure, caused either by the contractor or by the government. One senior SMC contracting official stated that their contracting directorate maintains a repository of on- orbit incentive plans and contract clauses that have been implemented. These incentives arrangements can be used as guides for SMC programs as they develop new contracts. NASA’s FAR supplement generally requires certain contracts for hardware deliverables worth more than $25 million to include performance incentives. In the case of satellite acquisitions, the on- orbit incentives serve as performance incentives. In addition, NASA’s FAR supplement requires that for cost-plus-award-fee contracts for end items, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final. This allows NASA to evaluate the contractor’s total performance—after the end item is delivered—against the award fee plan to determine the total earned award fee from the contract award fee pool. In other words, under this “re-look provision,” the total award fee is not earned until the satellite has demonstrated its performance on-orbit. In addition to on-orbit performance incentives, it is important to acknowledge the totality of the incentives and other terms in satellite contracts that are designed to motivate contractors to achieve the cost, schedule, and performance goals of the program. In many cases, multiple incentives are used to achieve such goals. The FAR provides that when multiple incentives are used, a balance must be achieved in which no incentive is either so insignificant that it offers little reward for the contractor, or so large that it overshadows other areas and neutralizes their motivational effect. In addition, it requires all multiple incentive contracts to include a cost incentive that precludes rewarding a contractor for superior technical performance when their cost outweighs their value. For satellite programs, achievement of full mission performance is the primary objective, but cost and schedule goals also play key roles in a program’s success. Our body of prior work has shown that most major government satellite programs experience significant cost growth and schedule delays due to unmatched resources and requirements, immature technologies at program start, and inconsistent application of knowledge-based practices throughout the life of a program. As a result, although some programs may have successful on-orbit performance, they may also have had major cost overruns and schedule delays along the way. There are many nuances when it comes to satellite failures. These can be especially important when considering government opportunities for recourse should a satellite fail or underperform. The Aerospace Corporation (Aerospace), a federally funded research and development center (FFRDC) that provides engineering and technical support to national security space programs, categorizes satellite anomalies based on the criticality or severity of the anomaly and distinguishes them based on their impact on the mission. For the purposes of this report, a catastrophic failure results in the total loss of a satellite, or a satellite that will never meet any of its mission requirements; a partial failure results in a satellite that fails to meet some of its mission requirements or that loses a redundant system. When satellites fail, they often do so in the first few months they are in orbit. Aerospace reported in 2012 that mission-impacting anomalies—or failures—that occur during the first 120 days of a satellite’s on-orbit life account for approximately 40 percent of all such failures that occur during the first 3 years of operation. Causes of failure during a satellite’s first 3 years of operation varied according to Aerospace, but the top three reasons identified were issues related to a satellite’s design, parts, and software. Given high development risks and the likelihood of requirements changes in satellite programs, most government satellite acquisitions use cost- reimbursement contracts. New technologies and unstable requirements mean satellite program officials are unlikely to accurately predict development costs and schedules, making cost-reimbursement contracts a prudent choice. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies are more likely to use firm-fixed-price contracts. In both cases, agencies tend to use incentives in their contracts to help achieve cost, schedule and performance goals. Across the 19 programs we reviewed at DOD, NASA and NOAA, about $43.1 billion of $52.1 billion (83 percent) was obligated on cost- reimbursement contracts and orders, while the remaining $9 billion (17 percent) of obligations were on firm-fixed-price and fixed-price incentive contracts and orders. DOD satellite obligations comprised nearly 80 percent of the government satellite acquisitions in our review (see figure 3). Government satellite programs are often designed to develop and incorporate innovative technologies unavailable in the commercial market. We reported in 2010 that DOD accepts greater technology and development risks with space acquisitions, and as such, costs associated with technology invention are difficult to estimate. For our 12 in-depth case study programs, 15 of the 23 contracts and orders we reviewed were cost-reimbursement type contracts (see appendix III for more detailed information on the contract types for our case study programs). Several of the contract files for these programs cited technical complexity leading to uncertainties in cost performance or uncertain requirements as reasons their program used cost- reimbursement contracts. According to one program’s contract files, a firm-fixed-price contract would not be appropriate for the design and development of the satellite’s primary instrument because of the program’s aggressive performance goals and flexible launch dates. In 2010, we reported that firm-fixed-price contracting normally does not work for DOD space systems because programs tend to start with many unknowns about the technologies and costs needed to develop satellites. Since our 2010 report, however, DOD has begun to consider acquisition approaches that might be more productive using fixed-price contracts such as disaggregating large satellites and advancing technology incrementally. One senior SMC contracting official noted that in recent years, SMC has acquired a number of satellite programs on a fixed-price basis. In these instances, once the programs matured the technologies and reduced risks, the programs were able to shift to a production-type state and use fixed-price contracts. Five of the 23 case study contracts and orders used firm-fixed-price type contracts, mostly to acquire lower-risk items. These included standard spacecraft buses (meaning, those with proven designs) and communications satellites, both of which have relatively lower technical risks. For example, some NASA and NOAA programs we reviewed used firm-fixed-price orders to acquire spacecraft buses from the NASA “catalog,” which contains proven designs from multiple contractors. In some cases, such as communication satellites, the commercial market produces satellites that government programs can use with only minor modifications. These satellites have typically been used in a commercial market—lowering technical risk—and may also have adequate pricing data available to accurately estimate costs, both of which lend themselves to firm-fixed-price contracting. The remaining three of the 23 case study contracts and orders we reviewed used fixed-price-incentive contracts to acquire additional satellites in production. For instance, DOD’s SBIRS program bought its first four satellites under cost-reimbursement contracts, but bought the next two satellites with a fixed-price-incentive contract. According to the SBIRS contract file, program officials deemed the fixed-price incentive contract type the most appropriate because, given the maturity of the satellite vehicle design, they believed they could assess a fair and equitable ceiling price for the acquisition. Fixed-price incentive contracts can be complex, as noted in SMC’s guide to structuring incentives for fixed-price contracts, issued in November 2012. For example, how risk is apportioned on a fixed-price-incentive contract may resemble that of a cost-reimbursable contract or a firm-fixed-price contract, depending on the share ratio—a calculation which represents the allocation of cost risk between the government and the contractor—and the ceiling price. The guide also notes that fixed-price-incentive contracts can lead to unintended, negative outcomes if structured poorly or managed improperly. All of our 12 case study programs used incentives—including award fees, incentive fees, or some combination of the incentives—to motivate contractors to achieve cost, schedule, or performance goals. Program officials told us they used award fees during the development phase to incentivize the contractor to achieve specific, short-term goals. With each award fee determination, which, for example, may occur every 6 months, the government can focus the contractor on specific tasks or areas. Program officials also said that award fee determinations can be effective in changing contractor behavior. For example, one NASA program official stated that during a particular award fee period, they informed the contractor that it needed to address planning for a complicated spacecraft thermal vacuum test that was behind schedule. The official said that after program officials documented their concerns in award fee letters, contractor performance improved, resolving the issue. Table 2 provides examples of how the government tied incentives to cost, schedule, and performance objectives for selected case studies. However, in addition to the 12 in-depth case study programs, several of the NASA programs in our review included contracts or orders with FFRDCs, academic institutions, or non-profit organizations that did not include incentives. In most of these cases, NASA awarded cost-plus- fixed-fee or cost with no fee contracts or orders. For example, several programs used cost-plus-fixed-fee orders issued from an indefinite delivery / indefinite quantity contract between NASA and the California Institute of Technology, a private nonprofit educational institution, which establishes the relationship for the operation of the Jet Propulsion Laboratory (JPL), an FFRDC. The contract includes both service and product deliverables and encompasses a large number of discrete programs and projects. According to NASA procurement officials, the desired program outcomes or objectives and performance requirements are defined in task orders issued under the contract. NASA officials stated that when there are no fees to pay or withhold from a contractor, NASA still has tools available to motivate contractor performance. In these instances, agencies rely on non-fee incentives, such as providing positive or negative evaluations of contractors in the Contractor Performance Assessment Reporting System (CPARS). The CPARS evaluations may affect the ability of FFRDCs and academic institutions to secure future contracts. Officials also stated the general reputation of contractors are important in winning future contracts. NASA officials also stated that with science missions, the academic institutions are self-motivated because they are interested in the data that satellites are collecting and within the science community, there is a sense of pride to be associated with a successful NASA mission. Eleven of the 12 selected in-depth case study programs we reviewed used contract incentives tied to on-orbit performance on at least one contract. We found, however, that the characteristics of the on-orbit incentives—such as the amounts at risk or the timing of the incentive payments—varied widely. In one instance, a satellite program held the contractor’s entire fee at risk pending demonstration of satellite performance, but in other cases, the at-risk amount was a portion of the total fee or profit on the contract. Timing of payments also differed on a program-by-program basis, and in some cases, satellites within the same program had distinctive incentives. When asked how they developed on- orbit incentives for their respective contracts, program officials cited considerations such as other incentives in the contract, agency acquisition preferences, and past history. On-orbit incentives varied widely across our 12 case study programs and in some cases, incentives varied between satellites under the same contract. To compare on-orbit incentives across these programs, we identified the two key characteristics that define each set of incentives— specifically, the amount and timing of the incentives. On-orbit incentive amount. Based on our analysis of 23 contracts and orders representing our 12 case study programs, we found that the amount of on-orbit incentives relative to the overall contract value varied widely (see figure 4). On-orbit incentives included on the contracts and orders for our 12 case study programs ranged from no on-orbit incentive to approximately 10 percent of the contract value (see appendix III for more information on the on-orbit incentive amounts by contract). In some cases, on-orbit incentives were only a portion of the contractor’s expected fee or profit. For one contract we reviewed, the contractor’s full fee was contingent upon successfully demonstrating that the satellite met on-orbit performance requirements. Most of the contracts and orders we reviewed included multiple satellite vehicles, and the on-orbit incentive could vary by vehicle. For example, in one DOD contract we reviewed, the at-risk amount for the entire contract was 7 percent, but the at-risk amount for individual vehicles ranged from 5 percent to 13 percent. The at-risk amount for individual satellites can also change depending on contractor performance during satellite development. Several contracts we reviewed define the potential on-orbit incentive amount as a percentage of the total award fee available, rather than a specific dollar amount. This means that poor contractor performance during the satellite development phase could reduce the amount of the on-orbit incentive. For example, if the total award fee for a contract is $100, and the on-orbit incentive is defined as 50 percent of the available award fee, the contractor could potentially earn $50 for on-orbit performance. If, however, the contractor loses $30 in potential award fee during the satellite development phase due to poor performance, the most the contractor could earn for on-orbit performance falls to $35 (50 percent of $70). Similarly, in one contract we reviewed, the at-risk amount on-orbit was capped as the lesser of 50 percent of the contractor’s realized profit or 50 percent of the target profit. In this case, if the contractor’s realized profit was zero dollars, there would be no payback to the government in the event of a failure. Because on-orbit incentives are realized near the end of a contract performance period, they can grow in importance to the contractor, relative to other incentives. For example, a contracting officer for one of our case study programs said that his program’s contract placed an equal priority on both on-orbit performance and cost and schedule incentives, but the contractor lost most of the cost incentives due to cost overruns. The contracting officer said that the on-orbit incentive was the largest remaining incentive available to the contractor, so in this case, the contractor was more intent on earning the on-orbit incentive and less focused on controlling costs—a potentially bad situation for the program. Incentive timing. The timing of an on-orbit incentive represents how the at-risk amount is spread out over a satellite’s mission life. For some of the contracts and orders we reviewed for selected case study programs, the on-orbit incentives covered a satellite’s entire mission life. There were some contracts and orders, however, for which the on-orbit incentives covered only a portion of the mission life. Given that when satellites fail, it is usually early in their mission life, three of the five firm-fixed-price satellite contracts or orders in our case study programs had milestone payment plans that ended once the on-orbit vehicle completed its check- out. Under this arrangement, depending on the terms of the contract, the government could potentially withhold the last milestone incentive payment if a catastrophic failure occurred prior to check-out, but would not have on-orbit incentives that lasted the remainder of the mission life. In these cases, the government assumes all of the risk once the vehicles complete check-out. Similarly, the on-orbit incentives for one of the SBIRS contracts covered the first 4 years of the satellite’s mission life. The WGS Block II and Block II follow-on contracts have a unique on-orbit incentive structure that includes a 10-year negative incentive followed by a 4-year positive incentive for the satellite’s 14-year mission life. The negative incentive includes calculations to determine how much money the contractor has to pay the government if its satellite fails to meet performance requirements during the first 10 years. The positive incentive, starting at year 11 of the satellite’s mission life, allows the contractor to offset any negative incentives assessed during that satellite’s first 10 years. At the end of 14 years, the government adds up the positive and negative incentive amounts to determine what, if anything, the contractor has to pay back. Satellite or component storage on the ground may also affect on-orbit incentives. For example, the GPS IIF contract reduces the on-orbit performance period by 25 percent if any of the first six vehicles is stored on the ground for 4 years; more if stored longer. DOD, NASA, and NOAA officials cited several factors when developing on-orbit incentives for their respective programs, including the other incentives in the contract, agency acquisition preferences, and individual program history. The overall contract. Program officials do not view on-orbit incentives in isolation, but rather as part of the larger negotiated agreement with the contractor. Officials told us that during contract negotiations, they may be willing to reduce the amount of fee on-orbit or alter the timing of on-orbit incentives, in return for contractor concessions in other areas. Programs negotiated overall incentives for a contract as well as how the incentives were spread out over the contract, including how much was tied to on-orbit performance. Officials said contractors generally prefer front-loaded incentives, whereas agencies may tend to prefer placing incentives at the end of the contract. The resulting contract and incentive structure depends on what the government and the contractor can agree to. Acquisition philosophy. Program officials told us on-orbit incentives reflect the acquisition policies, leadership preferences, and prevailing agency practices at the time the contract is being drafted. For example, DOD promotes the use of incentive fees, where possible, over award fees, to encourage greater use of objective fee criteria. Program officials also said they typically look at other satellite program contracts in their respective agencies, explaining that incentives for new programs may be structured based on what other programs have agreed to. Program history, staff, and contractor experience. Program history can affect incentive structures in different ways. In the case of WGS, the on-orbit incentives for the Block II follow-on contracts were modeled after the incentives in the Block II contract. Further, program officials said they also modified past incentives or established new incentives based on their own contracting experience. They told us that prior experience executing specific incentive structures lends itself to structuring incentives the same way again. Similarly, they said that contractors may seek to negotiate incentive provisions based on their company’s past experience. The government’s recourse in the event of a catastrophic satellite failure on-orbit is generally limited to recovery of a portion of the on-orbit incentive. As discussed above, the on-orbit incentive amount on any given satellite contract can vary widely but is uniformly less than 10 percent of the total satellite contract value. In all likelihood, the amount retained by or paid back to the government would be even less, as what the government may actually recoup depends on the circumstances of the failure. For example, if a contract includes no-fault provisions, when one contractor is at fault for the total loss of a satellite, the government may still be responsible for paying fees to the remaining contractors— whose products were not to blame for the failure. By design, on-orbit incentives are only a portion of the total contract value and therefore will not make the government whole in the event of total failure. Overemphasizing on-orbit incentives could result in the contractor losing sight of cost and schedule goals. Further, the government accepts more of the on-orbit risk than the contractor, in part because catastrophic failures are rare, according to satellite studies and industry experts we spoke to. For our 12 case study programs, we found that the aggregate on-orbit incentive amount at risk is around 4 percent of the aggregate contract value. This means that in a worst-case scenario in which all of the satellites failed prior to checkout, the maximum amount the government could recoup or withhold from the contractors is 4 percent of the total contract value. What the government could actually recoup or withhold depends on the terms of the contract and the circumstances of the failure, such as the extent to which technical parameters are met, the timing of the failure, and whether the contractor is found to be at fault. Two satellites among the programs we reviewed experienced catastrophic or partial failures—DMSP-19 and SMAP. Program officials said the DMSP-19 spacecraft contractor repaid $2.7 million plus interest to the government as a result of the failure, but there was no repayment or payments withheld in the case of SMAP. DMSP-19 suffered a catastrophic failure in the second year of its 5- year mission life when the Air Force lost the ability to control the satellite. There were two prime contractors on the DMSP contracts—one for the spacecraft and one for the sensors. According to program officials, the spacecraft contractor was found to be at fault for the failure, and had to reimburse $2.7 million in fee plus interest. Program officials stated that the sensor contractor was not responsible for the failure and therefore did not have to repay any fee. SMAP experienced a partial failure. One of SMAP’s two primary sensors—the radar—failed, while the other—the radiometer—is operating as intended. NASA was unable to identify the exact cause, but determined that the failure was related to the radar’s high- powered amplifier power supply. According to NASA’s SMAP mishap investigation report, without the radar, SMAP will not be able to meet mission requirements because the radiometer alone cannot meet resolution requirements. Because JPL built SMAP under a task order with no on-orbit incentives, the government had no monetary recourse when the radar sensor failed. The mishap investigation report estimated that the SMAP radar failure resulted in more than $550 million in losses, though the cost of the radar accounted for only 11 percent of that amount. Most of the estimated losses were related to investments in the science of the mission. However, NASA officials told us that the total science value of the shortfall in capability is highly uncertain. These officials noted that although not operating to its full resolution, SMAP provides higher resolution and more accurate soil moisture and sea surface salinity data than any prior NASA missions. No-fault provisions can have implications for satellites with multiple prime contractors, as mentioned in the DMSP example. If one contractor is at fault for the total loss of a satellite, the government may still be responsible for paying fees to the remaining contractors—whose products were not to blame for the failure—even though the satellite on which their products were riding was a total loss. Representatives from commercial companies we spoke with said they typically purchase insurance to mitigate their risk in the event of satellite losses. According to satellite insurance company representatives, insurance for any one satellite is generally spread across multiple insurance companies, each of which insures only a portion of the total value of the satellite. The cost of insuring the launch and full mission life of a commercial satellite could add 10 to 20 percent of its total contract value, according to one insurance broker we spoke with, even though relatively few satellites suffer significant failures. He noted that, at this time, the small market of satellite insurance providers would not have the capacity to insure many government satellites, given their high costs to build and launch. While tying some of a satellite contract’s incentive to on-orbit performance can help focus a contractor on building a quality satellite, overemphasizing performance through on-orbit incentives can unintentionally cause the contractor to lose sight of cost or schedule. For example, JWST program officials stated that the $56 million on-orbit incentive fee in the initial JWST contract encouraged the contractor to exceed performance requirements at the expense of cost and schedule. In other words, the cost and schedule incentives were relatively less significant to the contractor than the on-orbit performance incentive. In December 2014, we found that when the contract was renegotiated in December 2013, the JWST program and the contractor agreed to replace the on-orbit incentive with award fees that could be used to incentivize cost and schedule goals during development. Since that time, JWST officials told us the renegotiated award fees had contributed to better cost and schedule outcomes. Further, in another program’s contract negotiation documents we reviewed, the government was willing to put less of the contractor’s fee at-risk on-orbit in exchange for lower overall fees, which would reduce the contract price. Conversely, negotiation documents reflected that the government considered accepting higher overall fees in exchange for putting more of the contractor’s fee at-risk. Also, it is unclear whether increased on-orbit incentives would decrease the likelihood of on-orbit failures. Program officials expressed a wide range of views on the relative importance of on-orbit incentives in achieving successful outcomes. Program officials agreed that poorly designed incentives might lead to bad program outcomes, but there was no consensus on the effect of well-designed incentives. Officials we spoke with believed that on-orbit incentives were important, but the reasons cited were sometimes more related to how they can used in negotiations with the contractor—leading up to contract award and, in some cases, for contract modifications—than achieving successful on- orbit performance. Attributing positive on-orbit performance directly to on- orbit incentives is challenging, given the many factors that contribute to a satellite program’s success, including requirements and funding stability, technology maturity, and government and contractor experience. Further, on-orbit incentives are unlikely to flow down to the workers who actually build a satellite, or to sub-contractors who produce key parts and components. On-orbit incentives can span 10 years of performance, so the people who were directly involved in building a satellite may not even be with the company when the incentives are paid out. Although contractors may be motivated to achieve on-orbit performance through on-orbit incentives, they are also motivated by other factors. For example, in 2005, we found that various considerations, such as securing future contracts with the government, can be stronger motivators than earning additional profit. Officials from agencies and commercial companies that we spoke to confirmed that this is still true today. Specifically, program officials we interviewed stated that contractors react strongly to negative CPARS evaluations, as this could affect their ability to win future contracts. Officials also noted that contractors take pride in their work and believe in the missions their satellites support. They believed that contractors would do their best to succeed even without on- orbit incentives. They said that universities and FFRDCs are also motivated to do well because they are personally invested in advancing their scientific pursuits. According to program officials and commercial company representatives that we spoke to, the commercial satellite market is small but competitive, and satellite failures generate bad publicity that could affect a company’s ability to win commercial contracts and future government business. Finally, satellite acquisition programs tend to have far more cost and schedule challenges than performance issues. We have a large body of work identifying cost growth and schedule delays for space programs, including some in our case studies, and have made a number of recommendations to address the causes of these challenges. For example, we have previously recommended that agencies should improve their program cost estimates, separate the process of technology discovery from acquisition, and match resources and requirements at program start. The cost growth for some of our case study programs is much larger than their on-orbit incentives. For example, JWST has experienced more than $3.6 billion in cost growth. That exceeds the combined on-orbit incentives for all 56 of the satellite vehicles in our case study programs. Similarly, the first two GPS III satellites have experienced more than $600 million in cost growth. That is more than double the entire amount of on-orbit incentives for all 10 GPS III satellites currently under contract. A number of government officials and commercial companies we spoke with did not express concerns about the extent to which satellites experience catastrophic failures. Studies of satellite reliability vary depending on the timing and scope of the analysis, but the analyses we reviewed indicated that between 2 and 4 percent of satellites, including both government and commercial programs, experience a catastrophic failure before the end of their mission lives. Aerospace officials we spoke with said the failure rate for government satellites is around 2 percent, and that this is somewhat remarkable given that government satellites are often highly complex. Further, many government satellites utilize new, unproven technologies which pose more risk than commercial satellites; commercial satellites tend to use proven designs and rely more on mature technologies. As a result, it appears the most cost effective way to limit the government’s loss in the event of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as we have previously recommended. We provided a draft of this report to DOD, NASA, and NOAA for their review and comment. DOD and NOAA provided technical comments, which we incorporated as appropriate. NASA had no technical or written comments. We are sending copies of this report to the appropriate congressional committees, the Secretaries of Defense and Commerce, and the NASA Administrator. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have 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 major contributions to this report are listed in appendix IV. The following tables present the missions, original total program costs and quantities, current total program costs and quantities, and the number of satellites in orbit as of March 2017 for all 19 of the programs included in our review. The total acquisition or project costs include development and production costs of the space vehicles and in some cases, costs associated with the ground systems, launch vehicles, and other costs outside of the satellite vehicles. As a result, the total costs for a given program will be larger than the contracts values discussed in this report. To assess the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce’s National Oceanic and Atmospheric Administration’s (NOAA) contract and incentive structures, under the authority of the Comptroller General to conduct evaluations on his own initiative, we examined (1) the types of contracts and incentive structures government satellite programs use to develop satellites and why, (2) how selected programs structure on-orbit incentives, and (3) government options for recourse, if any, when a satellite fails or underperforms. To determine the types of contracts and incentive structures government satellite programs use to develop satellites and the reasons why, we analyzed contract obligations data from the Federal Procurement Data System-Next Generation (FPDS-NG) as of September 2016 for 19 programs, comprising all current major satellite programs across DOD, NASA, and NOAA. To assess the reliability of the FPDS-NG data, we reviewed relevant internal control documents and data quality summaries. We determined that the FPDS-NG data were sufficiently reliable for the purposes of this engagement. For DOD, we included major defense acquisition programs, and at NASA and NOAA, we included programs with a life-cycle cost greater than $250 million. For our analysis, we included each program’s development and production contracts and orders for the spacecraft and instruments and generally excluded contracts and orders related to launch, ground systems, maintenance, operations, and support services if they were separate contracts and orders. If these items or services were included within the development and production contract or order, we included them in our analysis. For each contract and order, we determined the predominant contract type for the design, development, and production of the satellites on the contract. We also reviewed DOD, NASA, and NOAA policies and guidance on contracting and incentives, and Federal Acquisition Regulation (FAR) and agencies’ FAR supplements for regulations and procedures on contracting. To determine the range of on-orbit incentive structures and government options for recourse should a satellite fail or underperform, of the 19 major satellite programs in our review, we selected 12 programs for in- depth analysis as case studies based on program size, contract type, contractor, mission, or notable on-orbit performance. For each case study, we analyzed contract files and conducted interviews with program and contracting officials at DOD, NASA, and NOAA to discuss contract types and incentive structures, rationale for the use of specific contract types and incentive structures, on-orbit performance and programmatic outcomes. Across the 12 case study programs, there were 23 contracts and orders and 56 space vehicles (see table 6). To determine the at-risk on-orbit incentive amount by contract or order, we reviewed contract clauses and fee plans for each of the 23 contracts and orders associated with the 12 case study programs to calculate the amount of money the contractor would not be paid or would need to pay back in the case of a catastrophic failure. We calculated the at-risk amount based on a hypothetical “worst case scenario” for each contract or order, in which the maximum payback or forgone payment would be assessed for a complete failure of the satellites. The at-risk amounts included milestone payments that would be withheld, award and incentives fees that would not be paid, and amounts that would need to be paid back by the contractor. These at-risk amounts were divided by the current value of the contract or order to calculate a percentage of contract or order value that would be at risk. The contract scope varied across our case study contracts. For example, some contracts included costs associated with developing ground systems or sustainment costs whereas others only included satellite development and production costs. However, the contract scope did not significantly alter the at-risk calculations. For all of the contracts and orders we reviewed, regardless of scope, the at-risk amounts were less than 10 percent of the contract value. For the seven remaining satellite programs at DOD and NASA that were not included in our case studies, we developed agency-specific data collection instruments (DCI) that we pre-tested, administered, and from which we analyzed the information collected. We tailored the DCIs to each agency based on agency policies and guidelines for contracting to obtain program-specific contract details, values, obligations to-date, special clauses used, incentive structures, and performance periods. We determined that the data collected from the DCIs were sufficiently reliable for the purposes of this engagement. The seven programs for which we executed DCIs included: Advanced Extremely High Frequency (AEHF); Global Precipitation Measurement (GPM) Mission, Gravity Recovery and Climate Experiment Follow-On (GRACE-FO), Landsat Data Continuity Mission (LDCM), Magnetospheric Multiscale (MMS), Orbiting Carbon Observatory 2 (OCO-2), and Surface Water and Ocean Topography (SWOT). In addition to the case studies above, we reviewed the Defense Meteorological Satellite Program 19 (DMSP-19) because of its recent on- orbit failure. We reviewed DMSP-19’s follow-on storage, maintenance, and support contracts rather than the development and production contracts because at the time of the failure, work was being performed under the follow-on contract. These contracts contained information on the on-orbit incentives and relevant options for government recourse after the on-orbit failure occurred. We also interviewed officials from a nongeneralizable sample of commercial companies: Ball Aerospace, DigitalGlobe, IntelSat, Lockheed Martin, and ViaSat to identify how selected commercial companies use on-orbit incentives and how commercial satellite acquisitions differ from government satellite acquisitions. We selected the companies based on the type of satellites they build or acquire. In addition to commercial satellite companies, we also consulted satellite insurance brokers from Marsh and one underwriter, XL Catlin, to obtain information on the likelihood of satellite failures in the commercial and government markets, the general capacity of the commercial satellite insurance market, and the dollar amounts associated with insuring commercial satellites. We reviewed Aerospace Corporation studies and briefings and interviewed Aerospace Corporation officials to identify the point during the life of a satellite in which most satellite failures occur, the frequency of government satellite failures, and to identify the various categories of satellite failures. We conducted this performance audit from March 2016 to June 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 12 in-depth case study satellite programs we reviewed included 23 contracts and orders. For these contracts and orders, we determined the predominant contract type for the design, development, and production of the satellites; and percent of contract value at-risk for on-orbit performance; which are presented in the tables below. We determined the percent of contract value at-risk for on-orbit performance for each contract or order by dividing the maximum dollar amounts the contractor would not be paid or would have to pay back in the event of a catastrophic failure by the current contract value. In addition to the contact named above, key contributors to this report were Rich Horiuchi, Assistant Director; Emily Bond; Brandon Booth; Claire Buck; Claire Li; Michael Shaughnessy; Roxanna Sun; Jay Tallon; and Alyssa Weir. | Acquiring and fielding satellites are high stakes endeavors. Each year, DOD, NASA, and NOAA spend billions of dollars acquiring satellites. Unlike with other major acquisitions, such as ships or aircraft, an agency can only determine the quality of a satellite after it is launched. That means any defects that occur may be impossible to repair, and in space, a single failure can be catastrophic for a mission's success. As a result, contractor performance is critical to a program's success, and contract incentives can be particularly important in aligning government and contractor interests—both in achieving mission success and ensuring responsible financial management. This report addresses (1) the types of contracts DOD, NASA, and NOAA use to develop satellites, (2) how selected programs structure on-orbit incentives, and (3) what recourse, if any, the government has in the event of satellite failure or underperformance. To conduct this work, GAO analyzed contract obligations data and documentation for 19 current satellite programs; reviewed policies and guidance regarding contact types and incentives; selected 12 case studies to determine incentive structures and recourse options; and interviewed program and contracting officials at each agency, as well as commercial representatives and industry experts. Given high development risks and uncertain requirements in satellite programs, most government satellite acquisitions use cost-reimbursement contracts. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies used firm-fixed-price contracts. Overall, across 19 programs GAO reviewed at the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), about $43.1 billion of $52.1 billion was obligated on cost-reimbursement contracts and orders, while the remaining $9 billion were on firm-fixed-price and fixed-price incentive contracts and orders. Most of the 12 selected programs that GAO reviewed contained an on-orbit incentive—incentives based on successful performance in space; however, they varied widely in terms of the amount at-risk for the contractor and the timing of payments. For example, the on-orbit incentives included on the contracts and orders for the 12 selected programs ranged from no on-orbit incentive to approximately 10 percent of the contract value. GAO also found variation in how the at-risk amount was spread out over a satellite's mission life. For example, some contracts included on-orbit incentives that covered a satellite's entire mission life while other contracts covered only a portion of the mission life. The government's recourse in the event of a catastrophic satellite failure is limited, relative to its overall investment. Given the small on-orbit incentive amounts included in contracts, the government's maximum financial recovery potential is modest. This is by design, however, as on-orbit incentives are not intended to make the government whole in the event of total failure. The government accepts this level of risk, in part because such failures are rare, according to government and industry experts. Also, it is unclear whether larger on-orbit incentives would reduce on-orbit failures given numerous other factors that affect a program's success, including requirements stability, design maturity and contractor experience. As a result, the most cost effective way to limit the government's loss in the rare case of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as GAO has previously recommended. GAO is not making any recommendations in this report. |
Foreign citizens wishing to temporarily enter the United States generally fill out a visa application; make an appointment; pay a fee; submit photographs and other documents; provide 2-digit fingerprints; and appear for a document review, name check against government watch lists, and interview with a State consular officer at an American Embassy or Consulate. Consular officers review applications, interview applicants, execute name checks through the Consular Lookout and Support System, make notations, and assess whether the applicant may be an intending immigrant, a potential threat to national security, or otherwise ineligible. Following these steps, the applicant is granted or refused a visa, or subjected to additional security checks. (See fig. 1.) Consular officers are assisted by locally hired staff who are generally not U.S. citizens. These staff perform support tasks but do not adjudicate visas. The Bureau of Consular Affairs considers the visa process to be a major element of national security. In addition to guidance on visa processing, State provides visa adjudicators, who are typically entry-level officers, with specific guidance and training on examining applicants’ documentation, interviewing, and screening out applicants who may pose security concerns. This guidance is provided in the Foreign Affairs Manual and the Consular Management Handbook, as well as through periodic policy updates of standard operating procedures transmitted to overseas posts and placed on an intranet site. While the Office of the Inspector General and Diplomatic Security share authority for investigating visa malfeasance, Diplomatic Security conducts most of the investigations. In particular, Diplomatic Security’s Visa Fraud Branch investigates visa malfeasance cases and carries out related enforcement functions for State. These cases are typically pursued by a regional security officer and consular management and involve observation of the suspected employee and collection of evidence to document the malfeasance. In cases where Justice determines sufficient evidence exits, it will prosecute employees who are accused of malfeasance. The Bureau of Consular Affairs has established a number of key internal controls designed to mitigate the risk of employee malfeasance, some of which are new or have been reinforced since September 11, 2001. Among the controls State has emphasized are: limiting employee access to visa issuing systems and applicants, periodic reconciliations of visa stocks, specific criteria for post employees to follow when referring foreign individuals seeking visas for favorable treatment by consular officials, and mechanisms to provide oversight of key consular activities by post and Consular Affairs headquarters management. While Consular Affairs’ controls are consistent with accepted control standards, we found that some of the controls were not always being followed at the posts we visited. To prevent the issuances of nonimmigrant visas to unqualified applicants, Consular Affairs has strengthened its efforts to limit employee access to automated systems that issue visas and has taken steps to ensure that visa applicants cannot predict which officers will interview them. Additionally, Consular Affairs has a series of controls over accountable items. It has also strengthened its criteria for applicants referred by post employees for favorable consideration in obtaining a visa and expedited processing by consular officers. Further, Consular Affairs has increased its emphasis on both headquarters and post supervisory oversight. It also requires posts to certify in writing annually their compliance with key internal controls. Consular Affairs has issued guidelines on reporting suspicious behavior that may involve malfeasance. It has also enhanced its malfeasance prevention efforts. The increased dependence of consular officers on automated systems requires Consular Affairs to have effective management controls over these systems. Consular Affairs has strengthened its existing controls over visa issuing systems by restricting employee access to key systems and safeguarding passwords, thereby emphasizing consular officers’ accountability for visa issuance and providing an audit trail to document which officer issued each visa. For example: The Consular System Administrator controls employees’ access to the automated consular systems by assigning user identifiers and roles. Designated consular officers ensure appropriate access to consular automated functions; an administrator specifically assigns each consular employee a specific role; and the computer system only allows consular staff to perform functions associated with that role. For example, only officers that adjudicate visas are assigned a system role that permits them to authorize visa issuance. In February 2004, Consular Affairs strengthened controls over access to employee computers by requiring that passwords be known only to the users and that they be changed semi-annually. In the past, employee passwords were assigned by the system administrator, but are now chosen by the employee. As an additional safeguard, employees are now reminded to lock their computers when not at their desks, and the system is set to automatically lock after an interval of idleness. Consular Affairs controls access of applicants to visa adjudicators and consular staff. To prevent applicants targeting a particular consular officer, Consular Affairs requires that consular officers interview applicants in a random manner, with no single person controlling the process. When translators are used, they are to be rotated among the adjudicators. Controls over Accountable Items To reduce the risk that blank visas will be stolen or that visas will be issued without being properly recorded in the consular systems, it is Consular Affairs’ standard practice to safeguard blank visas and other accountable items, closely monitor usage, conduct frequent inventories, and reconcile discrepancies quickly. Each post must designate a primary and backup accountable consular officer to be responsible for controlled items. Further, Consular Affairs procedures require controlled items to be reconciled daily, verified quarterly, and certified annually by senior consular or post officials. At least quarterly, the accountability officer must physically count the stock of each accountable item and reconcile the inventory ledger, ensuring that the number of the item on hand in fact matches the number that the ledger indicates should be on hand. Discrepancies between inventory records and stocks of blank visas on hand that can not be resolved must be reported within 24 hours to Consular Affairs management. U.S. officers from any U.S. government agency posted at embassies and consulates may refer to the consular section for favorable consideration and expedited processing foreign applicants where visa issuance would support U.S. interests or those of the mission. This so-called visa referral is a means for other embassy officials to provide additional information on a visa case and to document a perceived U. S. national interest served in facilitating the travel of the applicant. According to a 2005 State Inspector General’s report, embassy staff or prominent local figures often appeal to ambassadors or other mission managers for favorable consideration in obtaining visas, and consular officers have felt pressure to provide such assistance. To ensure that post staff refer visas only for qualified applicants, Consular Affairs has strengthened and formalized its criteria for issuing referred visas. Prior to 2002, posts individually interpreted the guidelines on making referrals and many posts did not have formal referral policies. In 2002, Consular Affairs required posts to establish a formal postwide referral system. Under this system, referral procedures are to be reissued annually, and supervisory consular officers are to periodically review referral activities, specifically noting frequency of referrals by officer as well as applicant return-to-country rates. Consistent with the new congressionally mandated biometric and interview requirements, the new referral criteria require fingerprinting and photos of all applicants and personal interviews of nearly all referred visa applicants, mandatory use of revised referral forms, certification that the applicant is personally known to the sponsor and presents no threat to national security, supervisory approval of the referral request by the sponsor’s supervisor, scanning of applicant forms and referral requests into the nonimmigrant visa system to provide a record and an audit trail, and post management reviews of aggregate visa trends by referrer. Since 2002, Consular Affairs has repeatedly reiterated referral criteria in policy updates and clarifications to overseas posts. Moreover, during our review, in June 2005, Consular Affairs again revised the referral policy reiterating the need for senior consular officers to adjudicate Class A referrals and requiring posts to provide the Bureau of Consular Affairs copies of their referral policies. In addition, Consular Affairs said that it gives briefings to every ambassador, deputy chief of mission, and principal officer emphasizing the importance of strict compliance with the visa referral policy, that visa referrals are tracked, and that mission leaders bear responsibility and liability for their own referrals. Citing cases of consular malfeasance resulting from lax supervision over consular functions, Consular Affairs has continually emphasized the need for supervisory oversight of the visa function, particularly by ambassadors, deputy chiefs of mission, or principal officers. Depending on the size of the post, daily oversight is exercised by senior consular officers over nonimmigrant visa section chiefs (who supervise adjudicating officers and other consular staff) or by the most senior available post officer. Senior consular section chiefs, who generally adjudicate referrals or other visas at smaller posts, are supervised by senior post managers. Consular Affairs requires that supervisors review all visa refusals daily and perform spot- checks of issuances, as well as undertake periodic reviews of post referrals. Supervisors have tools to assist with this responsibility. For example, the Nonimmigrant Visa application allows on-line oversight through reports of consular activities, such as daily visa refusals and issuances, including the time of visa issuance; the applicants interviewed and their nationalities; and the types of visas issued, including those for visitors, students, businesspersons, professionals, and performing artists, as well as the reasons for denials. Additionally, reports providing aggregate information on the number and types of referrals made by each post officer and their disposition are available. A recent enhancement to the system permits supervisors to view applications and referral forms showing applicant’s purpose of travel and whether the referral was signed appropriately and reviewed as required. Consular Affairs also has emphasized in cables and training the importance of ambassadors, deputy chiefs of mission, and principal officers’ supervisory role in reviewing the visa function. According to State officials, training courses for these offices have included information on the consular function, oversight responsibilities, and employee malfeasance. According to State training records, the senior managers at six posts we visited had received this training. To ensure that the internal controls over the visa process are being implemented, State requires that chiefs of mission certify annually that the controls are adequate. In addition, since September 2002, State has required that consular managers certify their compliance with key controls over the visa process to chiefs of mission and to Consular Affairs. Each year, posts are required to issue a report certifying their compliance with internal controls, including routine inventory counts of controlled items, established referral policies and procedures, and supervisory reviews of visa refusals and issuances. In October 2004, Consular Affairs required the review of 19 controls by each post. To safeguard the visa process, consular sections are required to assess post vulnerability to employee malfeasance. Posts are to identify internal visa malfeasance risks, such as inadequate oversight procedures, and to assess post vulnerability to external fraud, such as bribery. To assess this vulnerability, Consular Affairs has established Fraud Prevention Units at posts and designated Fraud Prevention Manager positions. The units are responsible for detecting suspected fraud by visa applicants as well as possible employee malfeasance, and coordinating with the regional security officer and local law enforcement authorities as necessary. The positions are often filled on a part-time basis by consular officers who are responsible for making vulnerability assessments along with their other duties. Consular Affairs also has guidance on reporting suspicious behavior. Employees are required to report suspicions of employee malfeasance to the senior consular manager at post and the regional security officer, unless one of them is believed to be involved in the malfeasant activity. Further, State’s guidance on reporting malfeasance emphasizes the need to protect the integrity of an investigation and the commitment of confidentiality to the source of an allegation. As such, State’s standard operating procedures call for potential malfeasance information to be closely held at post and in the department. With 211 visa issuing posts, State requires adequate and continuous oversight to reduce the risks of visa malfeasance. Headquarters management is an essential part of that oversight. To assist headquarters in monitoring post operations, State established the Vulnerability Assessment Unit (VAU) jointly staffed by Consular Affairs and Diplomatic Security. In addition, Consular Affairs established Consular Management Assistance Teams (CMAT). VAU, established in 2003, attempts to detect and prevent possible employee malfeasance by analyzing consular data from State’s Consular Consolidated Database. VAU reviews several different reports for variations that could indicate malfeasance. Among other things, these reports and other information can (1) identify whether senior officers with responsibility for reviewing adjudications have access to automated systems to do required reviews of visa adjudications, as well as whether they are actually doing so; (2) determine whether post employees follow procedures and use appropriate forms to make referrals for applicants; (3) review issuance and refusal rates of adjudicators; and (4) review rates of visa refusals overturned by senior officers. In 2003, State instituted CMATs to perform informal reviews of consular functions. The teams, which are provided VAU reports on consular activities, examine access controls, inventory reconciliations, training and knowledge of consular applications, appropriate use of referral procedures, supervisory reviews of daily adjudications, and other visa issues. Posts are selected for CMAT examination if there is knowledge of a management problem and a review can help to identify a systemic problem, if posts request a review, or if there has been a previous case of malfeasance at the post. CMAT reports, which may include recommendations to improve post management, are sent to State’s Bureau of Consular Affairs and to the posts. State has conducted 81 CMAT reviews, including reviews of several posts twice, since program inception. Consular Affairs has established and reinforced a system of internal controls, described above, designed to reduce visa malfeasance risks; however, we found that the controls were not being fully and consistently implemented. All the posts we visited had limited employee access to systems and applicant access to consular staff. However, we found that inventory counts of accountable items were performed inconsistently. Further, the referral policy was not followed. Also, supervisory adjudication reviews were not performed consistently. Moreover, we found that some posts had certified compliance with these controls when we, and in some cases, CMAT teams, indicated that they were not in compliance. In addition, staff were unclear on employee malfeasance reporting policies. Finally, headquarters oversight has been hindered by the lack of enhanced technical tools to identify potential malfeasance. Table 1 summarizes the results of our review of internal controls over the visa process at the 11 posts we visited. To reduce the risks of visa malfeasance, all the posts we visited had complied with department directives to limit employee access to visa issuing systems. This compliance ensured that employees only had appropriate level access to accomplish their responsibilities. We also observed at all posts that consular staff did not have exposed passwords at their workspace, and they logged off systems each time they left their desks. Moreover, most posts ensured that applicants did not have access to consular sections and that consular staff and applicants were interviewed in a random manner. To prevent malfeasant issuance of visas, Consular Affairs requires that blank visas (visa foils) be counted and safeguarded along with other controlled equipment. We found that not all posts reconciled visa inventories as required. Seven posts had not conducted quarterly reconciliations as required, although posts did routinely perform daily reconciliations. Moreover, some posts had certified that they had complied with inventory controls when they had not, and other posts did not accurately characterize their compliance. For example: At one post, the accountable consular officer was absent and the back up officer did not have the combination to the controlled area. Therefore, we could not review inventory logs nor could the backup perform the required daily reconciliation. Two posts had discrepancies in their monthly reconciliations due to miscounting. At one post, this discrepancy was discovered later when the post prepared for a CMAT review. A referral is also a useful foreign policy tool. However, if it is not implemented properly, it could create risks in the visa process by allowing expedited visa processing for potentially unqualified applicants to enter the United States. We found problems with the implementation and monitoring of referrals at seven posts. Moreover, in 2002, an Inspector General Report cited several instances where malfeasant employees sold referrals and recommended strengthening the nonimmigrant visa referral policy. The cases cited by the Inspector General involved Drug Enforcement Administration and Department of Commerce employees, but sales of referrals by State employees have also occurred. Consular Affairs has issued and reinforced guidance on referrals to posts three times since 2002. However, the Inspector General noted in March 2005 that the Bureau of Consular Affairs needed to be better informed of referral procedures in place at overseas posts. The report cited concerns that not all posts were following State guidance and recommended that posts verify that applicants had returned at the end of their authorized stay in the United States. State subsequently required posts to conduct periodic studies on whether referred applicants left the United States before their visa expired. State requires that all posts have a referral policy that defines specific criteria referred applicants must meet. The post policies are intended as a supplement to overall Consular Affairs guidance on referrals. As a further safeguard, referrals must be (1) adjudicated by senior consular officers, (2) reviewed by supervisors, and (3) monitored by post management. Class A referents, generally high-level foreign government, business, or cultural officials, are fingerprinted and undergo a document review but do not have to be interviewed by the consular section. We found that four posts did not have a current post-specific referral policy. Furthermore, based on our spot-checks of visa referral records, there was no evidence at six posts that some supervisors had performed the required reviews. In fact, at three of these posts, the supervisors, principal officers, or deputy chiefs of mission were not enabled to access the systems designed to permit and document supervisory review. Consular Affairs indicated that it encourages supervisors to document their review within the consular computer system. Our review of referral forms and applications revealed that not all referred applicants met State’s referral criteria. For example, A senior consular officer at one post issued referrals that did not meet Class A criteria, including approving referrals for the secretary of a foreign official and the adult children of foreign officials on personal travel, when only minor children accompanying the official qualify. One post could not identify the individual who had made a referral. The recent referral was approved by the consular section in February 2005. The individual making the referral did not appear on the post roster, and the post agency where the referrer was assigned could not identify the individual at the time of our visit. U.S. personnel not under the authority of the Chief of Mission cannot use the referral system, according to Consular Affairs. As a result, the post was unable to verify that the referral was legitimate. To monitor the referral process, State requires consular managers to review referral adjudications daily (as they do other issuances) and to annually examine 12 months of referrals for anomalies. To comply, all posts had prepared, as required, executive management aggregate reports of referrals by employee. Our review of these aggregate reports indicated no abnormalities; however, when we reviewed individual referral and applicant forms available online, we found that referrals had not been submitted or adjudicated appropriately. For example: One referral was made by a local employee, when only U.S. officers at the post are allowed to make referrals. At one post, a referral was made and adjudicated by the same officer. Consular officers may not refer and approve the same applicants for visas. This referral was for a cousin of a consular section employee, and consular officers are not allowed to adjudicate matters involving friends. Three posts had incorrectly used the Class A referral for local employees on personal travel. State permits Class A referrals for locally employed staff only for official travel. Nonimmigrant Visa chiefs are to review daily all refusals and a sample of issuances. When visa section chiefs adjudicate, senior consular officers are to perform the reviews, while at small posts with one or two consular officers, the deputy chief of mission, principle officer, or other senior post staff are to do so. State policy recommends on-line reviews, but permits paper reviews as well. Reviewers have an automated system that provides management reports that would reveal anomalies in consular officer visa issuances. However, we found little evidence that reviews were being undertaken consistently at the posts we visited. For example: Six posts did not consistently perform State required daily reviews of visa issuances and refusals. For example, at one post a review of the Nonimmigrant Visa system showed that required daily reviews had not been done for a month. At one post, with the consular section located in a different building from the embassy, we saw several months of visa adjudications on the floor awaiting review by the deputy chief of mission. A review of Nonimmigrant Visa adjudication reports at the posts we visited showed that some posts consistently reviewed daily visa applicant refusals, but did not follow Consular Affairs’ policy to spot- check daily visa issuances. Due to inaccurate or incomplete submissions, the certifications of consular management controls may not provide the level of assurance desired that internal controls are being followed. For example: Seven of the posts we visited had not conducted quarterly reconciliations, as required, although five had certified compliance with inventory controls. The October 2004 CMAT reviews of two of these posts had found similar problems, noting that required inventory controls had not been reconciled on a quarterly basis, although all had routinely performed daily reconciliations. Some posts submitted the required certifications but did not indicate whether they were in compliance. Two posts, for example, reported reviewing controlled items, but did not note whether they were reconciled. Many consular staff at most posts were aware that they should report suspected visa malfeasance but did not know the appropriate reporting procedures. Internal control standards require agencies to clearly establish areas of authority and appropriate lines for reporting. State policy requires that suspicions of malfeasance at posts be reported to Consular Affairs’ consular section chiefs and Diplomatic Security’s regional security officers, unless they are the subject of the allegations. In practice, most consular staff we spoke with said they report suspicions of consular malfeasance up their chain of command. If suspected malfeasance is not promptly reported to the regional security officer, subsequent investigations could be affected. In August 2005, Consular Affairs and Diplomatic Security provided more explicit guidance to the field on the actions that posts, in particular consular and security officers, must take in the event they suspect or uncover malfeasance. Consular Affairs’ headquarters oversight unit, the VAU, does not have adequate tools to assist their review of the visa process to identify fraud trends. The Consular Consolidated Database contains various reports that provide information on daily visa issuances, denials, and referrals by consular staff. Currently, the VAU can only recall this information on an ad- hoc basis, which is time consuming for the two staff assigned to the unit. For example, it took several hours for us and a VAU staff to review two categories of data—assigned roles allowing post staff to use consular databases and whether daily reviews of visa refusals and issuances were being conducted at five posts. Moreover, the unit has no automated means to sort data and generate reports that flag unusual variances in visa issuances or to track trends. As a result, the unit is currently reactive, focusing its research on supporting allegations and investigations of malfeasance and generating reports on individual post consular activities in preparation for CMAT team visits to posts. Unit officials indicated that they are working toward developing a more proactive approach to malfeasance analysis that will allow automated searches of anomalies, fraudulent or not, through a more efficient data mining and search capability. The new capability will include identification of consular activity outside of normal operating patterns, unusual timing of issuances, adjudications made by someone unauthorized to do so by controlled systems, and overrides of visa refusals, and would also result in further inquiry into the anomalies. Consular Affairs indicated that the software enhancements’ usefulness would be tested beginning in late September 2005. Between 2001 and 2004, Diplomatic Security substantiated through investigation 28 cases of U.S. employee visa malfeasance that resulted in various actions. In examining these case files, we could not discern why the malfeasance occurred in part because the data were not contained in Diplomatic Security case files or because in some instances the case was ongoing. However, in examining case data on several prosecuted cases, we found that a breakdown in post adherence to internal controls could have been a contributing factor. Several factors impede visa malfeasance investigations, including differences in U.S. and foreign laws, investigative techniques, and other issues. Malfeasance prosecutions also face several impediments. Cases are opened only for those allegations found to be supported by some evidence, even if that evidence is eventually determined to be unreliable. Allegations of visa malfeasance, initiated from tips or reporting of suspicious activity, are vetted through post security officers and investigated when warranted. According to Diplomatic Security Investigators, the investigative process can result in several outcomes: unfounded, with no reliable evidence found to support the allegation; unsubstantiated, with some evidence found that might indicate wrongdoing, but not sufficient to establish culpability and build a criminal case; or substantiated, with sufficient evidence found to support the allegation of malfeasance. Substantiated cases lead to further investigation and typically result in resignation, termination, arrest, or referral to Justice for criminal prosecution. The 28 substantiated cases of visa malfeasance between 2001 and 2004 resulted in various dispositions, according to Diplomatic Security records. Thirteen investigations resulted in arrests, 13 resulted in termination of the employee, and 2 resulted in employee resignations. Generally, the officers involved in these cases were arrested and the majority of Foreign Service Nationals were terminated. Most of the 28 cases we reviewed involved the alleged sale of visas by both consular and other post officers and Foreign Service nationals. However, possibly because the information provided was not complete, we could not identify any particular trend in the cases we reviewed covering 2001 to 2004 or in the 28 cases that were substantiated. Diplomatic Security does not have the capability to automatically pinpoint specific types of visa malfeasance or perform trend analyses. As a law enforcement entity, Diplomatic Security and its regional security officers overseas focus on gathering sufficient evidence to substantiate the allegation and do not focus on what allowed the alleged activity to occur. Consequently, in reviewing the information provided, we could not consistently determine across cases, for example, how the alleged malfeasance was discovered, the exact nature of the malfeasance, the rank of the individual allegedly involved in the malfeasance, and whether similar allegations were made when the individual was at other posts. This type of information would benefit investigations and could be a tool for consular management’s monitoring and training efforts. Diplomatic Security officials acknowledged this capability would be useful but noted that progress in developing this capability has been slow because Diplomatic Security has other priorities. Of the 28 cases substantiated, at least 10 individuals have been prosecuted. The individuals prosecuted received prison terms ranging from 18 to 63 months, and two individuals were given probation. In some of these cases, it appeared that the lack of adherence to internal controls could have played a role in allowing employee malfeasance to go undetected for a considerable period of time. Consular officials indicated that strict compliance to internal controls could not prevent malfeasance. However, they acknowledged that lack of strict compliance could create an environment that would make it easier to commit malfeasance. The following are examples of visa malfeasance or alleged visa malfeasance and how lack of strict compliance with internal controls may have been a contributing factor in creating an environment where the malfeasance could take place. Consular Affairs requires supervisors to review reports on visa refusals and issuances to detect anomalous activity. Between 2000 and 2003, two consular employees at one post sold visas to unqualified applicants. Diplomatic Security said it did not know how many visas were sold. However, 181 visas were revoked after the malfeasance was discovered. Diplomatic Security believes that many of the persons with revoked visas had already entered the country. We believe that strict compliance with internal controls could have identified this malfeasance earlier. Applicants for nonimmigrant visas generally apply at an embassy or consulate with jurisdiction over their place of normal residence, although they are not required to do so. However, in this case, there were a large number of third country nationals receiving visas from the same officer. Supervisory review of the issuances to the third country nationals or review of a standard report on visa issuances could have alerted management to this unusual activity. The consular officer ceased the illegal activity following a supervisory reprimand but soon was able to resume selling visas. The convicted employees received a 63-month sentence and forfeited $750,000 in illicit gains. Consular managers are required to continually oversee visa functions and suspicions of malfeasance must be examined carefully. Between 2000 and 2002 a senior consular officer at a small post accepted fraudulent applications and documents from a visa broker, issued them outside the normal process, and returned visas to the broker. After a supervisory reprimand, the officer revised the fraud scheme and conspired with the broker to approve visas for applicants with false passports. The officer received money for processing 85 visas, was convicted, and received a 24-month sentence. During the course of our work, State reported another case of visa malfeasance where we believe that lack of strict compliance with internal controls could have been a contributing factor. State requires consular and post management to periodically review referral activities and check on the return rates of applicants receiving a visa. Between 1999 and 2001, a State political officer at a small post allegedly referred unqualified applicants for visas, according to a State press release issued in April 2005. In the absence of the senior consular officer, the political officer was also responsible for visa adjudications and allegedly provided blank visa applications to an individual, assisted in filling them out, and then issued them to unqualified applicants. In return for these services the officer allegedly received a vintage BMW motorcycle. The officer was arrested in 2005. Consular Affairs emphasized that although some of its officers have engaged in visa malfeasance, other U.S. government employees and Foreign Service nationals have as well. Between 2000 and 2001, a U.S.- based Foreign Agricultural Service officer recommended 99 unqualified applicants and was able to influence the visa process through his recommendations and the submission of fraudulent documents, according to court documents. In exchange, the officer received bribes totaling $77,400. The officer, who was given the names of ineligible applicants by visa brokers, provided the applicants, on U.S. Department of Agriculture letterhead, letters stating that the individuals were agricultural specialists invited to the United States for official meetings. The officer then sent follow-up faxes to posts confirming the invitations. The individuals, who all listed the same destination address, presented the letters at embassy visa offices and unlawfully obtained visas. The officer was sentenced to 21 months in prison for participating in the visa malfeasance scheme. Visa malfeasance investigations are impeded by several factors, according to Diplomatic Security officials, including untimely reporting of alleged visa malfeasance. The ability to gather evidence is adversely affected, for example, when allegations are made several years after the alleged malfeasance occurred and witnesses have been reassigned, or are unavailable. In particular, entry-level officers, fearing reprisal, may delay reporting malfeasance until after they have been reassigned to a new post, according to State officials. In such cases, reconstructing the actions constituting any malfeasance is difficult because years may have passed since the incident occurred. When visa malfeasance occurs overseas, differences in legal systems can pose obstacles to investigators. Local laws may not permit the use of U.S. investigative techniques such as recorded conversations, undercover operations, or interrogation of suspects, according to Diplomatic Security officials. Additionally, according to Diplomatic Security investigators, investigations of local employees may be complicated due to differences in U.S. and foreign laws. According to Diplomatic Security officials, bribery is not a criminal offense in some countries and therefore it is difficult and sometimes impossible to obtain local warrants for searches in these countries. Conflicting priorities may also impede evidence gathering. For example, at one post, the Diplomatic Security investigator noted that he had to concentrate on ensuring the security of the post and was not able to devote adequate attention to investigating a recent allegation of visa malfeasance. Diplomatic Security officials confirmed that protecting personnel and infrastructure is the first priority of post security officers. Additionally, when malfeasance is suspected, Consular Affairs’ and Diplomatic Security’s differing objectives may affect evidence gathering. Diplomatic Security officials abroad and in headquarters, as well as Justice officials, all noted that documenting the illegal activity and gathering a sufficient amount of evidence to make a criminal case often requires allowing the suspect to continue working, unaware of the investigation. Consular Affairs noted that when this occurs, consular management closely reviews the suspect’s adjudications and monitors his or her activities to prevent issuances to ineligible applicants. However, Consular Affairs management interviewed on this issue expressed a preference for removing suspected individuals from their positions as quickly as possible. At one post, the ambassador, at the recommendation of the senior consular officer, took action to remove an employee under investigation in order to stop even the possibility that a visa could be issued to an ineligible applicant, thereby ending the covert investigation. As a result, a criminal case could not be developed, and the employee was dealt with administratively and was fired. Justice’s efforts to prosecute malfeasance are limited by a range of factors, including the inability to use U.S. warrants to search U.S. employees’ offices and residences overseas, according to Justice. U.S. magistrates generally cannot issue warrants for overseas searches. Further, Justice officials noted that they only accept for prosecution cases with sufficient evidence to warrant convictions. Under Rule 41 of the Federal Rules of Criminal Procedures, U.S. magistrates do not have the authority to issue search warrants for locations outside their districts, such as an embassy or residence overseas. According to Diplomatic Security officials, the ability to obtain U.S. search warrants, rather than relying on local warrants issued and executed by the host government, is important since investigations of visa malfeasance generally focus on embassy property or diplomatic residences. The U.S. mission and the residences of certain U.S. diplomats in country are inviolable, which means that agents of the host government may not enter the premises without the consent of the head of the mission, according to State officials. State officials also told us that the United States will never waive inviolability for the U.S. mission, and, therefore, investigators could not rely on a host country’s warrant to search an employee’s office at the U.S. mission. However, in certain instances, State officials said that they would waive inviolability for the personal residences of U.S. diplomats, located outside the U.S. mission. In instances where inviolability is waived, the United States can use current tools, such as letter rogatories and Mutual Legal Assistance Treaties, to request that a host government issue and execute a search warrant under the host government’s laws. Nonetheless, Diplomatic Security officials cited many difficulties they say can arise when using these tools. For example, according to these officials, differences between the United States’ and some host government’s techniques in gathering evidence can affect the admissibility of that evidence in U.S. courts. As a result of these and other difficulties, diplomatic security officials told us that they do not often utilize these tools to obtain local search warrants. In discussing with State and Diplomatic Security officials the possibility of obtaining additional search authorities under U.S. law, these officials raised issues regarding the magnitude of the need, as well as concerns over sovereignty and reciprocity. For example, Diplomatic Security officials indicated that in approximately six cases in the past year they would have wanted to conduct searches of employee residences and offices in connection with suspected visa malfeasance. State officials raised concerns that should the United States execute U.S. search warrants overseas, host governments could view this as a challenge to their sovereignty. Further, if the United States were to execute U.S. warrants overseas, the question arises whether the United States would have to extend the same privilege to foreign governments to execute their own warrants here in the United States. A visa system that is beyond reproach, with strong internal controls to protect against consular malfeasance, is critical to ensuring the integrity of visa decisions, national security, and U.S. immigration objectives. There is no way to prevent applicants from offering bribes; therefore, State recognizes that along with the integrity of its employees, an effective internal control program is needed to guard against employee malfeasance. Established internal controls make it more difficult for an employee to commit visa malfeasance. State has established a system of internal controls. However, at the posts we visited, we found that compliance with some of these internal controls was inconsistent. This increases the risk of visa malfeasance. Furthermore, most consular staff we spoke with did not know the appropriate way to report suspicions of employee visa malfeasance, which could hinder investigations. A further weakness to investigations is the lack of data on allegations and investigations to identify vulnerable points in the visa process. Finally, U.S. investigators cannot obtain a U.S. search warrant to search the offices or residences overseas of employees, which, according to Justice and Diplomatic Security officials, affects their ability to gather evidence in malfeasance cases. However, there are numerous factors that would need to be considered in pursuing additional search authorities. To emphasize the importance of internal controls to consular officers, section heads, and post managers, we recommend that the Secretary of State take the following two actions: Develop a strategy to achieve strict compliance with internal controls. The strategy should include a system to spot check compliance. The strategy should also include formalized procedures in Fraud Prevention Units to document how the post will address the risk of employee malfeasance and emphasize the importance of reporting suspected internal malfeasance to consular managers and post security officers. Improve State’s existing mechanisms to combat visa malfeasance. This could be accomplished by (1) improving the software available to the Vulnerability Assessment Unit to automatically sort data to identify and analyze abnormalities in post visa issuance statistics that could be an indication of malfeasance and (2) enhancing the investigative case tracking systems used by the Bureau of Diplomatic Security in order to better identify trends and vulnerabilities in the visa process for use by investigators and consular managers. We also recommend that the Secretary of State and the Attorney General determine whether seeking additional overseas search authorities is warranted to facilitate investigations of visa malfeasance. If they determine that such authorities are warranted, the Secretary of State and the Attorney General should develop an implementation plan and notify the Congress of any required legislative changes. We provided a draft of this report to the Departments of State and Justice. The Department of State provided written comments, which are included in appendix II. State concurred with our conclusions and recommendations and has begun taking actions to improve and monitor posts’ adherence to internal controls. Specifically, the department said it will review and approve post referral policies, and it has established an ombudsman to ensure that there is no undue influence on consular officers to issue visas. To monitor compliance with internal controls, the department plans to establish an automated control system for controlled items, field test an automated data mining system of consular activities, and launch a worldwide fraud case tracking system in 2006. Lastly, the department said it will work with the Attorney General to determine if additional authority for overseas searches of employees’ residences and offices is warranted and, if so, how it could best be achieved. Justice did not comment on our recommendations, but provided technical comments, which we incorporated 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 30 days after its issue date. At that time, we will send copies of the report to relevant congressional committees and subcommittees, the Secretary of State, the Attorney General, and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The scope of our work covered the visa application and adjudication process at selected U.S. Consulates and Embassies overseas. To assess the policies and procedures governing visa operations, we obtained copies of written procedures and interviewed officials from the Bureau of Consular Affairs. At the embassies and consulates we visited, we interviewed foreign service nationals, foreign service officers, adjudicating officers, the Nonimmigrant Visa section chiefs, the consular section chiefs, and the deputy chiefs of mission or principal officers. When available, we also interviewed consuls general and ambassadors. To assess the internal controls designed to prevent the illegal provision of visas, we asked State to identify the policies, procedures, and key internal controls governing visa operations. State identified a number of key internal controls, and, in particular, identified the Consular Management Handbook (Chapter 600), their Standard Operating Procedures, and the relevant sections of the Foreign Affairs Manual as sources for these controls. We obtained and examined the Department of State’s Consular Management Handbook, Standard Operating Procedures, key sections of the Foreign Affairs Manual, and documents related to how the department develops and enforces standards of conduct for visa adjudication officers from the department’s Bureau of Consular Affairs. To determine if supervisors were reviewing records of visa issuances, we reviewed on line reports at posts and at the Vulnerability Assessment Unit (VAU). To assess whether the key internal controls were being followed, we examined post records for the year preceding our visit, except in the case of referral policies, where we examined judgmental samples of four months of referrals at each post. We visited 11 consular posts in six countries to observe and verify the implementation of the key internal controls. These posts are Nogales, Guadalajara, and Mexico City, Mexico; Quito and Guayaquil, Ecuador; Lima, Peru; Ho Chi Minh City and Hanoi, Vietnam; Bangkok and Chiang Mai, Thailand; and Mumbai, India. To select the posts to visit, we reviewed overall post staffing data and issuance rates and selected posts that had both large and small staffing levels with varied experience. Selected posts performed a varying amount of adjudications, and some had regional responsibilities for fraud detection and investigations. Some posts had also undergone internal reviews and permitted examination of external oversight functions. Lastly, some posts selected had been the subject of fraud allegations, enabling the review of investigative procedures. Our reported results apply to the posts we visited, and we cannot generalize the results to posts not visited. To assess the nature and extent of malfeasance, we examined records provided by State’s Bureau of Diplomatic Security on investigations of visa malfeasance involving employees between 2001 and 2004. We reviewed 140 cases collected by Diplomatic Security covering alleged visa malfeasance involving employees over the last 4 years. The cases reviewed represented 2004, 2003, and 2002, as well as prominent, but not all cases from 2001. The reports included information on the types of employees being investigated for visa malfeasance, such as U.S. Foreign Service officers, and employees of other U.S. government agencies overseas and locally hired staff. Diplomatic Security does not maintain automated data on employee malfeasance, and it obtained these reports for us by reviewing its files on all types of visa fraud and identifying those where employee malfeasance was involved. While Diplomatic Security reported that it made its best efforts to obtain complete data from 2002 through 2004, it could not assure us that it had identified every case that had been opened and involved employee malfeasance. These data covered 2001 to 2004 because this was the most recent information available. However, there were a number of limitations in these data. For example, the information available did not include a comprehensive set of allegations, nor completely describe the nature of the fraudulent activity under investigation. We determined that these data were sufficiently reliable to provide details on approximate figures of the employee malfeasance cases that were opened, as well as details about the types of cases. We also obtained information from the Department of Justice on visa fraud prosecutions by the Public Integrity Section conducted between January 2001 and March 2005. These data allowed us to determine how many cases this office in Justice has pursued in the last 4 years, as well as the status or outcome of those cases. Additionally, we interviewed officials from State’s Office of the Inspector General, Consular Affairs’ Office of Fraud Prevention, and its VAU. We observed VAU officials as they conducted their analysis and queries. We interviewed the fraud prevention staff and management at all the embassies and consulates visited, and also interviewed the Regional Security Officers and Assistant Regional Security Officers/Investigators at all posts where such officers were posted and available. To determine how State and Justice interact to investigate suspicious activity and allegations of employee malfeasance, we interviewed officials from State’s Bureaus of Consular Affairs and Diplomatic Security, and Justice’s Criminal Division, Public Integrity Section, and the Executive Office for United States Attorneys. We conducted our work from August 2004 through July 2005 in accordance with generally accepted government auditing standards. In addition to the person named above, John Brummet, Assistant Director; Claude Adrien; Joseph Carney; Martin de Alteriis; Etana Finkler; Patricia Martin; and Mary Moutsos made key contributions to this report. | Issuing a U.S. visa to a foreign citizen in exchange for money or something of value is a crime that can facilitate entry into the United States of unqualified persons, including those who may wish to do our country harm. Internal controls make it difficult for an employee to commit visa malfeasance without being detected, but, despite these safeguards, visa malfeasance does occur. GAO examined (1) State's internal controls to prevent nonimmigrant visa malfeasance and if they are being implemented and (2) visa malfeasance cases from 2001-2004 and factors cited by State and the Department of Justice (Justice) that contributed to visa malfeasance and affected investigations and prosecutions. State has a set of internal controls to prevent visa malfeasance and has taken actions to improve them; however, these internal controls are not being fully and consistently implemented by the posts we visited. While State's controls are consistent with accepted control standards, we found noncompliance with required supervisory oversight at 6 of the 11 posts we visited. This included failure to inventory items used to issue visas, review visa decisions, and follow State's procedures when issuing visas for applicants referred by officers within the post. Lack of full compliance with internal controls increases vulnerability to visa malfeasance. State recently established two headquarters entities to monitor post visa operations. While stronger oversight should help strengthen compliance with internal controls, State has not developed automated software to sort and analyze abnormalities in visa issuances that could indicate potential malfeasance. The Bureau of Diplomatic Security substantiated 28 visa malfeasance cases between 2001 and 2004 involving U.S. employees. The suspects were fired, chose to resign, or were arrested. State investigators could not tell us how many opened cases were referred to Justice for possible prosecution because they had not been routinely collecting that information. In fact, their case records did not permit investigators to identify malfeasance trends or consular managers to identify internal control weaknesses needing attention. Justice's Public Integrity Section successfully prosecuted 10 U.S. government employees. State Diplomatic Security and Justice officials noted that their investigations and prosecutions were impeded by constraints on evidence gathering. Additionally, investigators can not obtain U.S. search warrants to search consular officer's offices or residences overseas. Justice and State are discussing the possibility of pursuing legal changes and other means to address these constraints. |
Credit unions differ from other depository institutions because of their cooperative structure and tax exemption. Credit unions are member-owned cooperatives run by boards elected by their members. They do not issue capital stock; rather, they are not-for-profit entities that build capital by retaining earnings. However, like banks and thrifts, credit unions have either federal or state charters. Federal charters have been available since 1934 when the Federal Credit Union Act was passed. States have their own chartering requirements. As of December 2002, the federal government chartered about 60 percent of the nearly 10,000 credit unions, and about 40 percent were chartered by their respective states. Both federally and state- chartered credit unions are exempt from federal income taxes, with federally chartered and most state-chartered credit unions also exempt from state income and franchise taxes. Another distinguishing feature of credit unions is that they may serve only an identifiable group of people with a common bond. A common bond is the characteristic that distinguishes a particular group from the general public. For example, a group of people with a common profession or living in the same community could share a common bond. Over the years, common-bond requirements at the state and federal levels have become less restrictive, permitting credit unions consisting of more than one group having a common bond to form “multiple-bond” credit unions. The term “field of membership” is used to describe all the people, including organizations, that a credit union is permitted to accept for membership. As previously noted, the loosening of common-bond restrictions, as well as expanded powers, have brought credit unions into more direct competition with other depository institutions, such as banks. In addition, credit unions can offer members additional services made available by third-party vendors and by certain profit-making entities with which they are associated, referred to as credit union service organizations (CUSO). CUMAA was the last statute that enacted major provisions affecting, among other things, how federally chartered credit unions could define their fields of membership and how federally insured credit unions demonstrate the safety and soundness of their operations. In February 1998, the Supreme Court ruled that NCUA lacked authority to permit federal credit unions to serve multiple membership groups. In response, CUMAA authorized multiple-group chartering, subject to limitations NCUA must consider when granting charters. Also, the act limited new community charter applications to well-defined “local” communities. Moreover, CUMAA placed several additional restrictions on federally insured credit unions. It tightened audit requirements, established PCA requirements when capital standards were not met, and placed a cap on the percentage of funds that a credit union could expend for member business loans. NCUA has oversight responsibility for federally chartered credit unions and has issued regulations that, among other things, guide their field of membership and the scope of services they can offer. NCUA also has responsibility for overseeing the safety and soundness of federally insured credit unions through examinations and off-site monitoring. In addition, NCUA administers NCUSIF, which provides primary share (deposit) insurance for 98 percent of the nation’s credit unions.NCUA, in its role as administrator of NCUSIF, is responsible for overseeing federally insured, state-chartered credit unions to ensure that they pose no risk to NCUSIF. State governments have responsibility for regulating state-chartered credit unions. State regulators oversee the safety and soundness of state- chartered credit unions; although, as mentioned above, NCUA also has responsibility for ensuring that state-chartered credit unions that are federally insured pose no risk to NCUSIF. States set their own rules regarding field of membership and the services credit unions can provide. In addition, some states allow the credit unions in their states the option of obtaining private primary share insurance. Currently, 212 credit unions in eight states have primary share insurance from a private company, ASI, located in Ohio. Primary share insurance for these privately insured credit unions covers up to $250,000. Between 1992 and 2002, the capital ratios of federally insured credit unions improved and remained higher than those of other depository institutions. The industry’s assets also grew over this period, coincident with an increased emphasis on mortgage loans. Credit union industry profitability, after declining from 1992 to 1999, has since stabilized. In addition, since 1991 there has been a significant drop in the number of problem credit unions as measured by regulatory ratings. Consolidation in the industry has continued while total industry assets have grown, which has in part resulted in two distinct groups of federally insured credit unions—larger credit unions, which are fewer in number and provide a wider range of services that more closely resemble those offered by banks, and smaller credit unions, which are larger in number and provide more basic financial services. The capital of federally insured credit unions as a percent of total industry assets—the capital ratio—increased steadily between 1992 and 1997 and has since remained mostly level. As shown in figure 1, the capital ratio of the industry was 8.1 percent in 1992, increased to 11.1 percent in 1997, and was 10.9 percent in 2002. As a point of comparison, the capital ratio of credit unions has remained higher than that of banks and thrifts since 1992. As a result, credit unions have a greater proportion of assets available to cover potential losses than banks and thrifts. This may be appropriate since credit unions, unlike banks, are unable to raise capital in the capital markets but must instead rely on retained earnings to build and maintain their capital levels. Total loans as a percent of total assets of federally insured credit unions grew between 1992 and 2002. In 1992, 54 percent of credit union assets were made up of loans and 16 percent were in U.S. government and agency securities, while in 2002 loans represented 62 percent of industry assets, and U.S. government and agency securities represented 14 percent of total assets. The largest category of credit union loans was consumer loans (a broad category consisting of unsecured credit card loans, new and used vehicle loans, and certain other loans to members, but excluding real estate loans such as mortgage or home equity loans), followed by real estate loans. For example, in 2002, 31 percent of credit union total assets were classified as consumer loans and 26 percent were classified as real estate loans. However, over time, holdings of real estate loans have grown more than holdings of consumer loans. For example, real estate loans grew from 19 percent of total assets in 1992 to 26 percent in 2002, while consumer loans grew from 30 percent to 31 percent over the same period. Despite a larger increase in real estate lending relative to consumer lending, credit unions still had a significantly larger percentage of consumer loans relative to total assets compared with their peer group banks and thrifts: consumer loan balances of peer group banks and thrifts were less than 8 percent of total assets in 2002. To provide context, in terms of dollar amounts, credit unions had $175 billion in consumer loans while peer group banks and thrifts had $190 billion in consumer loans. However, these banks and thrifts held a greater percentage of real estate loans than credit unions. See appendix III for additional details. The profitability of credit unions, as measured by the return on average assets, has been relatively stable in recent years. The industry’s return on average assets was higher in the early to mid-1990s than in the late 1990s and early 2000s. While declining from 1.39 in 1993 to 0.94 in 1999, the return on average assets has since stabilized. It has generally hovered around 1, which, by historical banking standards, is a performance benchmark, and it was reported at 1.07 as of December 31, 2002. For comparative purposes, the return on average assets for peer group banks and thrifts was 1.24 in 2002. Earnings, or profits, are an important source of capital for financial institutions in general and are especially important for credit unions, as they are mutually owned institutions that cannot sell equity to raise capital. As previously mentioned, credit unions create capital, or net worth, by retaining earnings. Most credit unions begin with no net worth and gradually build it over time. Since we last reported on the financial condition of credit unions, there has been a significant drop in the number of problem credit unions as measured by the regulatory ratings of individual credit unions. Regulatory ratings are a measure of the safety and soundness of credit union operations, and credit unions with an overall CAMEL rating of 4 (poor) or 5 (unsatisfactory) are considered problem credit unions. The number of problem credit unions declined by 63 percent from 578 (5 percent of all credit unions) in 1992 to 211 (2 percent of total) in 2002. Total assets in federally insured credit unions grew from $258 billion in 1992 to $557 billion in 2002, an increase of 116 percent. During this same period, total member shares in these credit unions grew from $233 billion to $484 billion, an increase of 108 percent. At the same time, the number of federally insured credit unions fell from 12,595 to 9,688. As a result of the increase in total assets and the decline in the number of federally insured credit unions, the credit union industry has seen an increase in the average size of its institutions and a slight increase in the concentration of assets. At year-end 1992, credit unions with more than $100 million in assets represented 4 percent of all credit unions and 52 percent of total assets; at year-end 2002, credit unions with more than $100 million in assets represented about 11 percent of all credit unions and 75 percent of total assets. From 1992 to 2002, the 50 largest credit unions by asset size went from holding around 18 percent of industry assets to around 23 percent of industry assets. Despite the slight increase in concentration of assets in the credit union industry, it was neither as concentrated as the banking industry, nor did it witness the same degree of increased concentration. From 1992 to 2002, the 50 largest banks by asset size went from holding around 34 percent of industry assets to around 58 percent of industry assets. Appendix IV has additional information on assets in federally insured credit unions and banks. This consolidation in the credit union industry has in part widened the gap between two distinct groups of federally insured credit unions—larger credit unions, which are relatively few in number and provide a wider range of services, and smaller credit unions, which are greater in number and provide more basic banking services. Figure 2 illustrates institution size and asset distribution in the credit union industry as of 2002, with institutions classified by asset ranges; smaller credit unions are captured in the first category, while credit unions with assets in excess of $100 million are separated into additional asset ranges for illustrative purposes. For example, as of December 31, 2002, the 8,642 smaller credit unions—those with $100 million or less in total assets—constituted nearly 90 percent of all credit unions but held only 25 percent of the industry’s total assets (see right-hand axis of fig. 2). Conversely, the 71 credit unions with assets of between $1 billion and $18 billion, held 27 percent of total industry assets (see right-hand axis of fig. 2) but represented less than 1 percent of all credit unions. We observed that larger credit unions tended to hold a wider variety of loans than did smaller credit unions, and larger credit unions emphasized different loan types than smaller credit unions. For example, new and used vehicle loans have represented a relatively greater proportion of total assets for smaller credit unions, and nearly all smaller credit unions held such loans. However, while nearly all of the larger credit unions held new and used car loans, first mortgage loans represented a relatively greater proportion of total assets for larger credit unions. In fact, nearly all larger credit unions held first mortgage loans, junior mortgage and home equity loans, and credit card loans, while in general less than half of the smaller credit unions held these loans. Larger credit unions also tended to be more likely to provide more sophisticated services, such as financial services through the Internet and electronic applications for new loans. While nearly all larger credit unions offered automatic teller machines, less than half of smaller credit unions did. In fact, when compared with similarly sized peer group banks and thrifts, larger credit unions tended to appear very similar to their bank peers in terms of loan holdings. Appendixes IV and V provide further details. As credit unions have become larger and offer a wider variety of services, questions have been raised about whether credit unions are more likely to serve households with low and moderate incomes than banks. However, limited comprehensive data are available to evaluate income of credit union members. Our assessment of available data—the Federal Reserve’s 2001 SCF, 2001 HMDA data, and other studies—provided some indication that credit unions served a slightly lower proportion of households with low and moderate incomes than banks. Industry experts suggested that credit union membership characteristics—occupationally based fields of membership and traditionally full-time employment status—could have contributed to this outcome. However, limitations in the available data preclude drawing definite conclusions about the income characteristics of credit union members. Additional information, especially with respect to the income levels of credit unions’ members receiving consumer loans, would be required to assess more completely whom credit unions serve. It has been generally accepted, particularly by NCUA and credit union trade groups, that credit unions have a historical emphasis of serving people with modest means. However, there are currently no comprehensive data on the income characteristics of credit union members, particularly those who actually receive loans and other services. As credit unions have become larger and expanded their offerings of financial services, industry groups, as well as consumer advocates, have debated which economic groups benefit from credit unions’ services. Additionally, questions have been raised about credit unions’ exemption from federal income taxes. As stated in our 1991 report, and still true, none of the common-bond criteria available to federally chartered credit unions refers to the economic status of their members or potential members. Information on the extent to which credit unions are lending and providing services to households with various incomes is scarce because NCUA, industry trade groups, and most states (with the exception of Massachusetts and Connecticut) have not collected specific information describing the economic status of credit union members who obtain loans or benefit from other credit union services. Credit unions, even those serving geographic areas, are not subject to the federal Community Reinvestment Act (CRA), which requires banking regulators to examine and rate banks and thrifts on lending and service to low- and moderate- income neighborhoods in their assessment area. As a consequence, credit unions are not required by NCUA or other regulators to maintain data on the extent to which loans and other services are being provided to households with various incomes. However, two states—Massachusetts and Connecticut—collect information on the distribution of credit union lending by household income and the availability of services because their state-chartered credit unions are subject to examinations similar to those of federally regulated institutions. Modeled on the federal examination procedures for large banks, the state regulators apply lending and service tests to assess whether credit unions are meeting the needs of the communities they have set out to serve, including low- and moderate-income neighborhoods. Massachusetts established its examination procedures in 1982, and Connecticut in 2001.All credit unions in Massachusetts are subject to these examinations, including those whose field of membership is community-based. In contrast, in Connecticut, only state-chartered credit unions serving communities with more than $10 million in assets are subject to the examination. According to a Connecticut state official, the Connecticut legislature established its examination due to an increasing trend of multiple-bond credit unions to convert to community-chartered bonds, and the $10-million threshold was chosen because the legislature believed credit unions of that size would normally have the personnel and technological resources to appropriately identify and serve their market. In May 2003, Connecticut started to examine community-chartered credit unions with assets of more than $10 million. Consumer and industry groups have debated if information that demonstrates whether credit unions serve low- and-moderate income households is necessary. Some consumer groups believe that credit unions should supply information that indicates they serve all segments of their potential membership. The Woodstock Institute—an organization whose purpose is to promote community reinvestment and economic development in lower-income and minority communities—recommended, among other things, that the CRA requirement should be extended to include credit unions, based on a study they believe demonstrated that credit unions are not adequately serving low-income households.Woodstock Institute officials noted that they would prefer to see CRA requirements applied to larger credit unions, those with assets over $10 million. The National Federation of Community Development Credit Unions (NFCDCU) has recommended that credit unions whose fields of membership cover large communities should be affirmatively held accountable for providing services to all segments of those communities, and that NCUA publish annual reports on the progress and status of these expanded credit unions. In contrast, NCUA and industry trade groups have opposed these and related requirements largely because they state that no evidence suggests that credit unions do not serve their members. Our analysis of the Federal Reserve Board’s 2001 SCF suggested that credit unions overall served a lower percentage of households of modest means (low- and moderate-income households combined) than banks. More specifically, while credit unions served a slightly higher percentage of moderate-income households than banks, they served a much lower percentage of low-income households. The SCF is an interview survey of U.S. households conducted by the Federal Reserve Board that includes questions about household income and specifically asks whether households use credit unions or banks. Our analysis of the SCF indicated the following percentages for those households that used a financial institution: 8 percent of households only used credit unions, 13 percent of households primarily used credit unions, 17 percent of households primarily used banks, and 62 percent of households only used banks. To provide a more consistent understanding of our survey results, we used the same income categories used by financial regulators—low, moderate, middle, and upper—in their application of federal CRA examinations. To determine the extent to which credit unions served people of “modest means,” we first combined households with low or moderate incomes into one group and combined households with middle or upper incomes into another group. We then combined the SCF data into two main groups— households that only and primarily used credit unions versus households that only and primarily used banks. As shown in figure 3, this analysis indicated that about 36 percent of households that only or primarily used credit unions had low or moderate incomes, compared with 42 percent of households that used banks. Moreover, our analysis suggested that a greater percentage of households that only and primarily used credit unions were in the middle- and upper-income grouping than the proportion of households that only and primarily used banks. To better understand the distribution of households by income category, we also looked at each of the four income categories separately. As shown in figure 4, this analysis suggested that the percentage of households that only and primarily used credit unions in the low-income category was lower than the percentage of households that used banks in the same category (16 percent versus 26 percent). In contrast, households that only and primarily used credit unions were more likely to be moderate- and middle-income (19 percent and 22 percent) than those that only and primarily used banks (16 and 17 percent). Given that credit union membership has traditionally been tied to occupational- or employer-based fields of membership, the higher percentage of moderate- and middle- income households served by credit unions is not surprising. We also attempted to further explore the income distribution of credit unions’ members by separately analyzing households that only used credit unions or banks from those that primarily used credit unions or banks. However, the results were subject to multiple interpretations due to characteristics of the households in the SCF database. For example, when user groups are combined and compared, the results may look different than when the groups are separated and compared. Because such a high percentage of the U.S. population only uses banks (62 percent), the data obtained from the SCF is particularly useful for describing characteristics of bank users but much less precise for describing smaller population groups, such as those that only used credit unions (8 percent). In addition to assessing the income characteristics of households using credit unions and banks, we also performed additional analysis by education, race, and age. The results of these analyses can be found in appendix VI. As an indicator of the income levels of households that utilize credit union services, we used 2001 HMDA loan application records to analyze the income of households receiving mortgages for the purchase of one-to-four family homes from credit unions and peer-group banks. Our analysis indicated that credit unions reporting HMDA data made a lower proportion of mortgage loans to households with low and moderate incomes than peer group banks reporting HMDA data—27 percent compared with 34 percent. More specifically, credit unions made 7 percent of their loans to low-income households compared with 12 percent for banks, and credit unions made 20 percent of their loans to moderate-income households compared with 22 percent for banks (see fig. 5). We also analyzed and compared the proportion of mortgage loans reported by peer group banks and credit unions for the purchase of homes by the median family income of the census tracts in which the homes were located. We found that credit unions made roughly the same proportion of loans for the purchase of homes, by census tract income category, as banks. For example, we found that both credit unions and banks made 1 percent of their loans for the purchase of homes in low-income census tracts and that credit unions made 9 percent of their loans for the purchase of properties in moderate-income census tracts compared with 10 percent by banks (see fig. 6). In addition, we found that both credit unions and banks made 54 percent of their loans for the purchase of homes in middle- income census tracts, and that credit unions made about 37 percent of their loans in upper-income census tracts compared with 35 percent by banks. This analysis is a measure of whether all neighborhoods (census tracts within an assessment area) are receiving financial services, including low- and moderate-income ones. Because each HMDA loan record identified the income of the mortgage loan recipient and the location of the property, the HMDA database allowed us to determine the proportion of mortgages made within the four income categories—low, moderate, middle, and upper—used by financial regulators for CRA examinations. However, not all financial institutions are required to report HMDA data—for example, depository institutions were exempt from reporting data in 2001 if they had assets less than $31 million as of December 31, 2000, and if they did not have a home or branch office in an MSA. Further, not all credit unions, including those that had more than $31 million in assets, made home purchase loans. As a result, most credit unions did not meet HMDA’s reporting criteria—only about 14 percent of all credit unions submitted data included in our analysis. On the other hand, the credit unions that did report their loans to HMDA held about 70 percent of credit union assets and included about 62 percent of all credit union members. Our analysis of HMDA data allowed us to determine the overall proportion of mortgage loans credit unions and peer group banks made to households and neighborhoods with low and moderate incomes. However, we would need information on the proportion of low- and moderate-income households within credit union fields of membership to actually make an evaluation of whether credit unions, collectively or individually, have met the credit needs of their entire field of membership. Similar to analyses used in federal CRA lending tests, this information could then be used as a baseline from which to evaluate an individual credit union’s actual lending record. In addition, information on factors (for example, a community’s economic condition, local housing costs) that could affect the ability of a credit union to make loans consistent with safe and sound lending would be necessary to evaluate an institution’s lending record. If regulators were to make these types of evaluations for credit unions, they would be easier to implement for those serving geographic areas because demographic information (for example, on census tract median income levels) would be available to describe credit union field of membership. For credit unions with an occupational or associational membership, other ways of characterizing their field of membership would need to be determined. In addition, as previously mentioned, using HMDA data to analyze credit union mortgage lending to members does not provide any information on smaller credit unions, because in 2001 credit unions with less than $31 million in assets as of December 31, 2000, were not required to report HMDA data. Because smaller credit unions did not report HMDA data, one group of credit unions—the roughly 3,800 credit unions that qualified for NCUA’s Small Credit Union Program in December 2002—were largely excluded from our HMDA analysis. Credit unions qualifying for assistance from this program must have less than $10 million in assets or have received a “low-income” designation from NCUA. In addition, low-income credit unions must demonstrate that more than half of their current members meet one of NCUA’s low-income criteria. Further, smaller credit unions are more likely than larger credit unions to make consumer loans than mortgages, making an evaluation of mortgage lending more relevant to larger credit unions than smaller ones. Because most credit unions can be classified as small, analyzing the distribution of consumer loans by household income would provide a more complete picture of credit union lending. Other recently published studies—CUNA and the Woodstock Institute— generally concluded that credit unions served a somewhat higher-income population. The studies noted that the higher income levels could be due to the full-time employment status of credit union members. The CUNA 2002 National Member Survey reported that credit union members had higher average income households than nonmembers— $55,000 compared with $46,000. The report provided several reasons for the income differential, including the full-time employment status of credit union members, credit union affiliation with businesses or companies, and weak credit union penetration among some of the lowest-income age groups—18 to 24 and 65 and older. However, the report noted that additional analyses, specifically those grouping consumers based on the extent to which they rely on banks and credit unions as their primary provider should also be considered. In addition, a study sponsored by the Woodstock Institute, based on an analysis of 1999 and 2000 survey responses obtained from households in the Chicago, Illinois, metropolitan area concluded that credit unions in the Chicago region served a lower percentage of lower-income households than they did middle- and upper- income ones. For example, while 40 percent of surveyed households with incomes between $60,000–$70,000 contained a credit union member, only 23 percent of households earning between $30,000–$40,000 contained a credit union member. The study also noted that household members working for larger firms, and those who were members of a labor union, were significantly more likely to be credit union members. Officials from NCUA and the Federal Reserve Board also noted that credit union members were likely to have higher incomes than nonmembers because credit unions are occupationally based. An NFCDCU representative noted that because credit union membership is largely based on employment, relatively few credit unions are located in low- income communities. However, without additional research, especially on the extent to which credit unions with a community base serve all of their potential members, it is difficult to know whether full-time employment is the sole explanatory factor. The Credit Union Membership Access Act of 1998 authorized preexisting NCUA policies that had allowed credit unions to expand field of membership. In 1998, the Supreme Court ruled against NCUA’s practice of permitting federally chartered credit unions to consist of more than one common bond.In CUMAA, Congress specifically permitted credit unions to form multiple-bond credit unions and allowed these credit unions to serve underserved areas. CUMAA also specified that community- chartered credit unions serve a “local” area.However, after the passage of CUMAA, NCUA revised its regulations to make it easier for credit unions to serve communities larger than before CUMAA. To some extent, these NCUA policies appear to have been triggered by concerns about competing with the states to charter credit unions. While CUMAA permitted multiple- bond credit unions to add underserved areas to their membership, the impact of this provision will be difficult to assess because NCUA does not track credit union progress in extending service to these communities. CUMAA authorized several preexisting NCUA field of membership policies that had enabled federally chartered credit unions to expand their fields of membership. These policies had allowed credit unions to consist of more than one membership group and expand their membership to include underserved areas. In addition, CUMAA permitted credit unions to retain their existing membership. Specifically, CUMAA affirmed NCUA’s 1982 policy of permitting credit unions to form multiple-bond credit unions, allowing these credit unions to retain their current membership and authorizing their future formation. A credit union with a single common bond has members sharing a single characteristic, for example, employment by the same company. In contrast, multiple-bond credit unions consist of more than one distinct group. Congressional affirmation of NCUA’s policy of permitting multiple-bond credit unions was important because earlier in 1998 the Supreme Court had ruled that federally chartered, occupationally based credit unions were required to consist of a single common bond. Figure 7 provides additional information since 2000 on the percent of federally chartered credit unions by charter type. In addition, CUMAA affirmed other preexisting NCUA policies. For example, CUMAA authorized multiple-bond credit unions to add individuals or organizations in “underserved areas” to their field of membership. This provision was similar to an NCUA policy that permitted multiple-bond credit unions, as well other federally chartered, single-bond, and community-chartered credit unions, to add low-income communities to their field of membership. In addition, CUMAA affirmed NCUA’s “once a member, always a member policy,” which had been in effect since 1968. CUMAA authorized this policy such that credit union members may retain their membership even after the basis for the original bond ended.However, CUMAA still contained provisions encouraging the creation of new credit unions whenever possible. Despite the qualification in CUMAA that a community-chartered credit union’s members be within a well-defined “local” community, neighborhood, or rural district, NCUA eased requirements for permitting credit unions to serve larger geographic areas. CUMAA added the word “local” to the preexisting requirement that community-chartered credit unions serve a “well-defined community, neighborhood, or rural district,” but provided no guidance with respect to how the word “local” or any other part of this requirement should be defined. Following passage of CUMAA, NCUA expanded the ability of credit unions to serve larger geographic areas through its regulatory rulings.Interpretive Ruling and Policy Statement (IRPS) 99-1, issued soon after CUMAA, was the first regulation to set standards for what could be considered a “local” area. It required credit unions to document that residents of a proposed community area interact or have common interests. Credit unions seeking to serve a single political jurisdiction (for example, a city or a county) with more than 300,000 residents were required to submit more extensive documentation than jurisdictions with fewer than 300,000 residents. However, IRPS 03-1, which replaced IRPS 99-1, eliminated these documentation requirements, regardless of the number of residents. Further, IRPS 03-1 allowed credit unions to propose MSAs with less than 1 million residents for qualification as local areas. See table 1 for changes in “local” requirements. NCUA adopted these definitions of local community based on its experience in determining what constituted a local community charter. Specifically, NCUA officials said that they decided single political jurisdictions should automatically qualify as “local” areas based on their review of applications by credit unions for community charters. They reported that they came to this conclusion because credit unions converting to a community charter or expanding their service areas had generally been able to successfully supply the documentation required by NCUA. We asked NCUA officials what kind of relationships community- chartered credit union members could have if, for example, a local community were to be defined as all of New York City. NCUA officials said that the defining factors for them were that people lived in the same political jurisdiction—thus providing, for example, a common government and educational system—and noted that credit unions applying to serve these larger jurisdictions still had to meet other requirements related to safety and soundness. The officials also said that had CUMAA not introduced the word “local,” NCUA could have considered providing credit unions permission to expand their field of memberships statewide. The regulatory changes in IRPS-03-1 pertaining to the definition of local community have made it easier for federally chartered credit unions to serve larger communities. Under IRPS-03-1, NCUA approved the largest community yet—the 2.3 million residents of Miami-Dade County, Florida.NCUA had disapproved this same credit union’s request about 2 years earlier, under IRPS 99-1, as amended by IRPS 01-1. Prior to IRPS-03-1, some of the largest community field of memberships approved by NCUA included service to 836,231 residents on Oahu, Hawaii, and service to 710,540 residents in Montgomery County and Greene County, Ohio. In addition, over the last 3 years, potential membership––an estimate of the maximum number of members that could join a credit union––in community-chartered credit unions has come to exceed that in multiple- bond credit unions. According to NCUA estimates, in March 2003, community-chartered credit unions had 98 million potential members compared with multiple-bond credit unions with 92 million potential members (see fig. 8). According to NCUA, a major reason for NCUA’s recent regulatory changes was to maintain the competitiveness of the federal charter in a dual chartering system. They also characterized NCUA’s field of membership regulations as more restrictive than those in some states. Officials in three of the states in which we conducted interviews—California, Texas, and Washington—said that the ability to expand field of membership more readily under state rules was a reason that federally chartered credit unions had converted to state charters. Consistent with this assertion, we found that state-chartered credit unions have experienced greater membership growth, although federally chartered credit unions still had more members. Between 1990 and March 2003, state-chartered credit union membership increased by 88 percent, from 19.5 million to 36.6 million, while membership in federally chartered credit unions increased by 24 percent, from 36.2 million to 44.9 million. In addition, if estimates of potential membership serve even as an approximation of future membership, state-chartered credit unions could be positioned to experience greater growth (see fig. 9). In March 2003, state-chartered credit unions had about 405 million potential members, almost twice the 208 million for federally chartered credit unions. We also found that states had chartered a higher percentage of their credit unions to serve geographic areas (communities) than NCUA. In 2002, we estimated that about 1,146 state-chartered credit unions, 30 percent of all state-chartered credit unions, served geographic areas compared with 848 federally chartered credit unions, 14 percent of all federally chartered credit unions. However, this number increases to 1,096, 18 percent of all federally chartered credit unions, once federally chartered credit unions serving underserved areas are included. State-chartered credit unions serving geographic areas held about 59 percent of state-chartered credit unions assets compared with 17 percent held by federally chartered credit union serving geographic areas, or 29 percent when the assets of credit unions with underserved areas were included. An NCUA objective is to ensure that credit unions provide financial services to all segments of society, including the underserved, but NCUA has not developed indicators to evaluate credit union progress in reaching the underserved. This type of evaluation could require information similar to that provided as part of CRA examinations—for example, information on the distribution of loans made by the income levels of households receiving mortgage and consumer loans—and provide comprehensive information on how credit unions have utilized opportunities to extend their services to underserved areas, including low- and moderate-income households. CUMAA had specifically provided that multiple-bond credit unions could serve underserved areas, and NCUA permitted single-bond and community-bond credit unions to add them as well. However, neither CUMAA nor NCUA required that credit unions report on services to these areas once they had been added. Figure 10 shows the number of underserved areas added before and after CUMAA. Instead of developing indicators to evaluate credit union progress in reaching the underserved, NCUA officials have claimed success based on the increase in the number of potential members added by credit unions in underserved areas and, recently, on the membership growth rate of federally chartered credit unions that have added underserved areas. As of March 2003, credit unions had added 48 million potential members in underserved areas. As noted previously, potential membership is an estimate of the maximum number of people who could be eligible to join a credit union. However, NCUA officials believe that potential membership is an appropriate measure because they view NCUA’s role as expanding membership opportunities for credit unions as opposed to the credit unions’ role of actually extending services to new members. In addition, in June 2003, NCUA claimed success based on estimates indicating that annual membership growth in credit unions that expanded into underserved areas has been higher than that of all federally chartered credit unions—4.8 percent compared with 2.49 percent. However, they could not identify whether the increase in membership actually came from the underserved areas or provide any descriptive information (for example, the income level) about the new members. Because NCUA does not collect information on credit union service to underserved areas, it would be difficult for NCUA or others to demonstrate that these credit unions are actually extending their services to those who have lower incomes or do not have access to financial services. As the number of credit unions adding underserved areas increases, this question becomes more important. For example, in 1999, the year after CUMAA, 13 credit unions added 16 underserved areas to their membership. In 2002, 223 credit unions added about 424 underserved areas. Further, the size of these communities can be substantial. For example, in May 2003, NCUA permitted one multiple-bond credit union to add an additional 300,000 residents within Los Angeles County, California, for a total of almost 1 million added residents in the last 2 years. In the same month, NCUA also approved a multiple-bond credit union’s (headquartered in Dallas, Texas) addition of 600,000 residents in underserved communities in Louisiana. Industry consolidation and changes in products and services offered by credit unions prompted NCUA to move from an examination and supervision approach that was primarily focused on reviewing transactions to an approach that focuses NCUA resources on high-risk areas within a credit union. Prior to implementing its risk-focused program in August 2002, NCUA sought guidance from other depository institution regulators that had several years of experience with risk-focused programs. While this consultative approach helped NCUA, it still faces a number of challenges that create additional opportunities for NCUA to leverage off the experience of the other depository institution regulators. These challenges include ensuring that examiners have sufficient expertise in areas such as information systems, monitoring the risks posed by expansion into nontraditional credit union activities such as business lending, and monitoring the risks posed to the federal deposit (share) insurance fund by institutions for which states are the primary regulator. Moreover, unlike other depository institution regulators, NCUA currently lacks authority to inspect third-party vendors, which credit unions increasingly rely on to provide services such as electronic banking. Further, credit unions are not subject to the internal control reporting requirements that banks and thrifts are subject to under FDICIA. NCUA adopted prompt corrective action, a system of supervisory actions tied to the capital levels of an institution, in August 2000, as required by CUMAA; few actions have been taken to date due to a generally favorable economic climate for credit unions. The credit union industry has undergone a variety of changes that prompted NCUA to revise its approach to examining and supervising credit unions. As described earlier, the credit union industry is consolidating, and more industry assets are concentrated in larger credit unions, those with assets in excess of $100 million. For example, in December 1992, credit unions with over $100 million in assets held 52 percent of total industry assets, but by December 2002, they held 75 percent of total industry assets. Furthermore, credit unions are providing more complex electronic services such as Internet account access and on-line loan applications to meet the demands of their members. Thirty-five percent of the industry offered financial services through the Internet as of December 2002; however, the rate increased to over 90 percent for larger credit unions. In addition, the composition of credit union assets has changed over time, with credit unions engaging in more real estate loans (see fig. 11). For example, the number of first mortgage loans about doubled from 589,000 loans as of December 1992 to 1.2 million loans as of December 2002. During this same period, the amount of first mortgage loans more than tripled from $29 billion to $101 billion. From 1992 to 2002, the percentage of real estate loans to total assets grew from 19 percent to 26 percent, a greater rate of growth than that of consumer loans over the same time period. The longer- term real estate loans introduced a greater level of interest rate risk than that introduced through the shorter-term consumer loans credit unions traditionally made. As a result of these changes, NCUA found that its old approach of reviewing the entire operation of credit unions and conducting extensive transaction testing no longer sufficed, particularly for larger credit unions, because of the number of transactions in which they engaged and the variety of products and services they tended to provide. In contrast, under the risk-focused approach, NCUA examiners are expected to identify those activities that pose the highest risk to a credit union and to concentrate their efforts on those activities. For example, as credit unions engage in more complex electronic services, examiners are to focus their efforts on reviewing information systems and technology to ensure that credit unions have sufficient controls in place to manage operations risk.In addition, as credit unions engage in more real estate lending, examiners are to focus on ensuring that these credit unions have sophisticated asset-liability management models in place to properly manage interest rate risk. When transaction testing is used under the risk-focused approach, it is used to validate the effectiveness of internal control and other risk-management systems. Further, the risk-focused approach places more emphasis on preplanning and off-site monitoring of credit union activities, which helps ensure that once examiners arrive on site, they already will have identified those areas of the greatest risk in a credit union and where to focus their resources. To compliment the risk-focused approach and allow NCUA to better allocate its resources, the agency adopted a risk-based examination program in July 2001. This program eliminates the requirement to perform annual examinations on low-risk credit unions, replacing annual exams with two examinations in a 3-year period. NCUA consulted with its Office of Corporate Credit Unions to inquire about their experiences with their risk-focused program that was implemented in 1998. As a result of this consultation, NCUA incorporated a greater level of examiner judgment in its risk-focused approach, specifically allowing examiners to determine the appropriate level of on- site versus off-site supervision. For example, if an examiner discovered a problem during off-site monitoring of a credit union, the examiner might adjust the schedule of the on-site examination to directly address the problem. In addition, in recognition that examiners would be required to assess the future risks that credit unions might be undertaking, NCUA, after consulting with its Office of Corporate Credit Unions, required that examiners review information beyond the financial statements. For example, under the risk-focused program, examiners might analyze due diligence reviews by management for new and existing products and services, internal controls, and measurements of actual performance against forecasted results, to determine what future risks a particular credit union might be undertaking. NCUA’s consultations with FDIC and its review of two FDIC Inspector General reports prompted NCUA to develop programs to address challenges that FDIC experienced in implementing its risk-focused program. For example, according to NCUA, FDIC did not conduct much training for its examiners prior to implementing its risk-focused program. NCUA, on the other hand, held training for all examiners, including state examiners, and once the risk-focused program was implemented, NCUA also provided additional training to help examiners assess risks more effectively. NCUA’s review of the FDIC Inspector General reports found that some FDIC examiners resisted the move to the risk-focused program. NCUA’s response was to develop a quality control program to ensure that examiners and supervisors were adopting the risk-focused approach and that documentation was completed consistently across NCUA’s regions. Under the quality control program, NCUA officials reviewed a sample of examinations from each region for scope, conciseness of reports, appropriateness of completed work papers and application of risk-focused concepts. NCUA’s development of the quality control program was timely and appropriate, because we found some NCUA examiners and state supervisors were reluctant to move to the risk-focused program. The examiners and supervisors were concerned that they would be blamed if a credit union later had a problem in an area they had not initially identified as high-risk. NCUA’s consultations with the Office of the Comptroller of the Currency (OCC) enabled NCUA to consider a different approach to improve its oversight of large credit unions under the risk-focused program. OCC had implemented a large bank program in recognition of the need for an alternative approach to oversight of large and sophisticated banks. NCUA likewise found the need for an alternative approach to oversight of large credit unions because its examiners traditionally examined a large number of small credit unions and very few larger ones and, thus, had been unable to gain sufficient comfort and expertise in examining the larger, more complex institutions. As a result of consultations with OCC, NCUA implemented its Large Credit Union Pilot Program in January 2003 to, among other things, develop a core of examiners with experience overseeing these larger credit unions. Under this program, NCUA has also experimented with different examination approaches, including targeted examinations, which focus on certain aspects of credit union operations such as the loans, investments, or asset-liability management. NCUA officials told us that they received some preliminary feedback from credit unions that found the pilot to be beneficial. However, because the pilot ended recently, NCUA officials stressed that it was too early to tell how effective this program will be in helping NCUA improve its examinations of large credit unions. In recognition that the risk-focused program was a significant departure from NCUA’s old approach to examination and supervision, NCUA also sought feedback from the industry on the risk-focused program by developing a survey for credit unions to complete once they had gone through their first risk-focused examination. NCUA reported that it had received preliminary results from the survey that indicated that the risk- focused program has been well received. Specifically, NCUA received the highest marks for examiners’ courteous and professional conduct, effective overall examination process, and effective communication with management and officials throughout the examination. Officials from some of the large credit unions we interviewed were pleased with the program because they felt that the examination was focused on the high-risk areas that credit union officials needed to monitor. Likewise, examiners with whom we spoke told us that adopting a risk-focused approach had made a bigger difference in their oversight activities at the larger credit unions because they could focus their resources on the high-risk areas of these institutions. In contrast, the examiners relied on the old approach of extensive transaction testing at the smaller credit unions that lacked sufficient resources to implement robust internal control structures and tended to limit their activities to the basic or traditional services offered by credit unions. NCUA faces a number of challenges in implementing its risk-focused approach that create additional opportunities for it to leverage the experiences of the other regulators that have been using risk-focused programs for several years. These challenges include ensuring that examiners have sufficient training to keep pace with changes in industry technologies and methods, adequately preparing for monitoring credit unions as they expand more heavily into nontraditional credit union activities such as business lending, and overseeing state-chartered institutions in states that lack sufficient examiner resources and expertise. According to NCUA examiners who had recently implemented the risk- focused program, NCUA faces challenges in training its examiners in specialized areas such as information systems and technology. Likewise, as we found in prior reviews, other depository institution regulators also faced these challenges in implementing risk-focused programs. Some NCUA examiners with whom we spoke indicated that NCUA’s formal and on-the-job training of subject matter examiners, particularly in the areas of information systems and technology, payment systems, and specialized lending, was insufficient and did not help them keep pace with the changing technology in the industry. As a result, some examiners were not confident that they could assess the adequacy of information systems that were vital to the operations of some credit unions. NCUA officials sought to address concerns about specialist training by modifying their training manual to more clearly state what classes were appropriate for the different specialized areas. Further, as a member of the Federal Financial Institutions Examination Council (FFIEC), NCUA was aware of specialized training offered by other depository institution regulators under the auspices of FFIEC, and encouraged NCUA examiners to take advantage of this training.However, NCUA had not specifically consulted with other depository institution regulators on how these regulators addressed the challenge of training their specialists as banks and thrifts had become more complex over time. NCUA’s revised regulation on member business loans also presents NCUA with the challenge of ensuring that it is adequately prepared to monitor this growing area of lending. A recent NCUA final rule on member business loans relaxed certain requirements (allowing well-capitalized, federally insured credit unions to offer unsecured business loans) and introduced a new risk area for NCUA to monitor.(Appendix VII provides a detailed description of changes to this and other NCUA rules and regulations since 1992.) While member business loans are still a relatively small percentage of credit union loans (2 percent) and there are statutory limits placed on these loans, NCUA’s recently revised rules could result in credit unions making more of these loans.The Department of the Treasury has raised concerns that allowing credit unions to engage in unsecured member business loans would increase risks to safety and soundness. Since member business loans constitute only a small percentage of credit union lending, most NCUA examiners will not have significant experience looking at this type of lending activity. In contrast, banks and thrifts offer these loans to a much greater extent than credit unions and their regulators do have experience in this area. Due to variability in levels of state oversight and resources, NCUA may face challenges in implementing the risk-focused program at the state level. Lack of examiner resources and expertise in some states, high state examiner turnover, and weakness of enforcement by some state regulators may affect oversight of federally insured, state-chartered credit unions, according to NCUA officials. While state officials with whom we met had adopted NCUA’s risk-focused program and indicated they were generally pleased with NCUA’s support, some of these officials indicated that they faced challenges related to oversight of their credit unions. For example, they indicated that budget problems had made it difficult to hire additional staff. In addition, some state officials indicated that they could not compete on pay with the industry, which led to high examiner turnover. A state official from a large state indicated that the increase in credit unions converting from federal to state charters had stretched her examiner resources. The challenges faced by states are of particular concern given that state supervisors have primary responsibility for examining federally insured, state-chartered credit unions, which as of December 31, 2002, held 46 percent of industry assets. Inadequate oversight of these state-chartered institutions could have a negative impact on the financial condition of NCUSIF. The FDIC and Federal Reserve share oversight responsibility with state supervisors for state-chartered banks, and these regulators also face challenges similar to those faced by NCUA with regard to variability in state oversight. In commenting on how it addressed some of the issues facing states, NCUA officials told us that in cases where states lacked examiner resources or expertise, NCUA provided its own staff to ensure that federally insured, state-chartered credit unions were adequately examined. In addition, NCUA conducted joint examinations with state supervisors on selected federally insured, state-chartered credit unions to assess the risk they posed to NCUSIF. Some state officials with whom we met raised concerns over joint examinations, claiming that NCUA examiners tried to impose federal regulations on these state-chartered credit unions. These state officials also expressed concern over NCUA’s process for developing its overhead transfer rate, which they claimed was not transparent. We discuss the overhead transfer rate more fully later in this report. As we reported in July 1999, NCUA does not have the third-party oversight authority provided to other federal banking regulators, and the lack of such authority could limit NCUA’s effectiveness in ensuring the safety and soundness of credit unions.Credit unions are increasingly relying on third-party vendors to support technology-related functions such as Internet banking, transaction processing, and funds transfers. While these third-party arrangements can help credit unions manage costs, provide expertise, and improve services to members, they also present risks such as threats to security of systems, availability and integrity of systems, and confidentiality of information. With greater reliance on third-party vendors, credit unions subject themselves to operational and reputation risks if they do not manage these vendors appropriately. Although NCUA received authority to examine third-party vendors as part of the year 2000 readiness effort, this authority was temporary and expired on December 31, 2001. While NCUA has issued guidance regarding due diligence that credit unions should be applying to third-party vendors, NCUA must ask for permission to examine third-party vendors. Without vendor examination authority, NCUA has no enforcement powers to ensure full and accurate disclosure. For instance, in one case NCUA was denied access by a third-party vendor that provides record-keeping services for 99 federally insured credit unions with $1.4 billion in assets. NCUA notified the credit unions to heighten their due diligence to ensure that appropriate controls were in place at the third- party vendor. In another case, NCUA was given access to a third-party vendor, but the vendor withheld financial statements from NCUA examiners. The third-party vendor served 113 credit unions representing almost $750 million in assets. Credit unions with assets over $500 million are required to obtain an annual independent audit of financial statements by an independent certified public accountant, but unlike banks and thrifts, these credit unions are not required to report on the effectiveness of their internal controls for financial reporting. Under FDICIA and its implementing regulations, banks and thrifts with assets over $500 million are required to prepare an annual management report that contains a statement of management’s responsibility for preparing the institution’s annual financial statements, for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and for complying with designated laws and regulations relating to safety and soundness; and management’s assessment of the effectiveness of the institution’s internal control structure and procedures for financial reporting as of the end of the fiscal year and the institution’s compliance with the designated safety and soundness laws and regulations during the fiscal year. Additionally, the institution’s independent accountants are required to attest to management’s assertions concerning the effectiveness of the institution’s internal control structure and procedures for financial reporting. The institution’s management report and the accountant’s attestation report must be filed with the institution’s primary federal regulator and any appropriate state depository institution supervisor and must be available for public inspection. These reports allow depository institution regulators to gain increased assurance about the reliability of financial reporting. Banks reporting requirements under FDICIA are similar to the reporting requirement included in the Sarbanes-Oxley Act of 2002. Under Sarbanes- Oxley, public companies are required to establish and maintain adequate internal control structures and procedures for financial reporting and the company’s auditor is required to attest to, and report on, the assessment made by company management on the effectiveness of internal controls. As a result of FDICIA and Sarbanes-Oxley, reports on management’s assessment of the effectiveness of internal controls over financial reporting and the independent auditor’s attestation on management’s assessment have become normal business practice for financial institutions and many companies. Extension of the internal control reporting requirement to credit unions with assets over $500 million could provide NCUA with an additional tool to assess the reliability of internal controls over financial reporting. In August 2000, NCUA initially implemented PCA for credit unions. CUMAA mandated that NCUA implement a PCA program in order to minimize losses to NCUSIF. Under the program, credit unions and NCUA are to take certain actions based on a credit union’s net worth. Other depository institution regulators were required to implement PCA in December 1992. PCA was intended to be an additional tool in NCUA’s arsenal and did not preclude NCUA from taking administrative actions, such as cease and desist orders, civil money penalties, conservatorship, or liquidation of credit unions. CUMAA requires credit unions to take up to four mandatory supervisory actions—an earnings transfer, submission of an acceptable net worth restoration plan, a restriction on asset growth, and a restriction on member business lending—depending on their net worth ratios.Credit unions that are adequately capitalized (net worth ratio from 6.0 to 6.99 percent) are required to take an earnings transfer. Credit unions that are undercapitalized (net worth ratio from 4.0 to 5.99 percent), significantly undercapitalized (net worth ratio from 2.0 to 3.99 percent), or critically undercapitalized (net worth ratio of less than 2 percent) are required to take all four mandatory supervisory actions. CUMAA also required NCUA to develop discretionary supervisory actions, such as dismissing officers or directors of an undercapitalized credit union, to complement the prescribed actions under the PCA program. CUMAA also authorized NCUA to implement an alternative system for new credit unions in recognition that these credit unions typically start off with zero net worth and gradually build their net worth through retained earnings.Appendix IX provides more detail on NCUA’s implementation of PCA. To date, NCUA has taken few actions against credit unions under the PCA program due to a generally favorable economic climate for credit unions. As of December 31, 2002, NCUA took mandatory supervisory actions against 2.8 percent (276 of 9,688) of federally insured credit unions. Of these credit unions, the vast majority—92 percent or 253—had under $50 million in assets. Further, 41 percent (113 of 276) of these credit unions were required to develop net worth restoration plans. However, it is too early to tell how effective these plans will be in improving the condition of the credit unions or minimizing losses to NCUSIF. Credit unions were similar to banks and thrifts with respect to PCA capital categorization with 97.6 percent of credit unions considered well- capitalized compared to 98.5 percent of banks and thrifts (see table 2). However, a slightly higher percentage of credit unions were undercapitalized, significantly undercapitalized, and critically undercapitalized than banks and thrifts. Some NCUA, state, and industry officials claimed that PCA was beneficial because it provided standard criteria for taking supervisory actions and was a good way to restrain rapid growth of assets relative to capital. However, many state officials expressed concern over PCA due to the limited ability of credit unions to increase their net worth quickly, because they can only do so through retained earnings. They indicated that if a credit union were subject to PCA, it would be difficult for that credit union, particularly a smaller one, to increase capital and graduate out of PCA. In contrast, other financial institutions are able to raise capital more quickly through the sale of stock. Some of these state officials raised the issue of whether credit unions should likewise have a means to raise capital quickly by allowing credit unions to use secondary capital toward their capital requirement under PCA.Texas allowed its state-chartered credit unions to raise secondary capital even though the secondary capital could not count towards PCA. According to the Texas credit union regulator, no credit unions had taken advantage of the state’s secondary capital provision. Currently there is a debate in the industry on whether secondary capital is appropriate for credit unions. While some in the industry favor secondary capital as a way to help credit union avoid actions under PCA, others have raised the concern that allowing credit unions to raise secondary capital (for example, in the form of nonmember deposits) could change the structure and character of credit unions by changing the mutual ownership. As of September 2003, NCUA had not taken a position on secondary capital. Another concern raised by NCUA officials is in regard to the most appropriate measure of the net worth ratio for PCA purposes. NCUA officials have suggested using risk-based assets, rather than total assets, to calculate the net worth ratio of credit unions because they believe risk- based assets more clearly reflect the risks inherent in credit unions’ portfolios. NCUA officials recognize that, similar to banks, a minimum net worth ratio based on total assets (tangible equity for banks and thrifts) would still be needed for those institutions that are critically undercapitalized. For most credit unions, risk-based assets are less than total assets; therefore, a given amount of capital would have a higher net worth ratio if risk-based assets were used. While there may be some merit in using risk-based assets, credit unions have been subject to PCA programs for a short time, and the advantages and disadvantages of the current programs are not yet evident. Finally, some NCUA officials raised the concern that PCA has led to more liquidations of problem credit unions. In the past, NCUA sought merger partners for problem credit unions. However, NCUA officials told us that it was more difficult to find merger partners because stronger credit unions were concerned that their net worth ratio would be lowered by merging with problem credit unions, thereby putting them closer to the 7.0 percent net worth ratio that triggers PCA. As a result, the cost of mergers has increased under PCA because NCUA would have to provide greater incentives to a potential partner, and that has forced the agency to liquidate credit unions to a greater extent than prior to PCA. While the initial costs of liquidations appear to be high, the purpose of PCA is to reduce the likelihood of regulatory forbearance and protect the federal deposit (share) insurance funds through early resolution of problem institutions; thus, in the long run, the overall costs to NCUSIF should be less because of PCA. NCUSIF appears to be in satisfactory financial condition. For most of the past 10 years, NCUSIF’s financial condition has been stable as indicated by the fund’s equity ratio, earnings, and net income. However, while remaining positive as of December 31, 2002, NCUSIF’s net income declined in 2001 and 2002. Among the factors contributing to the decline was a drop in investment revenues, a sharp increase in the overhead transfer rate, which is the amount paid to NCUA’s Operating Fund for administrative expenses, and an increase in losses to the insurance fund. Moreover, NCUA’s methods for pricing NCUSIF insurance and for estimating losses to the fund did not consider important factors such as current credit union risk. NCUA’s flat- rate insurance pricing does not allow for the fact that some credit unions are at greater risk of failure than others, and the historical analysis NCUA uses for determining estimated losses does not reflect current economic conditions or consider the loss exposure of credit unions with varying risk. As a result of the current weaknesses in the methodologies used by NCUA, information reported on the financial condition of the fund may not accurately reflect the current risks to the fund. Indicators of the financial condition and performance of NCUSIF have generally been stable over the past decade. NCUSIF’s fund equity ratio—a measure of the fund’s equity available to cover losses on insured deposits— was within statutory requirements at December 31, 2002, as it has been over the past decade. CUMAA defines the “normal operating level” for the fund’s equity ratio as a range from 1.20 percent to 1.50 percent. CUMAA has designated the NCUA board to evaluate and set the specific operating level for the fund equity ratio. In setting the level, the board considers current industry and fund conditions, as well as the future economic outlook. For 2002, NCUA’s board set the specific operating level at 1.30 percent. If the equity ratio exceeds the board’s determined operating level, CUMAA requires NCUA to distribute to contributing credit unions an amount sufficient to reduce the equity ratio to the operating level. Also, should the equity ratio fall below the minimum rate of 1.20 percent, under CUMAA, NCUA’s board must assess a premium until the equity ratio is restored to and can be maintained at 1.20 percent. (See appendix X for a more detailed discussion of the funding process and accounting for NCUSIF.) Between 1991 and 2002, the equity ratio has fluctuated between 1.23 percent and 1.30 percent, a rate that has remained in line with legal requirements (see fig. 12). As of December 31, 2002, the ratio of fund equity to insured shares for NCUSIF as reported by NCUA was 1.27 percent. NCUSIF’s ratio can be usefully compared with the only other share or deposit insurance funds in the United States currently—FDIC’s Bank Insurance Fund (BIF), which insures banks, and its Savings Association Insurance Fund (SAIF), which insures thrifts; and ASI, which insures state- chartered credit unions that are not federally insured. The NCUSIF ratio was comparable with the other share and deposit insurance funds as of December 31, 2002 (see fig. 13). NCUSIF’s earnings—principally derived from its investment portfolio, which has increased significantly since 1991—have been sufficient to cover operating expenses and losses from insured credit union failures; make additions to its equity with the net income that is retained by the maintain its equity in accordance with legal requirements; maintain its allowance for anticipated losses on insured deposits; avoid assessing premiums, except for 1991 and 1992; and make, in some years, distributions to insured credit unions. NCUSIF’s net income has remained positive through 2002 and had generally been increasing since 1993, until significant declines occurred in 2001 and 2002 (see fig. 14). The declines were due to a combination of decreased yields from the investment portfolio, an increase in the overhead transfer rate, and larger insurance losses on failed credit unions. The investment portfolio of NCUSIF consists entirely of U.S. Treasury securities. Yields on these securities have declined—for example, from 6.07 percent in 2000 to 5.10 percent in 2001 and to 3.18 percent in 2002 on its 1- to 5-year maturities—following similar general declines in market yields for Treasury securities. Of the $40.2 million net income decline between 2000 and 2001, $22.2 million of the decline was attributable to increases in the overhead transfer rate, and $15.3 million was attributable to declines in investment income. Of the $47.5 million decline in net income between 2001 and 2002, $39.6 million was attributable to declines in investment income, while $12.5 million was attributable to provision for insurance losses. At the same time, operating expenses decreased by $5.1 million. For 2003, interest rates have continued to decline, which will likely continue to negatively affect investment earnings. The sharp increase in the overhead transfer rate and its negative impact on NCUSIF’s net income have raised questions about NCUA’s process for determining the transfer rate. The Federal Credit Union Act of 1934 created the Operating Fund for the purpose of providing administration and service to the credit union system—for example, the supervision and regulation of the federally chartered credit unions. NCUA’s Operating Fund is financed through assessment of annual fees to federally chartered credit unions as well as the overhead transfer from NCUSIF (see fig. 15). Federally chartered credit unions are assessed an annual fee by the Operating Fund based on the credit union’s asset size as of the prior December 31. The fee is designed to cover the costs of providing administration and service, as well as regulatory examinations to the Federal Credit Union System. NCUA’s board reviews the fee structure annually. The overhead transfer from NCUSIF for administrative services provides a substantial portion of funding for the Operating Fund. The annual rate for the overhead transfer is set by NCUA’s board based on periodic surveys of NCUA staff time spent on insurance-related activities compared with noninsurance-related, or regulatory, activities. An amount of overhead or administrative expense is transferred to NCUSIF in proportion to staff time spent on insurance-related activities. The overhead transfer is intended to account for NCUA staff being responsible for both insurance and supervisory-related activities. Between 1986 and 2000, the transfer rate was 50 percent, which, according to NCUA management, was based on surveys that indicated staff time was equally split between insurance and regulatory activities. For example, 50 percent of the Operating Fund’s $127.6 million, or $63.8 million, in expenses for 2000 were allocated to and paid by NCUSIF. For 2001, NCUA’s Board of Directors increased the overhead transfer rate to 67 percent on the basis that Operating Fund staff had increased their insurance-related activities. This resulted in a $24.7 million increase (almost 40 percent) from 2000 in the amount being allocated to NCUSIF. For 2002 and 2003, the NCUA board lowered the 67-percent overhead transfer rate to 62 percent by adjusting downward its allocation of what it considered “nonproductive” time factors such as employee administrative and education time used in the 2001 survey because it was reflective of regulatory rather than insurance-related activities. In September 2001, NCUA management engaged its financial audit firm, Deloitte & Touche, to review the basis on which the transfer rate was determined. The auditor’s report contained several recommendations that indicated that NCUA’s 2001 survey of staff time spent on insurance-related functions—the primary basis on which NCUA allocates administrative expenses—may not have resulted in an accurate allocation. The lack of a clear separation of the insurance and supervisory functions had also been the focus of a recommendation in our 1991 report (still unimplemented) that NCUA should establish separate supervision and insurance offices.The 2001 recommendations from NCUA’s financial audit firm included improvements in communication with staff on the survey process and results, frequency and timing of the survey, methods of survey distribution, and updated documentation of survey definitions and purpose. The auditors also noted that individuals were allocating time after the fact, when recollection may have been faulty, rather than tracking their time concurrently as would be possible if provided the survey and guidelines prior to an assignment. Additionally, the auditors reported that, to provide reliable results, the survey should cover a greater period of time. The limited period used could significantly skew the resulting proportion of activities devoted to insurance versus regulatory activities. The auditor’s recommendations indicated that the survey’s lack of consistency and reliability may have resulted in a misallocation of overhead expenses between the operating and insurance funds. Any misallocation would affect NCUSIF’s financial condition because any increase in the overhead transfer rate results in a decrease of NCUSIF’s net income. Misallocations also can significantly affect the financial results of the Operating Fund. In addition to the auditor’s findings, some federally insured, state-chartered credit unions and trade groups have expressed concerns about NCUA’s calculation of its overhead transfer rate. Primarily, they say that NCUA has not clearly defined insurance and regulatory functions, and its methodology for determining the overhead transfer rate is not transparent or understandable to participating credit unions. According to NCUA’s management, NCUA has begun implementing Deloitte & Touche’s recommendations. For example, selected field examiners are now completing surveys in a timely manner for periods covering a full year. However, headquarters staff are not required to complete the surveys as management asserts the split of their time mirrors that of field examiners. In addition, the transfer rate is calculated and approved by management every few years. However conditions can change that may result in the transfer rate not representing the current condition. Changing workloads and conditions can also cause a significant change in future rates. The Federal Credit Union Act requires all federally insured credit unions to allocate 1 percent of their insured shares to NCUSIF. This flat rate does not take into consideration variations in risk posed by individual credit unions. Although FDIC had implemented a version of risk-based pricing in 1993, FDIC has continued to study options for improving deposit insurance funding. FDIC’s suggestions for improvement were issued in a 2001 report that noted the cost of insurance, regardless of type (property, casualty, or life), in the private sector is priced based upon the risk assumed by the insurer. Premiums and loss experience are generally actuarially determined, such that increased risk equates to increased cost. Since passage of FDICIA in 1991, deposit insurance for banks and thrifts are adjusted for some risk, and since December 31, 2000, private-sector insurance for credit union shares has been adjusted for risk. (See appendix X for additional information on accounting for insurance.) While BIF and SAIF are adjusted for some risk, FDIC has made additional proposals for enhancing the risk-based nature of its insurance pricing. For instance, the current BIF and SAIF funding does not require a fast-growing institution to pay premiums if it is well capitalized and CAMEL-rated 1 or 2. As a result, FDIC has proposed that the pricing structure for BIF and SAIF be amended so that fast-growing institutions would be required to pay premiums. NCUSIF is the only share or deposit insurer that has not adopted a risk- based insurance structure. Therefore, some credit unions could be overpaying while others could be underpaying if their current rates were compared to their risk profiles—with the cost of insurance not being equitable based on the level of risk posed to NCUSIF by individual credit unions. In contrast, FDIC’s BIF and SAIF and ASI currently operate on a risk-based capitalization structure. Depository institutions insured by BIF and SAIF pay a premium twice a year based upon their capital levels and supervisory ratings, with institutions with the lowest capital levels and worst supervisory ratings paying higher premiums. ASI’s insurance fund requires its insured credit unions to maintain deposits between 1.0 and 1.3 percent of their insured shares. The amount for each credit union is determined based upon its supervisory rating, with lower-rated credit unions maintaining higher deposits. The risk-based structure has certain advantages. First, by varying pricing according to risk, more of the burden is distributed to those members that put an insurance fund at greater risk of loss. Second, risk-based pricing provides an incentive for member owners and managers of credit unions to control their risk. Finally, risk-based pricing helps regulators focus on higher-risk credit unions by enabling them to allocate their insurance activities in proportion to the price charged. During our review, members of NCUA’s management told us that they believe that risk-based pricing would adversely affect small credit unions and suggested that an option would be to add risk-based pricing only for credit unions over a certain size. By not having risk-based insurance structure, NCUSIF puts a disproportionate share of the pricing burden on less-risky credit unions and does not provide an incentive through pricing for owners and managers to control their risk. NCUA’s process for determining estimated losses from insured credit unions—the largest potential liability of the fund—does not reflect current economic conditions and loss exposures of credit unions with varying risk. The estimated liability balance is established to cover probable and estimable losses as a result of federally insured credit union failures. The estimated liability balance is reduced when the insurance claims are actually paid. NCUSIF’s estimated liability for losses was $48 million at December 31, 2002. In 2002, NCUA’s management analyzed historical loss trends over varying periods of time in order to assess whether the estimated liability for losses was adequate. It analyzed historical rates of insurance payouts for the past 3-year, 5-year, 10-year, and 15-year averages. The 15-year analysis encompassed an economic period of dramatic losses, which management contends may be cyclical and indicative of future exposure, although not necessarily indicative of current economic conditions. As a result of this analysis, in July 2002, management began building the estimated losses account balance by $1.5 million a month to $60 million (from $48 million at December 31, 2002), the amount the analysis determined would be needed to cover identified and anticipated losses. NCUA’s estimation method does not identify specific historical failure rates and related loss rates for the group of credit unions that had been identified as troubled, but instead specifically calculates expected losses for each problem credit union, if it is determined that a particular credit union is likely to fail. This methodology essentially assigns a probability of failure of either zero or 100 percent to each individual credit union considered to be troubled. By not considering specific historical failure rates and loss rates in its methodology, NCUA is using an over-simplified estimation method. As a result, NCUA may not be achieving the best estimate of probable losses. Therefore, NCUA may be over or underestimating its probable losses because it does not apply more targeted and specific loss rates to currently identified problem institutions, but instead, makes a determination that essentially selects from two probabilities: zero or 100-percent probability of failure. From 2000 to 2002, the amount of insured shares in problem credit unions doubled, going from $1.5 billion insured shares in 2000 to nearly $3 billion insured shares in 2002. The increase in insured shares of problem credit unions may be an indicator of larger future losses to the fund, since problem credit unions are more likely to fail. In addition, recent increases the share payouts show that the insurance fund is suffering from increasing losses that totaled $40 million in 2002. At the same time, the estimated loss reserve, which is intended to cover actual losses, has been declining since 1994. As a result the cushion between payouts for insurance losses and the reserve balance became increasingly smaller between 2001 and 2002 (see fig. 16). Given the recent trends, it is especially important to utilize specific data on failure rates for troubled institutions. In contrast to NCUA’s method, FDIC’s method records estimated bank and thrift insurance losses based on a detailed analysis of institutions in five risk-based groups. The first group consists of institutions classified as having a 100-percent expected failure rate. This determination is based on the scheduled closing date for the institution, the classification of the institution as “critically undercapitalized,” or identification of the institution as an imminent failure. The remaining four risk groups are based on federal and state supervisory ratings and the institutions’ projected capitalization levels. Every quarter, FDIC meets with representatives from other federal financial regulatory agencies to discuss these groupings and ensure that each institution is appropriately grouped based on the most recent supervisory information. Also on a quarterly basis, FDIC’s Financial Risk Committee (FRC), an interdivisional committee, meets to discuss and determine the appropriate projected failure rates to be applied to each of the four remaining risk-based groups. The projected failure rate for each risk-based group is multiplied by the assets of each institution in that group, which results in expected failed assets. Expected failed assets are then multiplied by an expected loss experience rate, the product of which results in the loss estimate for anticipated failures. The projected failure rates for the remaining four risk-based groups are based on historical failure rates for those categories. However, FRC has the responsibility for determining if the historical failure rates for each group are appropriate given the current and expected condition of the industry and may adjust failure rates, if necessary. The expected loss experience rates have been based on asset size and reflect FDIC’s historical loss experience for banks of different sizes. FRC may also use loss rates based on institution-specific supervisory information rather than the historical rates. This process, as implemented by FDIC, results in a more targeted estimation process that specifically captures current changes in the risk profile of insured institutions. The amount of insured shares and the number of privately insured credit unions and providers of private primary share insurance have declined significantly since 1990. Specifically, 1,462 credit unions purchased private share insurance in 1990 compared with 212 credit unions as of December 2002. During the same period, the total amount of privately insured shares decreased by 42 percent ($18.6 billion to about $10.8 billion). Although the use of private share insurance has declined, some circumstances of the remaining private insurer, ASI, raise concerns. First, ASI’s risks are concentrated in a few large credit unions and in certain states. Second, ASI has a limited ability to absorb catastrophic losses because it does not have the backing of any governmental entity and its lines of credit are limited in the aggregate as to the amount and available collateral. To mitigate its risks, ASI has implemented a number of risk-management strategies, such as increased monitoring of its largest credit unions. State oversight mechanisms of the remaining private share insurer and privately insured credit unions also provide some additional assurance that ASI and the credit unions it insures operate in a safe and sound manner. One additional concern, as we recently reported, is that many privately insured credit unions failed to make required disclosures about not being federally insured and, therefore, the members of these credit unions may not have been adequately informed that their deposits lacked federal deposit insurance. Compared with federally insured credit unions, relatively few credit unions are privately insured. As of December 2002, 212 credit unions—about 2 percent of all credit unions—chose to purchase private primary share insurance. These privately insured credit unions were located in eight states and had about 1.1 million members with shares totaling about $10.8 billion, as of December 2002—a little over 1 percent of all credit union members and 2 percent of all credit union shares. In contrast, as of December 2002, there were 9,688 federally insured credit unions with about 81 million members and shares totaling $483 billion. Through a survey of 50 state regulators and related follow-on discussions with the regulators, we identified nine additional states that could permit credit unions to purchase private share insurance.Figure 17 illustrates the states that permit or could permit private share insurance as of March 2003 and the number of privately insured credit unions as of December 2002. The number of privately insured credit unions and private share insurers has declined significantly since 1990. In 1990, 1,462 credit unions in 23 states purchased private share insurance from 10 different nonfederal, private insurers, with shares at these credit unions totaling $18.6 billion. Between 1990 and 2002, the amount of privately insured shares decreased 42 percent to about $10.8 billion. Shortly after the failure of Rhode Island Share and Depositors Indemnity Corporation (RISDIC), a private share insurer in Rhode Island in 1991, almost half of all privately insured credit unions converted to federal share insurance voluntarily or by state mandate.As a result of the conversions from private to federal share insurance, most private share insurers have gone out of business due to the loss of their membership since 1990; only one company, ASI, currently offers private primary share insurance. In states that currently permit private share insurance, a comparable number of credit unions have converted from federal to private share insurance and from private to federal share insurance since 1990—31 and 26, respectively. Most of the conversions from federal to private share insurance (26 of 31) occurred since 1997. According to management at many privately insured credit unions, they converted to private share insurance to obtain higher coverage and avoid federal rules and regulation. Additionally, management at these credit unions noted that they were satisfied with the service they received from the private share insurer and all but one planned to remain privately insured. According to NCUA—in states that currently permit private share insurance—since 1990, 26 credit unions converted from private to federal share insurance; the majority did so in the early 1990s, following the RISDIC failure and widespread concern over the safety and soundness of private share insurance.Most of the 26 credit unions planned to continue to purchase federal share insurance either because they were reasonably satisfied or because they viewed having their share insurance backed by the federal government as a benefit. Although the use of private share insurance has declined, we found two aspects of the remaining private insurer that raise potential safety and soundness concerns. First, ASI faces a concentration of risk in a few large credit unions and certain states. Second, ASI has limited borrowing capacity and could find it difficult to cover catastrophic losses under extreme economic conditions because it does not have the backing of any governmental agency, its lines of credit are limited in the aggregate as to the amount and available collateral, and it has no reinsurance for its primary share insurance. To help mitigate these risks, ASI has taken steps to increase its monitoring of its largest credit unions and is using other strategies to limit its risks. In addition, as a regulated entity, state regulation of ASI and the credit unions it insures provides some additional assurance that ASI and the credit unions operate in a safe and sound manner. ASI is chartered in Ohio statute as a credit union share guaranty corporation. As specified in Ohio statute, the purpose of such a corporation includes guaranteeing payment of all or a part of a participating credit union share account. Although ASI is commonly referred to as a provider of insurance, it is not subject to all of Ohio’s insurance laws. For example, ASI is not subject to Ohio’s insurance law that limits the risk exposure of an insurance company. Specifically, while Ohio insurance companies are subject to a “maximum single risk” requirement—“no insured institution’s coverage should comprise more than 20 percent of the admitted assets, or three times the average risk or 1 percent of insured shares, whichever is greater”—Ohio has not imposed this requirement on ASI. Although ASI is not subject to this requirement, we found that ASI exceeded this concentration limit. For example, one credit union made up about 25 percent of ASI’s total insured shares, as of December 2002. In contrast, the largest federally insured credit union accounted for only 3 percent of NCUSIF’s total insured shares. Other concentration risks exist; for example, we found that 45 percent of ASI’s total insured shares were located in one state (California). Further, all of ASI’s insured credit unions were located in only eight states, with almost half being located in one state (Ohio), which represents 14 percent of all ASI-insured shares. In contrast, 14.3 percent of federally insured credit union shares were located in one state (California). The credit unions that NCUSIF insures are located in 50 states and the District of Columbia, with the largest percentage (8 percent) of credit unions located in one state (Pennsylvania), which represents about 4 percent of NCUSIF’s insured shares. While we remain concerned about ASI’s concentration of risks, ASI employs a number of risk-management strategies—intended to mitigate its risk exposure in individual institutions—including being selective about which credit unions it insures, conducting regular on- and off-site monitoring of all its insured institutions, implementing a partially adjusted, risk-based insurance pricing policy, and establishing a 30-day termination policy. More specifically, ASI employs the following risk-management strategies: To qualify for primary share insurance with ASI, a credit union must meet ASI’s insurance eligibility criteria, which include an analysis of the financial performance of the credit union over a 3-year period and an evaluation of the institution’s operating policies. For example, to qualify for ASI coverage, a credit union’s fixed assets must be limited to 5 percent of the institution’s total assets or the amount permitted by its supervisory authority, whichever is greater, and credit unions must maintain a minimum net capital-to-asset ratio of 4 percent of total assets. In contrast, federal PCA requirements compel federally insured credit unions to maintain a minimum capital to assets ratio of 7 percent of total assets. The credit union also must submit its investment, asset- liability management, and loan policies for ASI’s review. In addition, ASI obtains and reviews the most recent reports from the credit union’s regulator and certified public accountant (CPA) or supervisory committee. Between 1994 and July 2003, ASI denied share insurance coverage to eight credit unions while approving coverage for 31 credit unions. ASI also regularly monitors all credit unions it insures. ASI routinely conducts off-site monitoring and conducts on-site examinations of privately insured credit unions at least once every 3 years. It also reviews state examination reports for the credit unions it insures and imposes strict audit requirements. For example, ASI requires an annual CPA audit for credit unions with $20 million or more in assets, while NCUA only requires the annual CPA audit for credit unions with more than $500 million in assets. Further, after insuring a large credit union, ASI implemented a special monitoring plan for its largest credit unions in light of its increased risk exposure. For larger credit unions (those with more than 10 percent of ASI’s total insured shares or the top 5 credit unions in asset size), ASI increased its monitoring by conducting semiannual, on-site examinations, as well as monthly and quarterly off- site monitoring, which included a review of the credit unions’ most recent audits (monthly) and financial information (quarterly). ASI also annually reviews the audited financial statements of these large credit unions. In January 2003, five credit unions with about 40 percent of ASI’s total insured assets qualified for this special monitoring.ASI also began a monitoring strategy intended to increase its oversight of smaller credit unions, due in part to experiencing larger-than-expected losses at a small credit union in 2002. ASI determined that 98 smaller credit unions qualified for increased monitoring, with shares from the largest of these smaller credit unions totaling about $23 million. ASI also has implemented a partially adjusted, risk-based insurance pricing policy, which produces an incentive for the institutions insured by ASI to obtain a better CAMEL rating, which in turn lowers the risk to ASI’s insurance fund. Like NCUSIF, ASI’s insurance fund is deposit- based; that is, ASI requires credit unions it insures to deposit a specified amount with ASI.As of December 2002, these deposits with ASI totaled $112 million. Unlike NCUSIF, ASI’s insurance fund is partially adjusted for risk, which acts as a positive, risk-management strategy to mitigate against losses. Specifically, a credit union with a higher, or worse, CAMEL rating is required to deposit more into ASI’s insurance fund. Conversely, NCUA requires federally insured credit unions to deposit 1.0 percent of insured shares into NCUSIF regardless of their CAMEL ratings. According to ASI, it also has the contractual ability to reassess all member credit unions up to 3 percent of their total assets to raise additional funds to cover catastrophic loss. ASI’s credit union termination policy provides another risk-mitigating strategy that ASI can use to manage its risk exposure to an individual credit union. ASI’s insurance contract identifies several circumstances that would enable ASI to terminate insurance coverage. For example, ASI may terminate a credit union’s insurance with 30 days notice to the credit union and its state regulator, if the credit union fails to comply with ASI requirements to remedy any unsafe or unsound conditions or remedy an audit qualification in a timely manner. According to ASI management, it has not terminated a credit union’s share insurance, although ASI has used its termination policy as leverage to force changes at a credit union. When its largest insured credit union applied for primary share insurance, ASI undertook an assessment of its financial and underwriting considerations for insuring this institution. ASI had previously provided excess share insurance to the credit union and was familiar with its financial condition. ASI’s independent actuaries determined that the ASI fund could withstand losses sustained during adverse economic conditions for up to 5 years, with or without insuring this large credit union. Ultimately, ASI’s assessment concluded that the credit union’s financial condition was strong and, although it would increase ASI’s concentration of risks, insuring the credit union would have a favorable financial impact on ASI. According to regulators from the Ohio Department of Commerce, Division of Financial Institutions (Ohio Division of Financial Institutions), they did not take exception to ASI insuring the large credit union and had reviewed ASI’s underwriting assessment and asked to be updated periodically. Unlike federal share insurance, which is backed by the full faith and credit of the United States, ASI’s insurance fund is not backed by any government entity. Therefore, losses on member deposits in excess of available cash, investments, and other assets of ASI-insured institutions would only be covered up to ASI’s available resources and its secured lines of credit, which serve as a back-up source of funds. According to ASI documents, the terms of ASI’s secured lines of credit required collateralization between 80 and 115 percent of current market value of the U.S. government or agency securities ASI holds. As a result, ASI’s borrowing capacity is essentially limited to the securities it holds. ASI officials also explained that due to the high cost of reinsurance, it has not purchased reinsurance on its primary share insurance, although it has reinsurance for its excess share insurance. ASI has not had large losses since 1975. ASI has expended funds for 118 claims and its loss experience—from the credit unions that have made claims—has averaged 3.95 percent of the total assets of these credit unions. If ASI’s historical loss average of 3.95 percent was tested and proved true for a failure at the largest credit union ASI insured, as of December 2002, the loss amount would be about $119 million. While this would be a major loss, ASI would most likely be able to sustain this loss. ASI’s historical loss rate is nearly 60 percent less than the loss rate experienced by NCUSIF for the same period. However, under more stressful conditions, ASI could have difficulty fulfilling its obligations. For example, ASI’s five largest credit unions represent nearly 40 percent of insured shares, for which a collective loss at 3.95 percent of the assets of these credit unions would exceed ASI’s equity by approximately $30 million. According to ASI, it could raise additional funds to cover catastrophic loss by reassessing all member credit unions up to 3 percent of their total assets, which excluding the top five credit unions, would generate approximately $214 million of additional capital, while maintaining minimum capital levels at 4 percent of total assets. Further, by Ohio statute, the Superintendent of the Division of Financial Institutions can order ASI to reassess its insured credit unions up to the full amount of their capital, which, excluding the top five credit unions, would generate approximately $794 million of funds for ASI with which to pay claims. This recapitalization process is generally similar to that required of NCUSIF before accessing its Treasury line of credit. However, if ASI reassessed its member credit unions during a catastrophic failure, it would further negatively affect these credit unions at a time that they were already facing stressful economic conditions. State Oversight of ASI and the Credit Unions It Insures Provides provides some additional assurance that ASI and privately insured credit Additional Assurance unions operate in a safe and sound manner. As a share guaranty State regulation of ASI and the privately insured credit unions it insures corporation, ASI is subject to state oversight and regulation in those states where ASI insures credit unions. ASI was chartered in Ohio statute, with the Ohio Division of Financial Institutions and the Ohio Department of Insurance dually regulating it. ASI is licensed by the Ohio Superintendent of Insurance and is subject to routine oversight by that department and Ohio’s Superintendent of Credit Unions. The Ohio Division of Financial Institutions conducts annual assessments of ASI, which evaluate ASI’s underwriting and monitoring procedures, financial soundness, and compliance with Ohio laws. Under Ohio law, its Department of Insurance also is required to examine ASI at least once every 5 years. The last Ohio Department of Insurance exam of ASI was completed in March 1999, which covered January 1995 through December 1997. When we met with Ohio officials in June 2003, they told us that the Ohio Department of Insurance planned to examine ASI in the third quarter of calendar year 2003. ASI is also required to submit annual audited financial statements, including management’s attestation, and quarterly unaudited financial statements to Ohio insurance and credit union regulators. Ohio law also requires ASI to provide copies of written communication with regulatory significance to Ohio regulators, obtain the opinion of an actuary attesting to the adequacy of loss reserves established, and apply annually for a license to do business in Ohio. In our discussions with officials from the Ohio Division of Financial Institutions and the Ohio Department of Insurance, we found that, to date, ASI has complied with all requirements and regulations, and no regulators have taken corrective actions against ASI or limited ASI’s ability to do business in Ohio. Generally, state financial regulators have taken the primary lead for monitoring ASI’s actions, while state insurance regulators were not as involved in overseeing ASI’s operations. All states where ASI insures credit unions have, at some point, formally certified ASI to conduct business in that state. Ohio and Maryland have certified ASI in the past year—as required by governing statutes in those states. Regarding the other states in which ASI operates, while they have not formally recertified ASI, Ohio’s annual examination process of ASI involves regulators from most states. State credit union regulators from Idaho, Illinois, Indiana, and Nevada commonly participate in this assessment; according to ASI officials, their acceptance of the final examination report infers that they approve of ASI’s continuing operation in their respective states. State credit union regulators from California and Alabama, however, have not participated in the annual on-site assessment of ASI. Regarding monitoring efforts by state insurance regulators, according to ASI, the Ohio Department of Insurance is the only state insurance department that imposes requirements and insurance regulators from Idaho, Illinois, and Nevada only request information. Most state credit union regulators with whom we met told us they had regular communication with ASI about the credit unions ASI insured. ASI officials reported that they commonly conducted joint, on-site exams of credit unions with state regulators. State credit union regulators imposed safety and soundness standards and carried out examinations of state- chartered credit unions in a way similar to how the federal government oversees federally insured credit unions. According to state regulators, state regulations, standards, and examinations apply to all state-chartered credit unions, regardless of their insurance status (whether federal, private, or noninsured). State credit union regulators reported that they had adopted NCUA’s examination program, and their examiners had received training from NCUA. However, as previously discussed, some state officials with whom we met indicated that they faced challenges related to oversight of their credit unions; for example, some states lacked examiner resources and had high examiner turnover. Additionally, privately insured credit unions—as compared with federally insured credit unions—are not subject to identical requirements and regulations. For example, while federally insured, state-chartered credit unions are subject to PCA—as discussed earlier, privately insured, state- chartered credit unions are not subject to these federally mandated supervisory actions. Although, as a matter of practice, many state regulators reported that they have the authority to impose capital requirements on privately insured credit unions and could take action when a credit union’s capital levels are not safe and sound. However, state officials in California, Idaho, Illinois, Indiana, Ohio, and Nevada said that their states required privately insured credit unions to maintain specified reserve levels, which were codified in statute or regulation. Additionally, Alabama requires credit unions seeking private insurance to meet certain capital levels. While some states had specific requirements for credit unions seeking to purchase private share insurance, many states regulators reported that they have the authority to “not approve” the conversion of credit unions to private share insurance. Alabama, Illinois, and Ohio have written guidelines for credit unions seeking to purchase private share insurance and regulators reported that they have the authority to “not approve” a credit union’s purchase of private insurance. The other five states that permitted private share insurance do not have written guidelines for credit unions seeking to purchase private share insurance, but Idaho, Indiana, and Nevada state regulators also noted that they have the authority to “not approve” a credit union’s purchase of private share insurance. Moreover, NCUA supervised the conversions of federally insured credit unions to private share insurance. Specifically, NCUA has imposed notification requirements on federally insured credit unions seeking to convert to private share insurance and requires an affirmative vote of a majority of the credit union members on the conversion from federal to private share insurance. NCUA has required these credit unions to notify their members, in a disclosure, that if the conversion were approved, the federal government would not insure shares. We reviewed six recent conversions to private share insurance, and found that, prior to NCUA’s termination of the credit union’s federal share insurance, these credit unions, including the large credit union that recently converted to ASI, had generally complied with NCUA’s notification requirements for conversion. Although actions taken by ASI and some state regulators provide some assurances that ASI is operating in a safe and sound manner, ASI’s concentration risks and limited borrowing capacity raise concerns that under stressful economic conditions it may not be able to fulfill its responsibilities to its membership. Congress determined that it was important for members of privately insured credit unions to be informed that their deposits in such institutions were not federally insured. Specifically, among other things, section 43 of the Federal Deposit Insurance Act requires depository institutions lacking federal deposit insurance, which includes privately insured credit unions, to conspicuously disclose to their membership that deposits at these institutions are (1) not federally insured and (2) if the institution fails, the federal government does not guarantee that depositors will get back their money. These institutions are required to conspicuously disclose this information on periodic statements of account, signature cards, and passbooks, and on certificates of deposit, or instruments evidencing a deposit (deposit slips). These institutions are also required to conspicuously disclose that the institution is not federally insured at places where deposits are normally received (lobbies) and in advertising (brochures and newsletters). The Federal Trade Commission (FTC) is responsible for enforcing compliance with section 43. However, FTC has never taken action to enforce these requirements, and has sought and obtained in its appropriations authority a prohibition against spending appropriated funds to carry out these provisions. We recently reported that because of a lack of federal enforcement of this section, many privately insured credit unions did not always make required disclosures. We conducted unannounced site visits to 57 locations of privately insured credit unions (49 main and 8 branch locations) in five states—Alabama, California, Illinois, Indiana, and Ohio and found that 37 percent of the locations we visited did not conspicuously post signage in the lobby of the credit union. During these site visits, we also obtained other available credit union materials (brochures, membership agreements, signature cards, deposit slips, and newsletters) that did not include language to notify consumers that the credit union was not federally insured—as required by section 43. Overall, 134 of the 227 pieces of materials we obtained from 57 credit union locations—or 59 percent—did not include specified language. As part of our review, we also reviewed 78 Web sites of privately insured credit unions and found that many Web sites were not fully compliant with section 43 disclosure requirements. For example, 39 of the 78 sites reviewed had not included language to notify consumers that the credit union was not federally insured. Our primary concern, resulting from the lack of enforcement of section 43 provisions, was the possibility that members of privately insured, state- chartered credit unions might not be adequately informed that their deposits are not federally insured and should their institution fail, the federal government does not guarantee that they will get their money back. The fact that many privately insured credit unions we visited did not conspicuously disclose this information raised concerns that the congressional interest in this regard was not being fully satisfied. In our August 2003 report, we concluded that FTC was the best among candidates to enforce and implement section 43 and provided suggestions on how to provide additional flexibility to FTC to enforce section 43 disclosure requirements. The House Committee on Appropriations, Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, is currently considering adding language in FTC’s 2004 appropriations bill that would require FTC to enforce and implement section 43 disclosure provisions. The financial condition of the credit union industry has improved since 1991. Between 1992 and 2002, changes in the industry have resulted in two distinct groups of credit unions—smaller credit unions providing their members with basic banking services and larger credit unions that seek to provide their members with a full range of financial services similar to other depository institutions. These larger credit unions control a larger percent of industry assets than they did in 1991. This concentration of industry assets creates the need for greater risk management on the part of credit union management and NCUA with respect to monitoring and controlling risks to the federal share insurance fund. Among the more significant changes that have occurred in the credit union industry over the past two decades have been the weakening or blurring of the common bond that traditionally existed between credit union members. The movement toward geographic-based fields of membership, and other expansions of the common-bond restrictions in conjunction with expanded lines of financial services, have made credit unions more competitive with banks. These changes have raised questions about the extent to which credit unions are fulfilling their perceived historic mission of serving individuals of modest means. However, no comprehensive data are available to determine the income characteristics of those who receive credit unions services, especially with respect to consumer loans and other financial services. Available data, such as that provided by the SCF and HMDA, provide some indication that credit unions serve low- and moderate-income households but not to the same extent as banks. If credit unions, as indicated by NCUA and the credit union industry, place a special emphasis on serving low- and moderate-income households, more extensive data would be needed to support this conclusion. These data would need to include information on the distribution of consumer loans because smaller credit unions are more likely to make consumer than mortgage loans. Lack of data especially impairs NCUA’s ability to determine if credit unions that have adopted underserved areas are reaching the households in the communities most in need of financial services. As the industry has changed and larger credit unions have become more like banks in the services they have provided, NCUA has adopted a supervisory and examination approach that more closely parallels that of the other depository institution regulators. While it is too soon to determine whether the risk-focused approach being implemented by NCUA will allow it to more effectively monitor and control the risks being assumed by credit unions, our work suggests that further opportunities exist for NCUA to further leverage off the approaches and experiences of the other federal depository institution regulators. For example, as NCUA is addressing challenges in implementation of its risk-focused program, it has the opportunity to use forums such as the FFIEC to learn how other depository institution regulators dealt with similar challenges in implementing their risk-focused programs. Also, NCUA might gain an evaluation of an institution’s internal controls, comparable to other depository institution regulators, if credit unions were required, like banks and thrifts, to provide management evaluations of internal controls and their auditor’s assessments of such evaluations. Finally, NCUA could gain better oversight of third-party vendors if it had the same ability to examine the activities of third-party vendors as do other depository institution regulators. As of December 2002, NCUSIF’s financial condition appeared satisfactory based on its fund-equity ratio and positive net income. However, it is not clear whether or to what extent NCUSIF’s recent decline in net income will continue. Improvements in NCUA’s processes for determining the overhead transfer rate, pricing, and estimated losses could help to promote future financial stability by providing more accurate information for financial management. As currently determined by NCUA, the overhead transfer rate may not have accurately reflected the actual time spent by NCUA staff on insurance-related activities. Recent fluctuations are the result of adjustments being made because of surveys that had not been conducted regularly or over sufficient periods of time. In addition, NCUSIF’s pricing for federal share insurance coverage does not reflect the risk that an individual credit union poses to the fund. Moreover, the process used by NCUA to estimated losses to the insurance fund—the fund’s most significant liability and management estimate—has been based on overly broad historical analysis. The risk-based pricing structure that is the norm across the insurance industry and, for loss estimates, the more detailed, risk-based historical analysis used by FDIC in insuring banks and thrifts may provide useful lessons for NCUA in improving its management of insurance for credit unions. While systemic risks that might be created by private share insurance appear to have decreased since 1990, the recent conversion of a large credit union from federal to private share insurance has introduced new concerns. Because the remaining private insurer’s (ASI) insured shares are overly concentrated in one large credit union and in certain states, and because it does not have the backing of any governmental entity and it has limited borrowing capacity, ASI may have a limited ability to absorb catastrophic losses. This raises questions about the ability of ASI, under severe economic conditions, to fulfill its obligations if its largest credit unions were to fail. Given this risk, we believe it is important that the members of privately insured credit unions are made aware that their shares are not federally insured. As we previously reported, since no federal entity currently enforces compliance with federal disclosure requirements for privately insured credit unions, and with the high level of noncompliance that we found in on-site visits to privately insured credit unions, we believe that members of privately insured credit unions might not be adequately informed that their shares are not federally insured. As a result, we have previously recommended that Congress consider providing additional flexibility to FTC to ensure compliance with the federal disclosure requirements. Recommendations for To promote NCUA’s ability to meet its goal of assisting credit unions in Executive Action safely providing financial services to all segments of society, to enable more consistent federal oversight of financial institutions, and to enhance share insurance management (for example, improving allocation costs, providing insurance according to risk, and improving the loss estimation process), we recommend that the Chairman of the National Credit Union Administration use tangible indicators, other than “potential membership,” to determine whether credit unions have provided greater access to credit union services in underserved areas; consult with other regulators through FFIEC more consistently about risk-focused programs to learn how these regulators have dealt with past challenges (for example, training of information technology specialists); continuously improve the process for and documentation of the overhead transfer rate by consistently calculating and applying those rates, updating the rates annually, and completing the survey with full representation; evaluate options for implementing risk-based insurance pricing. In its evaluation, the NCUA Chairman should consider the potential impact of risk-based insurance pricing to the ability of credit unions to provide services to various constituencies; and evaluate options for stratifying the industry by risk profile and applying probable failure rates and loss rates, based in part on historical data, for each risk profile category when estimating future losses from institutions. Should Congress be concerned that federally insured credit unions, especially those serving geographical areas, are not adequately serving low- and moderate-income households, Congress may wish to consider requiring NCUA to obtain data on the proportion of mortgage and consumer loans provided to low- and moderate-income households within each federally insured credit union’s field of membership and obtain descriptions of services specifically targeted to low- and moderate-income households. To ensure the safety and soundness of the credit union industry, Congress may wish to consider making credit unions with assets of $500 million or more subject to the FDICIA requirement that management and external auditors report on the internal control structure and procedures for financial reporting, as well as compliance with designated safety and soundness laws. To improve oversight of third-party vendors, Congress may wish to consider granting NCUA legislative authority to examine third-party vendors that provide services to credit unions and are not examined through FFIEC. We requested comments on a draft of this report from the Chairman of the National Credit Union Administration and the President and Chief Executive Officer of American Share Insurance. We received written comments from NCUA and ASI that are summarized below and reprinted in appendixes XI and XII respectively. In addition, we received technical comments from NCUA and ASI that we incorporated into the report as appropriate. NCUA concurred with most of the report’s assessment regarding the challenges facing NCUA and credit unions since 1991. For example, NCUA concurred with the report’s assessment that overall the financial health and stability of the credit union industry has improved since 1991. NCUA also agreed with our recommendation to consult with other regulators through FFIEC more consistently to leverage the knowledge and experience the other regulators have gained in administering risk-focused programs. NCUA stated that it plans to continue its coordination with its FFIEC counterparts as it makes ongoing improvements to its approach to supervising federally insured credit unions. NCUA also concurred with our matter for congressional consideration that credit unions with assets of $500 million or more should provide annual management reports assessing the effectiveness of their internal controls over financial reporting and their external auditor’s attestation to management’s assertions. NCUA stated that it is providing guidance for credit unions on the principles of the Sarbanes-Oxley Act that will, among other things, strongly encourage large credit unions to voluntarily provide this reporting on internal controls. However, NCUA believed that legislation was not necessary because NCUA has the authority to implement regulations requiring credit unions to provide these reports should it become necessary. While we acknowledge NCUA’s authority to issue regulations on this issue, we note that regulations can be changed unilaterally by the agency, whereas legislation is binding unless changed by Congress. Our intent in developing this matter for congressional consideration was to ensure parity between credit unions, banks, and thrifts with regard to internal control reporting requirements; therefore, we have left this as a matter for congressional consideration in our report. NCUA also indicated that it did not oppose our recommendation that it be given statutory authority to examine third-party vendors that provide services to credit unions and are not examined through FFIEC, provided that appropriate discretion was extended to the agency in the allocation of agency resources and evaluation of risk parameters in using this authority. NCUA stated that given that many of these third-party vendors service numerous credit unions, a failure of a vendor poses systemic risk issues. However, NCUA suggested that it be changed to a matter for congressional consideration because it was a statutory issue rather than one involving the use of existing NCUA regulatory authority. We agreed with NCUA’s assessment and have modified the report accordingly. NCUA concurred with the report’s recommendation to make improvements to the process for determining the overhead transfer rate and indicated that management is in the process of improving the methodology for calculating this rate. NCUA also concurred in part with our report’s conclusion that the NCUSIF loss reserve methodology warrants study, in order to further refine NCUSIF’s estimates. Regarding our recommendation that NCUA study options for improving its estimates of future insurance losses, NCUA stated that it is awaiting the receipt of recommendations that FDIC received on revising its insurance process, and NCUA will review the details of the revised FDIC process and how to integrate those practices within NCUA’s system. In its response, NCUA proposed an alternative to risk-based insurance pricing by using the adoption of a PCA approach where required net worth levels would be tied to an institution’s risk profile. While NCUA’s proposal may be one option to consider, we continue to recommend that NCUA evaluate and study various options for achieving a risk-based pricing of insurance to fairly distribute risk, provide incentives for member credit unions to control their risk, and focus regulators on higher-risk credit unions. While it is possible that the option suggested by NCUA would achieve the objectives, we believe that NCUA should study the costs, benefits, and risks associated with various options in order to determine the most effective and cost-beneficial means of achieving a risk-based system of insurance. NCUA disagreed with our recommendation that it should use indicators, other than “potential membership,” to determine whether credit unions have provided greater access to credit union services in underserved areas. NCUA officials stated that they believe that their data indicated that credit unions have reached out to underserved communities; implementation of this recommendation could result in significant and unnecessary data collection; and Congress has not imposed CRA-like requirements on credit unions in the past. We agree that federally chartered credit unions have added underserved areas in record numbers, increasing the numbers of potential members in these areas, and that membership growth in credit unions with underserved areas has been greater than for credit unions overall. However, this information does not indicate whether underserved individuals or households have received greater access to services (for example, by using check-cashing services, opening no-fee checking accounts, or receiving loans) as a result of these field of membership expansions. Further, while we agree that documenting service to the underserved would result in additional administrative requirements, the magnitude and scale of this effort does not necessarily require imposition of CRA as implemented for banks and thrifts, and could result in information benefitting future credit union expansion efforts. At a minimum, it would be useful to know whether membership growth in credit unions that have added underserved areas has come from the underserved areas themselves and the extent to which those census tracts within these areas have been identified as low- or moderate-income. This type of information, collected uniformly by a federal agency like NCUA, could serve as first step towards documenting the extent to which credit unions have reached for members outside of their traditional membership base. Finally, without this information, it will be difficult for NCUA or others that are interested to determine whether credit unions have extended services of any kind to underserved individuals as authorized in CUMAA. Finally, NCUA also concurred with the report’s identification of possible systemic risk that could be associated with private share insurance that lacks the full faith and credit backing of a state or the federal government. NCUA believed that the asset concentration, limited borrowing capacity, and the lack of any reinsurance of the private insurer present unique challenges for the eight state supervisory authorities where private insurance exists today. In commenting on the private share insurance section of a draft of this report, ASI stated that we failed to adequately assess the private share insurance industry. In summary, as discussed below, ASI raised objections to the report statements that ASI’s risks are concentrated in a few large credit unions and a few states; ASI has limited ability to absorb large losses because it does not have the backing of any governmental agency; and ASI’s lines of credit are limited in the aggregate as to amount and available collateral. In response, we considered ASI’s positions and materials provided, including ASI’s actuarial assumptions and ASI’s past performance, and believe our report addresses these issues correctly as originally presented. First, in regard to ASI’s concentration risks, ASI stated that the inclusion of a single large, high-quality credit union provided financial resources that improved, not diminished, the financial integrity of ASI. Our report acknowledges this fact. However, our report also notes that this credit union made up about 25 percent of ASI’s total insured shares, and that ASI’s five largest credit unions represent nearly 40 percent of ASI’s insured shares, as of December 2002. While not disputing that the large credit union would improve ASI’s current financial position, we continue to believe that this level of concentration in a few credit unions, under adverse economic conditions, could expose ASI to a potentially high level of losses. ASI also stated that ASI’s coverage and the geographic distribution of ASI’s insured credit unions is a matter of state law. The report points out this fact, and we acknowledge that it limits ASI’s ability to diversify its risks. However, the fact remains that ASI’s risks are currently concentrated in eight states. Second, in response to our report’s assessment of ASI’s limited ability to absorb catastrophic losses, ASI noted “its sound private deposit insurance program builds on a solid foundation of careful underwriting, continuous risk management and the financial backing of its mutual member credit unions, capable of absorbing large (catastrophic) losses.” In addition, ASI noted that over its 29-year history, it has paid over 110 claims on failed credit unions, and that no member of an ASI-insured credit union has ever lost money. ASI also noted that it could assess its member credit unions up to 3 percent of their total assets in order to obtain more capital. We acknowledge these facts in this report; however, our point remains that ASI has limited borrowing capacity and, under stressful economic conditions, may have difficulty securing funds from others to meet its obligations. ASI also objected to the report’s comparison of private share insurance to the federal insurance program. As the last remaining private share insurer, ASI has no peer on which to base a comparison and the only alternative to private share insurance for credit unions is NCUSIF. Third, ASI commented that the draft report incorrectly views the company’s lines of credit as a source of capital. ASI noted that their lines of credit are solely in place to provide emergency liquidity. We do not disagree with ASI’s statement. When incorporating ASI’s previously received technical comments, we clarified in the report that losses on member deposits, in excess of available cash, investments, and other assets of ASI- insured institutions, would only be covered up to ASI’s available resources and its secured lines of credit, which serve as a back-up source of funds. Further, the report notes that ASI’s lines of credit required collaterization between 80 and 115 percent of current market value of the U.S. government or agency securities ASI holds. As a result, ASI’s borrowing capacity is essentially limited to the securities it holds and therefore, in a time of stressful economic conditions, ASI may have difficulty maintaining its own liquidity if its insured credit unions were failing and unable to meet the withdrawal requests of depositors. Lastly, ASI supported our previous conclusion that FTC is the appropriate agency for monitoring and defining private share insurance consumer disclosure requirements and believed that privately insured credit unions would benefit from FTC’s enforcement of such provisions. In our concluding discussions with ASI officials, they emphasized that they were undertaking efforts to educate their member credit unions on the required consumer disclosures and taking steps, in conjunction with state credit union leagues, to ensure compliance. 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 Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, the Chairman and Ranking Minority Member of the House Committee on Financial Services, and other congressional committees. We also will send copies to the National Credit Union Administration and American Share Insurance and 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. This report was prepared under the direction of Debra R. Johnson and Harry Medina, Assistant Directors. If you or your staff have any questions regarding this report, please contact the Assistant Directors or me at (202) 512-8678. Key contributors are acknowledged in appendix XIII. Our report objectives were evaluate (1) the financial condition of the credit union industry; (2) the extent to which credit unions “make more available to people of small means credit for provident purposes;” (3) the impact, if any, of the Credit Union Membership Access Act of 1998 (CUMAA) on the credit union industry with respect to membership provisions; (4) how the National Credit Union Administration’s (NCUA) examination and supervision processes have changed in response to changes in the industry; (5) the financial condition of the National Credit Union Share Insurance Fund (NCUSIF); and (6) issues concerning the use of private share (deposit) insurance. To assess the financial condition of the credit union industry, we obtained and analyzed annual call report financial data (Form 5300) and regulatory ratings (CAMEL scores) for all federally insured credit unions from 1992 to 2002. NCUA requires federally insured credit unions to submit a quarterly call report, which contains information on the financial condition and operations of the institution. Using the call reports, we calculated descriptive statistics and key financial ratios and determined trends in financial performance. NCUA provided us with a copy of the electronic Form 5300 database for our analysis. The database contained year-end information for December 1992–December 2002. We reviewed NCUA established procedures for verifying the accuracy of the Form 5300 database and found that the data that forms this database are verified on an annual basis, either during each credit union’s examination, or through off- site supervision. We determined that the data were sufficiently reliable for the purposes of this report. In addition we received a database of regulatory ratings (CAMEL) from NCUA for 1992–2002, on which we (1) reviewed the data by performing electronic testing of required data elements, (2) reviewed existing information about the data and the system that produced them, and (3) interviewed agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. In addition to using call report data for credit unions, we also used data collected by the Federal Financial Institutions Examination Council (FFIEC) and Office of Thrift Supervision (OTS) to compare the financial condition of and services offered by credit unions with those of other depository institutions insured by the Federal Deposit Insurance Corporation (FDIC). We used call report (reporting forms FFIEC 031 and FFIEC 041 for banks and OTS Form 1313 for thrifts) data obtained from FDIC’s Statistics on Depository Institutions Web site, which contains consolidated bank and thrift data stored on FDIC’s Research Information System database. To assess the reliability of these data, we randomly cross-checked selected data obtained from this Web site with selected individual call reports and compared our calculations with aggregate figures provided by FDIC. Given the context of the analyses, we determined that these data were sufficiently reliable for the purposes of our report. For broad, industrywide comparisons with banks involving industry concentration and capital ratios, we used total assets and equity capital data for all FDIC-insured institutions, excluding insured branches of foreign-chartered banks. In order to determine bank and thrift institutions for our more detailed review, we constructed five peer groups in terms of institution size as measured by total assets, reported as of December 31, 2002. See table 3 for the definitions we used to create peer groups. We specified the maximum total assets of $18 billion by rounding up the total assets of the largest credit union in our database as of December 31, 2002, to the nearest billion dollars. We also classified bank and thrift institutions as to whether they emphasized credit card or mortgage loans; this was done by determining if a given bank had (1) a total loans to total assets ratio of at least 0.5 and (2) either a credit card loans to total loans ratio of at least 0.5 or a mortgage loans to total loans ratio of at least 0.5. The call report data that we used for our financial condition and services analyses consisted of information on total assets and total loans, as well as more specific loan holdings data (for example, consumer loans and real estate loans). We also obtained additional data to calculate bank capital ratios and return on average assets, including equity capital, net income, and average assets. To evaluate the extent to which credit unions serve people with low and moderate incomes, we analyzed existing data on the income levels of credit union members, reviewed available literature, and interviewed regulatory and industry officials. We analyzed 2001 Home Mortgage Disclosure Act (HMDA) data, the Federal Reserve’s 2001 Survey of Consumer Finances (SCF), NCUA program literature, and statistical reports of industry trade and consumer groups. To present our findings, we relied on the combined message of all these studies and data sources because we found no single source that contained data on the incomes of credit union and other depository institution consumers. To compare the income characteristics of households and neighborhoods that obtain mortgages from credit unions and banks, we used four income categories—-low, moderate, middle, and upper—used by financial regulators as part of the Community Reinvestment Act (CRA) exams. See table 4 for definitions. We analyzed loan application records (LAR) from the HMDA database to compare the proportion of mortgage loans made by credit unions and peer group banks with households and communities with various income levels. We used 2001 HMDA data, the most recent data set available from the Federal Reserve Bank at the time of our review. For the purposes of comparing credit union lending with that of banks, we included only those banks with assets of $16 billion or less on December 31, 2001, which was the size of the largest credit union in 2001, rounded up to the nearest billion. In addition, we excluded lending institutions that only made mortgages. Our HMDA analysis included records from 4,195 peer group banks. We obtained the asset size and total membership for credit unions reporting to HMDA from NCUA's 2001 call report database and obtained the asset size of other lenders (to identify the peer group banks) from the HMDA Lender File, which contains data on the characteristics of institutions reporting to HMDA, supplied to us by the Federal Reserve. Our HMDA analysis did not include all credit unions and banks because only institutions that meet HMDA’s reporting criteria, such as having a certain amount of assets, must report their mortgage loans to HMDA. For example, in 2001, depository institutions with more than $31 million in assets as of December 31, 2000, were required to report loans to HMDA. Largely because of this criterion, most credit unions—86 percent—were not required to report mortgage loans to HMDA and, thus, were excluded from our analysis. However, we believe our analysis is still of value because, in 2001, reporting credit unions held about 70 percent of credit union assets and included 62 percent of credit unions’ members. For our analysis, we only analyzed LARs for originated loans for the purchase of one-to-four family homes that served as the purchaser’s primary dwelling. Our analysis included about 71,000 loans reported by credit unions and about 807,000 loans reported by peer group banks. We determined that the data were sufficiently reliable for the purposes of this report by performing electronic testing of the required data elements, reviewing existing information about the data and the system that produced them, and interviewing agency officials knowledgeable about the data. We did not independently verify the accuracy of the contents of the LARs reported to the HMDA database or the accompanying lender file. After selecting the records, we determined what proportion of credit union and bank loans were made to purchasers with low, moderate, middle, and upper incomes. To do so, we categorized the purchaser's gross annual income, as identified on the LAR, into one of four income categories based on the median family income of the MSA in which the purchased home was located. We did this by matching the Metropolitan Statistical Area (MSA) on the HMDA LAR with the appropriate Department of Housing and Urban Development (HUD)-estimated 2001 median family income. We used SAS version 8.02 version, which is a computer-based data analysis and reporting software application, to perform all of these analyses. We did not analyze about 16 percent of the credit union and bank LARs because they did not contain a MSA. While it is possible that this information was simply not recorded, lenders must only report MSAs for properties located in MSAs where their institution has a home or branch office. In addition, we determined what proportion of credit union and bank loans were made for the purchase of properties in census tracts by the median family income of the census tract. The Federal Reserve Board, in categorizing each census tract level, used the four income categories used by the financial regulators (low, moderate, middle, and upper) and used definitions corresponding to the ones identified in table 4. Because the median income of each census tract is labeled within HMDA, we did not have to determine the income category ourselves. We did not analyze about 16 percent of the credit union and bank LARs because they did not contain a census tract. While it is possible that this information was simply not recorded, lenders are not responsible for identifying census tract information if the property is located in a county with less than 30,000 people or if the property was located in an area that did not have census tracts for the 1990 census. Finally, we analyzed the race and ethnicity data in HMDA to compare the lending records of credit unions and banks whose loans met our criteria. As noted in appendix VI, about 15 percent of records for credit unions lacked race and ethnicity data and 6 percent of records for banks. While it is possible that this information was simply not recorded, applicants filing loan applications by mail or by telephone are not obligated to provide this information. We also analyzed the Federal Reserve’s 2001 SCF, a triennial survey of U.S. households sponsored by the Board of Governors of the Federal Reserve System with the cooperation of Treasury, and reviewed secondary sources to identify the characteristics of credit union members. We analyzed the SCF because it is a respected source of publicly available data on financial institution and consumer demographics that is nationally representative and because it was the only comprehensive source of publicly available data with information on financial institutions and consumer demographics that we could identify. We analyzed the SCF to develop statistics on the income, race, age, and education of credit union members and bank customers. Because some customers use both credit unions and banks, we performed our income analysis based on the assumption that households can be divided into four user categories—those who use credit unions only, those who primarily use credit unions, those who use banks only, and those who primarily use banks. Dr. Jinkook Lee of Ohio State University developed these categories. In addition, to identify existing research on credit union research, we asked officials at NCUA and industry groups (for example, the Credit Union National Association (CUNA) to identify relevant studies and performed a literature search. To study the impact of CUMAA on credit union field of membership regulations, we reviewed and analyzed CUMAA and compared its provisions with NCUA interpretive rulings and policy statements (IRPS) in effect before and after CUMAA. In addition, we interviewed NCUA officials and industry representatives to obtain their viewpoints on how NCUA interpreted CUMAA's membership provisions. To obtain information about state field of membership regulations in general and how many state- chartered credit unions serve geographical areas, we surveyed regulators in the 50 states and received responses from the 46 that actively charter credit unions. This allowed us to compare the number of federally chartered and state-chartered credit unions serving geographical areas. Finally, we obtained historical trend data from NCUA on the charter types of federally chartered credit unions, “potential” (that is, people within a credit union’s field of membership but not members of the credit union) and actual membership, and service to underserved areas. To evaluate how NCUA’s supervision and examination of credit unions has evolved in response to changes in the industry since 1991, we identified changes in the types of products, services, and activities in which credit unions engage as well as key changes to NCUA regulations. We also identified changes to NCUA’s examination and supervision approach, and evaluated oversight procedures of federally insured, state-chartered credit unions. Finally, we studied NCUA’s implementation of prompt corrective action (PCA). To identify changes in the types of products, services, and activities in which credit unions engage, we analyzed 1992–2002 Form 5300 call report data and conducted structured interviews with NCUA examiners, state supervisory officials, and officials from seven large credit unions. To identify key regulatory changes, we (1) reviewed the Federal Credit Union Act and amendments made by Congress since 1991; (2) interviewed NCUA officials, including NCUA’s General Counsel and officials from NCUA’s Division of Examination and Insurance, NCUA and state examiners, and officials from seven large credit unions; (3) reviewed NCUA legal opinions and letters to credit unions; and (4) reviewed final rules published in the Federal Register. To identify changes to NCUA’s examination and supervision approach, we reviewed NCUA’s examiner guide for key elements of the risk-focused examination approach and compared current exam documentation requirements with previous requirements. We conducted structured interviews with six of NCUA’s regional directors, 23 NCUA examiners covering all NCUA regions, and 13 state supervisory officials from Alabama, California, Idaho, Illinois, Indiana, Maryland, Massachusetts, Michigan, Nevada, Ohio, Texas, Washington, and Wisconsin. These states contained 51 percent of the total number of federally insured, state- chartered credit unions and 58 percent of the total assets of federally insured, state-chartered credit unions as of December 31, 2002. In addition, we interviewed officials from seven large credit unions; selecting at least one credit union from NCUA’s six regions. To obtain information on the experiences of other depository institution regulators with the risk-focused examination and supervision approach, we interviewed officials from the FDIC, OTS, Office of the Comptroller of the Currency, and the Federal Reserve Bank. Finally, to obtain information on other NCUA initiatives intended to compliment the risk-focused program, we reviewed NCUA documents on the large credit union pilot program, and the subject matter examiner program. To evaluate oversight procedures of federally insured, state-chartered credit unions, we obtained information about the oversight procedures during our structured interviews with the 13 states supervisory officials and NCUA examiners. We also reviewed NCUA’s examiner guide and memorandum of understanding between NCUA and states describing NCUA’s procedures for conducting joint examinations of federally insured, state-chartered credit unions with state regulators. Finally, to study NCUA’s implementation of PCA, we reviewed CUMAA, NCUA rules and regulations pertaining to PCA, and NCUA’s examiner guide. We also analyzed data from NCUA on the number of credit unions subject to PCA as of December 31, 2002. We interviewed agency officials knowledgeable about this data and found that NCUA headquarters, as well as the region, conducted reasonableness checks against the Form 5300 database, which contains the net-worth ratio used for PCA. When data outliers were found, examiners were required to review the data for accuracy and make any necessary corrections. We determined that the data were sufficiently reliable for the purposes of this report. In addition, we interviewed NCUA officials and examiners, state supervisory officials, credit union officials, and officials of other federal financial regulatory agencies to obtain their perspectives on PCA. To evaluate the financial condition of NCUSIF, we obtained key financial data about the fund from NCUA’s annual audited financial statements for 1991–2002. For 2002, we compared NCUSIF’s key performance measure, which is the ratio of fund equity to insured shares (deposits), to key performance measures of the Bank Insurance Fund, Savings Association Insurance Fund, and American Share Insurance, the remaining private insurer. We also reviewed NCUSIF’s estimated loss and overhead administrative expenses transfer process and applicable internal controls. We reviewed other relevant industry studies on deposit-insurance pricing and loan-loss allowance. In addition, we interviewed NCUA officials, industry trade groups, and officials of other federal financial regulatory agencies to obtain their perspectives on the funding of NCUSIF, the overhead transfer rate, and the loan-loss allowance. To better understand the issues around share (deposit) insurance, we reviewed and analyzed relevant studies on federal and private insurers for both credit unions and other depository institutions.In addition, we interviewed officials at NCUA, the Department of the Treasury, and FDIC to obtain perspectives specific to private share insurance. We also obtained views from credit union industry groups including the National Association of Federal Credit Unions, National Association of State Credit Union Supervisors, and CUNA. To determine the extent to which private share insurance is permitted and utilized by state-chartered credit unions, we conducted a survey of state credit union regulators in all 50 states. Our survey had a 100-percent response rate. In addition to the survey, we obtained and analyzed financial and membership data of privately insured credit unions from a variety of sources (NCUA, Credit Union Insurance Corporation, CUNA, and ASI—the only remaining provider of primary share insurance). We found this universe difficult to confirm because in our discussions with state regulators, NCUA and ASI officials, and our review of state laws, we identified other states that could permit credit unions to purchase private share insurance. To determine the regulatory differences between privately insured credit unions and federally insured, state-chartered credit unions, we identified and analyzed statutes and regulations related to share insurance at the state and federal levels. In addition, we interviewed officials at NCUA and conducted interviews with officials at the state credit union regulatory agencies from Alabama, California, Idaho, Indiana, Illinois, Maryland, Nevada, New Hampshire, and Ohio. Finally, we analyzed NCUA’s application of its conversion policies and looked at the cases of six credit unions that terminated their federal share insurance and converted to private share insurance in 2002 and 2003. To identify factors influencing a credit union's decision to obtain private or federal share insurance, we conducted structured interviews with officials of both federally insured and privately insured credit unions. Specifically, we interviewed management at 29 credit unions that, since 1990, had converted from federal to private share insurance and management at 26 credit unions that had converted from private to federal share insurance. We did not interview credit union management in states that did not permit private insurance. To determine the extent to which privately insured credit unions met federal disclosure requirements, we identified and analyzed federal consumer disclosure provisions in section 43 of the Federal Deposit Insurance Act, as amended, and conducted unannounced site visits to 57 privately insured credit unions (49 main and 8 branch locations) in Alabama, California, Illinois, Indiana, and Ohio. The credit union locations were selected based on a convenience sample using state and city location coupled with random selection of main or branch locations within each city. About 90 percent of the locations we visited were the main institution rather than a branch institution. This decision was based on the assumption that if the main locations were not in compliance, then the branch locations would probably not be in compliance either. Although neither these site visits, nor the findings they produced, render a statistically valid sample of all possible main and branch locations of privately insured credit unions necessary in order to determine the “extent” of compliance, we believe that what we found is robust enough, both in the aggregate and within each state, to raise concern about lack of disclosure in privately insured credit unions. During each site visit, using a systematic check sheet, we noted whether or not the credit union had conspicuously displayed the fact that the institution was not federally insured (on signs or stickers, for example). In addition, from these same 57 sites visited, we collected a total of 227 credit union documents that we analyzed for disclosure compliance. While section 43 requires depository institutions lacking federal deposit insurance to disclose they are not federally insured in personal documents, such as periodic statements, we did not collect them. We also conducted an analysis of the Web sites of 78 privately insured credit unions, in all eight states where credit unions are privately insured, to determine whether disclosures required by section 43 were included. To identify these Web sites, we conducted a Web search. We attempted to locate Web sites for all 212 privately insured credit unions; however, we were able to identify only 78 Web sites. We analyzed all Web sites identified. Finally, we interviewed FTC staff to understand their role in enforcement of requirements of section 43 for depository institutions lacking federal deposit insurance. To understand how private share insurers operate, we conducted interviews with officials at three private share insurers for credit unions— ASI (Ohio), Credit Union Insurance Corporation (Maryland), and Massachusetts Credit Union Share Insurance Corporation (Massachusetts). Because ASI was the only fully operating provider of private primary share insurance, ASI was the focus of our review. We obtained documents related to ASI operations such as financial statements and annual audits and analyzed them for the auditor’s opinion noting adherence with accounting principles generally accepted in the United States. Additionally, to understand the state regulatory framework for this remaining private share insurer, we interviewed officials at the Ohio Department of Insurance. We made 52 recommendations to Congress and the National Credit Union Administration (NCUA) in our 1991 report on the credit union industry and NCUAOf these, 28 were made to Congress, of which 8 were implemented or partially implemented as of September 2003. We made 24 recommendations to NCUA, and 19 were implemented as of September 2003. In addition, we issued one matter for congressional consideration. Congress partially addressed this matter. Our recommendations spanned the range of issues addressed in our 1991 report, including the condition of the credit union industry and the National Credit Union Share Insurance Fund (NCUSIF), credit union law and regulation, supervision of credit unions, NCUA’s management of failed credit unions, corporate credit unions, share insurance issues, structural changes in NCUA, and the evolution of credit unions’ role in the financial marketplace. NCUA implemented most of our recommendations to the agency. The key changes implemented by NCUA affected (1) corporate credit unions, (2) reporting requirements for credit unions, and (3) supervision of state- chartered credit unions. With respect to corporate credit unions, NCUA implemented various recommendations that established minimum capital requirements, limited investment powers of state-chartered corporate credit unions, increased detail and frequency of reporting requirements, and established a new unit in NCUA that is responsible for oversight, examination, and enforcement of corporate credit unions. We expect to review corporate credit unions following this study and to report in greater depth on issues affecting corporate credit unions. In the area of reporting requirements, NCUA implemented a requirement in 1993 that all federally insured credit unions with assets greater than $50 million file financial and statistical reports (call reports) on a quarterly basis and as of July 1, 2002, required all federally insured credit unions to file quarterly call reports. Finally, NCUA affirmed its supervision of state-chartered and federally insured credit unions by establishing examination goals, as well as conducting examinations, at almost 16 percent of all state-chartered and federally insured credit unions in 2002. NCUA told us that it chose not to implement five of our recommendations because it either disagreed with the recommendations (see recommendation 24 in table 5), or believed it had already addressed the recommendations (see recommendations 9, 11, 16, 17 in table 5). For example, NCUA disagreed with our recommendation to separate its supervision and insurance functions (see recommendation 24) and believed it was unnecessary for credit unions to submit copies of their supervisory committee audit reports to NCUA, as NCUA examiners routinely review the reports as part of the examination process (see recommendation 9). Congress implemented or partially implemented 8 of the 28 recommendations we made, which (1) established minimum capital levels for credit unions, (2) tightened commercial lending, and (3) established annual audit requirements for credit unions with assets greater than $500 million. As discussed in table 5, among those not implemented are recommendations dealing with NCUA’s Central Liquidity Facility (CLF) (see recommendations 49-52) and the structure of NCUA (see recommendations 43-48). See table 5 for our recommendations to NCUA and Congress and their status as of August 31, 2003. As we reported earlier, the financial condition of federally insured credit unions—the industry—has improved since 1991, based on various measures such as capital ratios, assets, and regulatory ratings. This appendix provides greater detail on these measures. We used annual call reports from December 31, 1992, to December 31, 2002, as well as a database of regulatory ratings from the National Credit Union Administration (NCUA) for the same time period. In addition, we used consolidated data based on annual call reports for banks and thrifts in order to compare them with credit unions. The capital of federally insured credit unions as a percentage of total industry assets—the capital ratio—grew from 8.10 to 10.86 percent from December 31, 1992, to December 31, 2002 (see fig. 18). Over this period, larger credit unions had consistently higher capital ratios than smaller credit unions. The credit union industry grew dramatically since December 31, 1992, as measured by assets and the value of shares (see table 6). From December 31, 1992, to December 31, 2002, assets in federally insured credit unions increased from $258 billion to $557 billion, or 116 percent, while shares increased from $233 billion to $484 billion, or 108 percent. From December 31, 1992, to December 31, 2000, the annual percentage growth rates of assets and shares generally fluctuated from around 3 percent to around 7 percent, with a significant rise in 1998 to over 10 percent. In the last 2 years (2001–2002), however, the annual percentage growth in assets and shares again rose sharply. According to NCUA officials, the more recent growth in assets and shares reflected a “flight to safety” on the part of consumers seeking low-risk investments in reaction to the generally depressed condition of the securities market. As noted earlier, the industry has consolidated and become slightly more concentrated. As of December 31, 1992, there were 12,595 credit unions, but by December 31, 2002, that number had declined to 9,688 (see table 7). The number of credit unions with less than $10 million in assets declined during this period, while the number of credit unions with more than $30 million in assets grew. Those credit unions with over $100 million in assets had around 52 percent of total industry assets as of December 31, 1992, but by December 31, 2002, credit unions of this size had around 75 percent of total industry assets. The 50 largest credit unions held 18 percent of industry assets in 1992, but by 2002 the 50 largest credit unions held 23 percent of industry assets. As industry assets have increased, the composition of these assets has changed. Total loans as a percentage of total assets increased from 54 percent as of December 31, 1992, to 62 percent as of December 31, 2002 (see table 8). While consumer loans, which broadly consist of unsecured credit card loans, new and used vehicle loans, and certain other loans to members, remained the largest category of credit union loans, the most significant growth in credit union loan portfolios was in real estate loans. These loans grew from 19 percent of total assets as of December 31, 1992, to 26 percent of total assets as of December 31, 2002. Despite the growth in credit union real estate loans, credit unions had a lower percentage of real estate loans to total assets (26 percent) than their peer group banks and thrifts, which had 37 percent of real estate loans to total assets (see table 9). Credit unions had a significantly higher percentage of consumer loans to total assets (31 percent) compared with their peer group banks and thrifts (8 percent). These banks and thrifts, however, had a significantly higher percentage of agricultural and commercial loans to total assets (12 percent) compared with credit unions (slightly more than 1 percent). The profitability of credit unions, as measured by the return on average assets, has been relatively stable in recent years. According to this measure, credit union profitability was higher in the early to mid-1990s than in the late 1990s and early 2000s. While declining from 1993 through 1999, the return on average assets has since stabilized. It has generally hovered around 1 percent, which, by historical banking standards, is a performance benchmark, and it was reported at 1.07 as of December 31, 2002 (see fig. 19). Profits are an especially important source of capital for credit unions because they are mutually owned institutions that cannot sell equity to raise capital. The number of credit unions with a CAMEL rating of 1 (strong) increased from 1,082 (9 percent) in 1992 to 2,186 (23 percent) in 2002 (see fig. 20). During the same time period, institutions classified as problem credit unions—those with CAMEL ratings of 4 (poor) or 5 (unsatisfactory)— decreased from 578 (5 percent) in 1992 to 211 (2 percent) in 2002. Figures 21, 22, and 23 illustrate the marked size disparity between credit unions and institutions insured by the Federal Deposit Insurance Corporation (FDIC), with figure 21 highlighting how small most credit unions are. At the end of 2002, the largest credit union had less than $18 billion in assets, while the largest bank, with over $600 billion in assets, was larger than the entire credit union industry. Given the disproportionate size of the banking industry relative to the credit union industry, peer groups were defined to mitigate the effects of this discrepancy. Therefore, for our more detailed reviews, we constructed five peer groups in terms of institution size as measured by total assets, reported as of December 31, 2002. We further refined the sample of FDIC- insured institutions to exclude those banks and thrifts we determined had emphases in credit card or mortgage loans. The largest bank included in our analyses had total assets of nearly $18 billion in 2002. See appendix I for details. Figures 24, 25, 26, and 27 illustrate that differences in services (as measured by the number of institutions holding various consumer, mortgage, and business loans) between credit unions and peer group banks are manifested in terms of institution size. Overall, the credit union industry in aggregate did not appear to be that similar to the banking industry (as captured by our sample of peer group banks) in terms of services; however, when broken out by size, the larger credit unions (those with more than $100 million in assets, or credit unions in Groups II, III, IV, and V) appeared to be offering very similar services to peer banks. Moreover, as nearly 90 percent of all credit unions had less than $100 million in assets as of December 31, 2002, the results depicted in Figure 24 are influenced more heavily by these institutions. In the absence of detailed time series data on the provision of services by credit unions, we used holdings of various loans, including mortgage and consumer loans, as well as other variables, as rough measures of credit union services over time. We also separated credit unions by asset size to illustrate any differences in provision of services by this criterion. For illustrative purposes, we compared the smallest credit unions (those with assets of $100 million or less) with the largest credit unions (those with more than $1 billion in assets). The percentage of all credit unions holding first mortgage loans has increased every year since 1992 (see fig. 28). However, nearly twice as many credit unions hold new and used vehicle loans as first mortgage loans. Calculating the percentage of loan amounts held to total assets can reveal the relative importance of each type of loan to credit unions. Figure 29 shows that first mortgage loans have increased in importance, surpassing each of the other loan holdings. Although nearly all credit unions have offered regular shares (savings accounts), over the years, the percentage of those offering share drafts (checking accounts) and money market shares has increased, as illustrated in figure 30. The number of employees could have an effect on the provision of services as well. Figure 31 shows that industry consolidation has not adversely affected employment. Even though the industry shrank in terms of the number of institutions from 12,595 in 1992 to 9,688 in 2002, a decline of 23 percent, the number of full-time employees went from 119,480 in 1992 to 180,401 in 2002, an increase of 51 percent. The differences between the smallest credit unions (those with $100 million or less in assets) and the largest credit unions (those with more than $1 billion in assets) are also apparent in the types of loans held and their relative importance for each group over time (see figs. 32 and 33). Nearly all of the smallest credit unions have emphasized new and used vehicle loans, but typically less than one-half of these credit unions have held other loan types. As of December 31, 2002, used vehicle loans were the relatively most important loan holding for the smallest credit unions, surpassing new vehicle loans. Almost all of the largest credit unions have held most types of loans over the past decade, with the exception of member business loans—but the percentage of the largest credit unions holding these has been steadily growing and, as of December 31, 2002, roughly three out of four of these credit unions held them. First mortgage loans have consistently been the most important loan holding of the largest credit unions, and they now represent nearly one-quarter of the asset mix of these credit unions. As of December 31, 2002, we observed a gap in services offered by smaller credit unions and larger credit unions (see fig. 34). While larger credit unions—those with assets of more than $100 million—accounted for just over 10 percent of all credit unions, they offered more services than smaller credit unions. For example, nearly all of the larger credit unions held mortgage loans and credit card loans, while only around one-half of the smaller credit unions held these loans. The discrepancy in the services offered by smaller and larger credit unions is more accurately illustrated through an analysis of more recently collected data on more sophisticated product and service offerings, such as the availability of automatic teller machines (ATM) and electronic banking (see fig. 35). While less than half of the smallest credit unions offered ATMs and one-third offered financial services through the Internet, nearly all larger credit unions offered these services. This appendix provides additional information on the characteristics—age, education, and race/ethnicity—of households that use banks and credit unions. For figures 36, 37, and 38, we analyzed data from the Federal Reserve's 2001 Survey of Consumer Finances (SCF). The categories we used to describe these households—credit union users and bank users— included those who only and primarily used each of these institutions. To supplement our analyses of households by race, we also analyzed 2001 loan application records from the Home Mortgage Disclosure Act database (HMDA) (see fig. 39). As we did with our analysis of HMDA income data, we only analyzed records for home purchase loans actually made for the purchase of one-to-four family homes. Fifteen percent of the HMDA data reported by credit unions and 6 percent of the HMDA data reported by banks lacked race and ethnicity data. As such, the data in this figure may not represent the exact proportion of mortgage loans by race. We also found that the proportion of loans without data varied by the asset size of institutions. For example, race data were missing for 23 percent of credit unions with assets of more than $500 million compared with about 3 percent for credit unions with less than $50 million in assets. Similarly, race data were missing for about 8 percent of peer group banks with more than $500 million in assets compared with about 4 percent of banks with less than $50 million in assets. However, since these larger institutions made most of the loans, missing data from these institutions account for more than 80 percent of all the missing data. Since 1992, changes to the National Credit Union Administration’s (NCUA) rules and regulations governing credit unions generally expanded the powers of credit unions to offer products and services, and broadened the activities in which they could engage. With the exception of member business lending, which NCUA constrained during the 1990s, federally chartered credit unions gained authority to, among other things, (1) invest in a wider variety of financial instruments, (2) offer services through the Internet, and (3) profit from referring members to products, such as insurance and investments, sold by third parties. Also, NCUA increased the number of activities in which credit union service organizations (CUSO) could engage, including student loan and business loan origination. In September 2003, NCUA expanded credit union powers in member business lending to permit well-capitalized credit unions to make unsecured member business loans within certain limits, among other things. See table 10 for a timeline of key changes to NCUA rules and regulations. The National Credit Union Administration (NCUA) changed its budget process in 2001 to allow outside parties, including credit unions and trade organizations, to submit comments on the budget. While outside parties can submit their budget suggestions and concerns at any time, NCUA has a formal budget briefing where these parties can officially submit their comments. This briefing takes place at the latter stage of NCUA’s budget process. The changes NCUA has made to its budget process come during a period in which NCUA has been reducing the growth in its budgets. NCUA has two main sources of funding for its operating costs. According to NCUA, 62 percent of the funds for operating costs in their 2002 budget came from the National Credit Union Share Insurance Fund (NCUSIF), administered by NCUA. NCUSIF is principally financed from earnings (income) on investments purchased using the deposits of federally insured credit unions. Funds are transferred from the insurance fund through a monthly accounting procedure known as the overhead transfer to cover costs associated with ensuring that insured deposits are safe and sound. The remaining 38 percent of NCUA’s funds for its operating costs came primarily from operating fees assessed on federally chartered credit unions, for which NCUA has oversight responsibility. NCUA budgets on a calendar-year basis, and its board sets the policies and overall direction for the budget. In July and August prior to the next budget year, the NCUA regional offices submit their workload and program needs. NCUA’s examination and insurance officials in headquarters assess the information and formulate proposed program hours, which along with historical actual expenditures are the basis for the proposed budget. In September and October, the Chief Financial Officer (CFO) reviews and analyzes the figures, conducts briefings with office directors, and makes adjustments. In November, NCUA holds a public briefing where interested parties, including credit unions and trade associations, have the opportunity to comment. Later in November, the CFO briefs the board prior to final budget adjustments. Additionally, in July of the budget year, there is a midyear budget review to determine if any adjustments need to be made to the budget. According to NCUA officials, NCUA also conducts a variance analysis on the budget on a monthly basis and a more comprehensive review at the end of the year. According to NCUA, credit unions and other stakeholders can submit their budget suggestions and concerns at any time. Normally, suggestions come between August and November while NCUA is working on the budget. For the public budget hearing, credit unions can address the board for 5 minutes or submit a written document. Recent budget concerns by credit unions have centered on lessening the costs to credit unions for NCUA oversight. Credit unions have raised specific concerns about the number of NCUA staff or full-time equivalents, the salaries of NCUA staff, and the overhead transfer rate from the insurance fund. According to NCUA data, its average full-time equivalent cost is less than that of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) and equal to that of the Office of Thrift Supervision (OTS). Nevertheless, NCUA has responded to concerns over its salary levels by deciding to undertake a pay study. In recent years, NCUA has been successful in slowing its budget growth. After 10-percent annual growth from 1998 to 2000, NCUA budget growth has decreased to an average of about 3 percent in 2000–2003 (see fig. 40). The NCUA board’s budget priorities have been to streamline business processes, increase efficiencies, control budget growth, and match resources to mission requirements, while maintaining effective examination processes and products. NCUA is seeking budget savings by adopting a risk-focused examination approach, extending the examination cycle, adopting more flexible rules and regulations, increasing efficiencies from technology (such as videoconferencing), and consolidating two of their regions into one. NCUA’s authorized full-time equivalent staff level decreased over 7 percent from 1,049 in 2000 to 971 in 2003 (see fig. 41). This level of staff reductions has been partly in response to changes in the industry. Since 1998, the number of federally insured credit unions has decreased steadily by about 3 percent per year. Section 301 of the Credit Union Membership Access Act (CUMAA) amended the Federal Credit Union Act to require the National Credit Union Administration (NCUA) to adopt a system of prompt corrective action (PCA) for use on credit unions experiencing capitalization problems. The goal of requiring PCA is to resolve the problems of insured credit unions with the least possible long-term loss to the National Credit Union Share Insurance Fund (NCUSIF). In that regard, NCUA was required to prescribe a system of PCA consisting of three principal components: (1) a comprehensive framework of mandatory supervisory actions and discretionary supervisory actions, (2) an alternative system of PCA for “new” credit unions, and (3) a risk-based net worth (RBNW) requirement for “complex” credit unions. Furthermore, section 301 also required NCUA to report to Congress on how PCA was implemented and how PCA for credit unions differs from PCA for other depository institutions. NCUA submitted this report in May 2000. In addition, NCUA submitted a further report to Congress that described how NCUA carried out the RBNW requirements for credit unions and how these requirements differed from RBNW requirements of other depository institutions (see table 11). After NCUA implemented the initial PCA and RBNW regulations, it formed a PCA Oversight Task Force to review at least a full year of PCA implementation and recommend necessary modifications. The task force reviewed the first six quarters of PCA implementation. It made several recommendations to improve PCA, including revising definitions of terms and clarifying implementation issues. In June 2002, NCUA issued a proposed rule setting forth revisions and adjustments to improve and simplify PCA. In November 2002, after incorporating public comments on the proposed rule, NCUA issued the final PCA rule adopting the proposed revisions and adjustments. The final rule became effective on January 1, 2003. The PCA rule consists of a comprehensive framework of mandatory and discretionary supervisory actions for all federally insured credit unions except “new” credit unions. The PCA system includes the following five statutory categories and their associated net worth ratios: well-capitalized—7.0 percent or greater net worth, adequately capitalized—6.0 to 6.99 percent net worth, undercapitalized—4.0 to 5.99 percent net worth, significantly undercapitalized—2.0 to 3.99 percent net worth, and critically undercapitalized—less than 2.0 percent net worth. As noted earlier in the report, mandatory supervisory actions apply to credit unions that are classified adequately capitalized or lower. The PCA system also includes conditions triggering mandatory conservatorship and liquidation. CUMAA also authorized NCUA to develop a comprehensive series of discretionary supervisory actions to complement the mandatory supervisory actions. Some or all of these 14 discretionary supervisory actions can be applied to credit unions that are classified undercapitalized or lower (see table 12). The discretionary supervisory actions are tailored to suit the distinctive characteristics of credit unions. CUMAA required NCUA to develop an alternative PCA system for “new” credit unions. In doing so, NCUA recognized that new credit unions (1) initially have no net worth, (2) need reasonable time to accumulate net worth, and (3) need incentives to become adequately capitalized by the time they are no longer new. Accordingly, the PCA system for new credit unions has relaxed net worth ratios, allows regulatory forbearance, and offers incentives to build net worth. The PCA system for new credit unions includes six net worth categories and their associated net worth ratios (see table 13). CUMAA also required NCUA to formulate the definition of a “complex” credit union according to the risk level of its portfolios of assets and liabilities. Well-capitalized and adequately capitalized credit unions classified as complex are subject to an additional RBNW requirement to compensate for material risks against which a 6.0 percent net worth ratio may not provide adequate protection. (We describe the RBNW requirement in more detail elsewhere in this appendix.) CUMAA mandated that NCUA submit a report to Congress addressing PCA. The report, dated May 22, 2000, explains how the new PCA rules account for the cooperative character of credit unions and how the PCA rules differ from the Federal Deposit Insurance Act’s (FDIA) “discretionary safeguards” for other depository institutions as well as the reasons for the differences. The report discusses how the PCA rules account for credit unions’ cooperative character in three areas: their not-for-profit nature, their inability to issue stock, and their board of directors consisting primarily of volunteers. First, the final rule accounts for credit unions’ not-for-profit nature by permitting a less-than-well-capitalized credit union to seek a reduction in the statutory earnings retention requirement to allow the continued payment of dividends sufficient to discourage an outflow of shares. In addition, a well-capitalized credit union whose earnings are depleted may be permitted to pay dividends from its regular reserve provided that such payment would not cause the credit union to fall below the adequately capitalized level. Secondly, to account for the inability of credit unions to issue capital stock, the final rule relies on the Net Worth Restoration Plan, which must be submitted by credit unions classified as undercapitalized or lower. Finally, to recognize that credit unions’ boards of directors consist primarily of volunteers, the rule exempts credit unions that are near to being adequately capitalized from the discretionary supervisory action authorizing NCUA to order a new election of the board of directors. NCUA reported that the final rule established discretionary supervisory actions that are essentially comparable to section 38 of FDIA, which specifies “discretionary safeguards” for other depository institutions. The report notes that NCUA adopted discretionary supervisory actions that are similar to all but two of FDIA’s 14 discretionary safeguards. NCUA did not adopt FDIA’s safeguards requiring selling new shares of stock and prior approval of capital distributions by a bank holding company. NCUA’s rationale for these exclusions was that, unlike banks, credit unions cannot sell stock to raise capital and are not controlled by holding companies. NCUA departed from FDIA discretionary safeguards in fashioning three of the discretionary supervisory actions: (1) dismissals of senior officers or directors, (2) exemption of officers from discretionary supervisory actions, and (3) ordering a new election of the boards of directors. NCUA reported that the discretionary supervisory action for director dismissals departs significantly from its FDIA counterpart. The FDIA safeguard protects from dismissal of officials with office tenures of 180 days or less, when an institution becomes undercapitalized. In contrast, NCUA contends that such a “safe harbor” is unnecessary for credit unions. Moreover, NCUA field experience supports the view that short-tenured officers can be as responsible as others for rapidly declining net worth. With regard to exempting officers from discretionary supervisory actions, NCUA provides conditional relief to credit unions in contrast to the FDIA. For example, the report notes that FDIA allows 11 discretionary safeguards to be imposed on undercapitalized institutions. On the other hand, NCUA’s comparable discretionary supervisory actions can be imposed against undercapitalized credit unions in the first tier of that category only when they fail to comply with any of CUMAA’s four mandatory supervisory actions or fail to implement an approved Net Worth Restoration Plan.NCUA’s rationale for granting relief from the relevant discretionary supervisory actions is to avoid treating credit unions that are just short of adequately capitalized as harshly as those that are almost significantly undercapitalized. NCUA’s report states that it modified the discretionary supervisory action ordering a new election of the board of directors. Specifically, NCUA excludes undercapitalized credit unions from this requirement but applies it to significantly undercapitalized and critically undercapitalized credit unions. NCUA’s exception was based on the belief that the safeguard would undermine a defining characteristic of credit unions—membership election of directors—and possibly discourage members from volunteering to serve as directors. Moreover, NCUA noted that its discretionary supervisory action does not compel a credit union to replace its board with a NCUA- designated slate; it simply requires the membership to reconsider its original choice of directors. Finally, the report states that ordering a wholesale election of the board of directors may be an overreaction when a credit union’s net worth is within reach of becoming adequately capitalized. NCUA submitted a report to Congress addressing its RBNW provisions on November 3, 2000. In general, the report describes NCUA’s comprehensive approach to evaluating a credit union’s individual risk exposure. It explains the RBNW requirement that applies to complex credit unions. The RBNW requirement takes into account whether credit unions classified as adequately capitalized provide adequate protection against risks posed by contingent liabilities, among other risks. According to the RBNW report, NCUA’s approach (1) targets credit unions that carry an above-average level of exposure to material risk, (2) allows an alternative method to calculate the amount of net worth needed to remain adequately capitalized or well-capitalized, and (3) makes available a risk mitigation credit to reflect quantitative evidence of risk mitigation. NCUA reported that its final rule targets credit unions that have higher material risk levels, thus warranting an extra measure of capital to protect them and NCUSIF from losses. As noted previously, credit unions do not issue stocks that create shareholder equity. Without shareholder equity to absorb losses, the RBNW requirement serves to mitigate most forms of risk in a complex credit union’s portfolio. Specifically, the RBNW measures the risk level of on- and off-balance sheet items in the credit union’s “risk portfolios.” The requirement applies only if a credit union’s total assets at the end of a quarter exceed $10 million, and its RBNW requirement under the standard calculation exceeds 6 percent. The $10 million asset floor eliminates the burden on credit unions that are unlikely to impose a material risk. NCUA uses two methods to determine whether a complex credit union meets its RBNW requirement. Under the “standard calculation,” each of eight risk portfolios is multiplied by one or more corresponding risk weightings to produce eight “standard components.” The sum of the eight standard components yields the RBNW requirement that the credit union’s net worth ratio must meet for it to remain either adequately capitalized or well-capitalized. If the RBNW requirement is not met, the credit union falls into the undercapitalized net worth category. NCUA allows a credit union that does not meet its RBNW requirement under the standard calculation to substitute for any of the three standard components, a corresponding “alternative component” that may reduce the RBNW requirement. The alternative components recognize finer increments of risk in real estate loans, member business loans, and investments. Finally, in reporting on the RBNW requirement, NCUA recognized that credit unions, which failed under the standard calculation and with the alternative components, nonetheless might individually be able to mitigate material risk. In such instances, a risk mitigation credit is available to credit unions that succeed in demonstrating mitigation of interest rate or credit risk.If approved, a risk mitigation credit will reduce the RBNW requirement a credit union must satisfy to remain classified as adequately capitalized or above. The National Credit Union Share Insurance Fund (NCUSIF) capitalizes its insurance fund differently than the Federal Deposit Insurance Corporation (FDIC) capitalizes the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF). For NCUSIF, a cash deposit in the fund equal to 1 percent of insured shares, adjusted at least annually, must remain on deposit with the fund for the period a credit union remains federally insured. This deposit is treated as an asset on the credit union’s financial statements, and as part of equity on NCUSIF’s financial statements in an account entitled “Insured credit unions’ accumulated contributions.” If a credit union leaves federal insurance, for example to become privately insured, the deposit with NCUSIF is refunded. However, if the National Credit Union Administration’s (NCUA) board assesses additional premiums in order to maintain the minimum required equity ratio, the premiums are treated as an operating expense on the credit unions’ financial statements and would not be refunded. Since 2000, NCUA has not made any distributions to contributing credit unions because the fund did not exceed the NCUA board’s specific operating level. And, between 1990 and 2002, federally insured credit unions were assessed premiums only in 1991 and 1992, when the fund’s equity declined below the mandated minimum normal o rcent of insured shares. 1.20 pep erating l evel ofHowever, unlike federally insured credit unions, federally insured banks and thrifts operate exclusively under a premium-based insurance system. This system requires banks and thrifts to remit a premium payment of a specified percent of their balance of insured deposits twice a year to FDIC to obtain federal deposit insurance. Each bank or thrift treats the premium as an expense in its financial statements, while FDIC recognizes the premium as income in its financial statements. If a bank or thrift elects to not continue its federal deposit insurance, its premiums are, unlike the NCUSIF insurance deposit, nonrefundable. or 3) and a supervisory subgroup (A, B, or C).This resulted in the best- rated institutions being categorized as 1-A and the worst institutions as 3-C. These categorizations result in a range of premium costs, with the best- rated institutions paying the lowest premium and the worst-rated institutions paying the highest premium. In August 2000, FDIC issued a report that discussed the current deposit insurance system, including the existence of two separate funds, an insurance pricing system that may provide inappropriate incentives for risk and growth, and issues of fairness and equitable insurance coverage, and offered possible solutions. The report warned that this system might require banks to fund insurance losses when they can least afford it. Solutions offered in the report included (1) merging BIF and SAIF, (2) improving the pricing of insurance premiums through a number of options, and (3) setting a “soft” target for the reserve ratio, which would allow the deposit insurance fund balances to grow during favorable economic periods, thereby smoothing premium costs over a longer period of time. As a result of FDIC’s report, legislation is pending that may provide additional reforms of the deposit insurance system, including pricing of insurance. percent up to a maximum of 1.3 percent for each credit union depending on the credit union’s CAMEL rating. The FDIC study of risk-based pricing indicated that one of the negative aspects of not pricing to risk is that new institutions and fast-growing institutions are benefiting at the expense of their older and slower-growing competitors. Rapid deposit growth lowers a fund’s equity ratio and increases the probability that additional failures will push a fund’s equity ratio below the minimum requirements, resulting in a rapid increase in premiums for all institutions. B. ASI has limited ability to absorb large (catastrophic) losses because it does not have the backing of any government entity. In its 29-year history, ASI has paid over 110 claims on failed credit unions, and more importantly, no member of a privately insured credit union has ever lost money in an ASI-insured account. Also, ASI’s statutory ability to reassess its member credit unions provides a significant amount of committed equity for catastrophic losses. Further, the company employs numerous programs to mitigate the risk of large losses and field examines more than 60% of its insured risk annually. Therefore, a sound private deposit insurance program, built upon a solid foundation of careful underwriting, continuous risk management and the financial backing of its mutual member credit unions, can absorb large (catastrophic) losses. With regard to the government backing, the GAO fails to consider that ASI is a private business, licensed at the state level; owned by the credit unions it insures; and, managed by a board of directors elected by such member credit unions. Private share insurance was never intended to have any state or federal guarantees. C. ASI’s lines of credit are limited in the aggregate as to amount and available collateral. The Study Section erroneously views the company’s lines of credit as a source of capital, when they are solely in place to provide emergency liquidity. Proportionately, ASI’s committed lines of credit with third parties, as a percentage of fund assets, are greater than that of the federal share insurer. Comparisons throughout the Study Section are often provided on an absolute basis, not a proportionate basis, which we believe skews many of the results included in the Study Section. D. Many privately insured credit unions have failed to make required consumer disclosures about the absence of federal insurance of member accounts as required under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the Federal Trade Commission (FTC) is the appropriate federal agency to enforce such compliance. FDICIA was passed in December 1991, and not long thereafter, the FTC sought and received an exemption from Congress from enforcing the consumer disclosure provisions of FDICIA. We concur with the Study Section’s observations in this regard, and believe privately insured credit unions would benefit from FTC’s enforcement of such provisions. Detailed comments supporting and supplementing our above comments are attached as Exhibit A. A. ASI’s risks are concentrated in a few large credit unions and in certain states. All businesses face some degree of concentration risk. For example, 55% of all federally insured shares are on deposit at only 230 NCUSIF-insured credit unions -- this represents less than 3% of all federally insured credit unions nationally. Despite this natural phenomena, the GAO proceeds to raise concern over ASI’s risk distribution. The Study Section states that compared to federally insured credit unions, “…relatively few credit unions are privately insured.” As of December 31, 2002, about 2% of all credit unions are privately insured. ASI is currently authorized in nine states and insuring credit unions in eight nationally, and is limited to insuring only state- chartered credit unions in those states in which the company is authorized to do business. In its current states of operation, the company insures 212 credit unions, comprising $10.8 billion in insured shares. What the Study Section fails to report is that these credit unions represent 19% of all 1,095 state-chartered credit unions within that limited market, and 13.67% of the $80 billion in shares in those same 1,095 credit unions. Clearly, private share insurance is more significant to those affected states than the Study Section’s 2% statistic infers. The Study Section also reports that 45% of all shares insured by ASI are in credit unions chartered in California, as compared to 14.7% for the NCUSIF. These facts can be misleading given that ASI has a limited market, and the NCUSIF operates in all 50 states. An entirely different, but more comparable, result is achieved when one isolates the relative risk in these eight states only. Under an assumption that both entities are limited to doing business in just the eight ASI states, ASI’s 45% concentration in California looks significantly less daunting when compared to 55% for the NCUSIF. This should offer evidence that when placed on equal footing, the relative risk concentration variances are reduced materially. While eight states represent a limited market, they do not necessarily represent a geographic concentration risk, as inferred by the Study Section. We argue that the company’s states of operation represent a diverse cross-section of our nation, for example: East Coast – Maryland; Midwest – Ohio, Indiana and Illinois; West Coast – California and Nevada; Northwest – Idaho; and, Southeast – Alabama. As a private company, ASI faces various admission obstacles when seeking new markets. First, a state must have a state statute that allows for an option in share insurance. According to the Study Section, a total of approximately 20 state statutes currently allow for the share insurance option for their state-chartered credit unions. Based on this data, ASI is operating in about 40%-50% of the available markets. Furthermore, the actual power to approve such coverage, when permitted by statute, is generally resident with the specific state’s credit union supervisory authority. So, as a private company, to do business in any state requires that three basic conditions exist: (1) credit union demand; (2) a permissible statute; and, (3) regulatory acceptance of the option. Based on these legislative and regulatory barriers, we take exception to the GAO constantly using the federal share insurer, the NCUSIF, as a benchmark in evaluating a private company’s geographic concentration risk. Due to the agency’s federal franchise, none of the above conditions need be present for the NCUSIF to do business in a state. The business of insuring credit union member deposits is a business of risk assumption. Accordingly, the type of risk one assumes drives the cost of the program and the risk of ultimate loss to the fund. ASI has been very selective in assuming the risk it underwrites, and does a thorough job of monitoring and field examining its insured institutions on a recurring basis as reported in the Study Section. In addition, the Study Section reports that the company has denied insurance coverage to certain credit unions representing inordinate risk to the fund, and conversely has approved many that satisfy the company’s Risk Eligibility Standards. Of the 29 credit unions that have converted to private share insurance during the past decade, all were at the time, and are now, safe and sound credit unions, and all strictly complied with the federal requirements to convert insurance. These were not problem credit unions fleeing federal supervision. Included in these federal requirements is a mail ballot vote of the credit union’s entire membership. Risk in a Few Large Credit Unions The Study Section reports that ASI has one insured institution that represents approximately 25% of its total insured shares, and that its “Top Five” credit unions represent 40% of total insured shares. The first statistic compares unfavorably to the NCUSIF’s reported concentration risk in a single institution of 3%, to which we take no exception. The risk of a single institution, however, has been significantly misrepresented in the Study Section. A large, well managed credit union contributes significantly to the financial stability of a share insurance program. When underwriting its current largest institution in 2002, ASI considered several risk-mitigating factors, and, as with all applicant credit unions, performed a careful analysis of the institution. First, the subject institution received (and continues to receive) the highest rating available for credit unions. Second, ASI’s independent actuaries evaluated the adequacy of ASI’s capital prior to, and following, the underwriting of this credit union, and determined that ASI would continue to have a sufficiently high probability of sustaining runs even with this credit union in its insurance fund. Lastly, the federal insurer and state regulator both approved of the credit union’s insurance conversion, but only after the credit union took a full mail ballot vote of its almost 200,000 members and agreed to satisfy all the requirements of consumer disclosure under FDICIA. With regard to the risk concentrated in a few large credit unions, the Study Section fails to report the concentration risk in what would be the equivalent of the NCUSIF’s “Top Five” federally insured credit unions. Proportionately, this would equate to the NCUSIF’s top 230 federally insured credit unions. In terms of asset size, this group of 230 credit unions represents 45% of the NCUSIF’s total insured shares. Clearly, the two funds compare on this statistic, when measured on a proportionate, not absolute basis. B. ASI has limited ability to absorb large (catastrophic) losses because it does not have the backing of any government entity. The credit union movement introduced share insurance on the state level long before Title II of the Federal Credit Union Act was enacted in 1971, providing the first federal deposit insurance for credit unions. However, private share insurance didn’t come of age until the mid 1970s, as states began to realize the loss of sovereignty in a state charter under an all-federal insurance setting. It was never envisioned that private share insurance would seek, or need, any guarantee from a state or federal government to operate. In the cooperative spirit of the credit union movement, private share insurance was designed to be a credit union-owned and credit union-operated private fund. Nor was it ever the intent of the framers of private share insurance for it to operate without supervision, or financial capacity. Accordingly, various state laws were proactively sought and passed to permit the private share insurance option, subject to admission standards and required approvals. Private share insurance was designed to provide credit unions with a comparable – not identical -- alternative means for protecting member share accounts. Accordingly, a government backing for private share insurance was never anticipated, and to use the lack of such a guarantee as a criticism of private share insurance does not take into account its legislative intent, past performance or founding principles. To our knowledge, no private insurance company, licensed by individual states, has a guarantee from the federal government. Further, no private insurance company in the U.S. would be able to meet the “deep pockets” test of the federal or state governments inferred in the Study Section. As evidence of this, the largest insurance company in the country reports just under $32 billion in capital from all of its various insurance product lines. This is barely 50% of sheet capital plus the off-balance sheet recapitalization liability of its insured credit unions). Credit union-only insurance funds have a stable history that does not track with insurers of thrifts or a combination of thrifts and credit unions. Funds that have insured only credit unions (like ASI and the NCUSIF) have had very successful track records when it comes to loss and risk management. In over 29 years, ASI’s loss ratio has been significantly below that of its federal counterpart, and ASI has never had a year with an operating loss, nor has it ever had to seek any form of recapitalization from its member credit unions to bolster the fund due to losses. The reality is that a sound deposit insurance program, built upon a solid foundation of careful underwriting, continuous risk management and the financial backing of its mutual member credit unions, can exist as long as consideration is given to an actuarial analysis of the capital adequacy of the program in terms of sufficiently high probabilities (over 90%) of being able to withstand runs and multiple runs on the system. This is a common analysis that is accepted in the insurance industry for various kinds of low frequency, high-severity risk programs and is the foundation that the ASI insurance program is built upon. Our actuarial analyses and independent actuarial reports were provided to the GAO during its investigation. Alternative share insurance can be comparable to the NCUSIF, and still not have a government backing. C. ASI’s lines of credit are limited in the aggregate as to amount and available collateral. With regard to ASI’s committed bank lines of credit, the Study Section infers that ASI’s ability to absorb losses is reduced since its lines of credit are limited in the aggregate as to amount and available collateral. We disagree with this inference. The company’s lines of credit are designed to be solely a liquidity facility. The committed lines ensure liquidity of ASI’s invested funds; i.e., they provide a mechanism for ASI to quickly generate cash to meet liquidity needs, without having to liquidate the portfolio. Resources available for funding losses are not the same as resources available for providing liquidity. Lines of credit are not intended to be a source for funding insurance losses. In fact, banks would not provide a loan for such a purpose. ASI’s assets and its off-balance sheet sources of funding (i.e., the power to recapitalize the fund by insured credit unions under the ASI’s governing statute and insurance policy) are its capital sources for funding losses, not the bank lines of credit. Proportionately, ASI’s lines of credits are greater than that of the NCUSIF. ASI’s $90 million in committed lines of credit equates to approximately 47% of the company’s total assets. NCUSIF’s $1.6 billion maximum borrowing capacity ($100 million from the U.S. Treasury and $1.5 billion from the Central Liquidity Facility, as disclosed in the NCUSIF’s and CLF’s audited financial statements for the year ended December 31, 2002), equates to approximately 28% of its total assets. ASI has other sources of liquidity when it liquidates a credit union -- that is the credit union’s own liquid assets. Approximately 42% of ASI’s primary insured credit unions’ total assets are comprised of cash and investments – we believe this is significant. In addition, the non-liquid assets (namely loans and fixed assets) of a failed institution can be pledged as collateral for additional borrowings to generate short-term liquidity until such loans and other assets can be collected and/or sold. In essence, a failed credit union’s total assets over time often generate sufficient liquidity to pay shareholders. Any shortage (historically less than 4% of total assets of the failed institution) is usually funded as a loss by ASI’s assets. This is the same principle under which NCUSIF operates. D. Many privately insured credit unions have failed to make required consumer disclosures about the absence of federal insurance of member accounts as required under the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the Federal Trade Commission (FTC) is the appropriate federal agency to enforce such compliance. The Study Section reference to the GAO’s August 20, 2003 study titled: Federal Deposit Insurance Act: FTC Best Among Candidates to Enforce Consumer Protection Provisions (GAO-03-971) reiterates the GAO’s earlier concern that “…members of privately insured credit unions might not be adequately informed that their deposits are not federally insured…” Although the statement may be accurate, any implication that ASI and its member credit unions are purposefully misleading consumers fails to directly implicate the Federal Trade Commission (FTC) who, with the concurrence of Congress, has totally disregarded its statutory responsibility to regulate the disclosure requirements as defined by Section 151 (g) of FDICIA, codified at 12 U.S.C. § 1831 (t)(g). We believe that the GAO’s earlier study brought to light the problems that arise when a federal law effectively lacks an enforcement agency, and we support the GAO’s previous conclusion that the FTC is the appropriate agency for monitoring and defining private share insurance consumer disclosure requirements. This concludes ASI’s detailed comments in response to the GAO’s draft report on its study of private share insurance in the credit union movement -- a component of the GAO’s broader study titled, Credit Unions: Financial Condition Has Improved But Opportunities Exist to Enhance Oversight and Share Insurance Management. In additional to those named in the body of this report, the following individuals made key contributions. 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. | Recent legislative and regulatory changes have blurred some distinctions between credit unions and other depository institutions such as banks. The 1998 Credit Union Membership Access Act (CUMAA) allowed for an expansion of membership and mandated safety and soundness controls similar to those of other depository institutions. In light of these changes and the evolution of the credit union industry, GAO evaluated (1) the financial condition of the industry and the deposit (share) insurance fund, (2) the impact of CUMAA on the industry, and (3) how the National Credit Union Administration (NCUA) had changed its safety and soundness processes. The financial condition of the credit union industry has improved since GAO's last report in 1991, and the federal share insurance fund appears financially stable. However, a growing concentration of industry assets in large credit unions creates the need for greater risk management on the part of NCUA. The question of who benefits from credit unions' services has also been widely debated. While it has been generally accepted that credit unions have a historical emphasis on serving people of modest means, our analysis of limited available data suggested that credit unions served a slightly lower proportion of low- and moderate-income households than banks. CUMAA and subsequent NCUA regulations enabled federally chartered credit unions to expand their membership, serve larger geographic areas, and add underserved areas. According to NCUA officials, these changes were necessary to maintain the competitiveness of the federal charter with respect to state-chartered credit unions. While NCUA has stated its commitment to ensuring that credit unions provide financial services to all segments of society, NCUA has not developed indicators to determine if credit union services have reached the underserved. In response to the growing concentration of industry assets and increased services offered by credit unions, NCUA recently adopted a risk-focused examination and supervision program but still faces a number of challenges, including lack of access to third-party vendors that are providing more services to credit unions. Further, credit unions are not subject to internal control and attestation reporting requirements applicable to banks and thrifts. GAO also found that the insurance fund's rate structure does not reflect risks that individual credit unions pose to the fund, and NCUA's estimation of fund losses is based on broad historical analysis rather than a current risk profile of insured institutions. |
LPI, also known as “force-placed” or “creditor-placed” insurance, is an insurance policy purchased by a mortgage servicer on a home to ensure continuous coverage when the borrower’s homeowners or flood insurance lapses or otherwise becomes inadequate. Most investors, such as Fannie Mae and Freddie Mac, require continuous homeowners insurance coverage on properties that serve as collateral for loans, and mortgage contracts usually require that borrowers maintain continuous coverage to protect the investor’s financial interest in the property. Regulated lending institutions are also required to ensure that borrowers obtain and maintain flood insurance for properties in special flood hazard areas. If a borrower does not maintain continuous coverage as required by the mortgage contract, the servicer is required to purchase LPI and may charge the borrower for the associated premiums and costs. As a result, LPI allows servicers to meet these requirements and protect the mortgage holder’s financial interest in the property. A distribution of LPI policies in 2013 can be seen in figure 1. Servicers generally contract with LPI providers to cover all the mortgages in their portfolios from the date any borrower-purchased coverage lapses, regardless of when the coverage lapse is discovered. According to industry officials, most servicers outsource tracking and notification services—that is, monitoring of the mortgages’ insurance policies for possible lapses in coverage and communicating to borrowers that LPI will be placed unless the borrower provides proof of insurance—to LPI insurers or managing general agents. Because LPI insurers are responsible for losses that occur during coverage lapses, some of the larger insurers perform these services themselves. Industry officials said that some smaller LPI insurers use a managing general agent to perform some or all of the tracking services, usually because setting up these services requires a large upfront investment, but generally continue to perform the notification services directly. Insurers typically factor the expenses associated with such activity into the LPI premium rates, which are based on the value of the underlying properties. When the servicer places an LPI policy, it pays the premium to the LPI insurer and reimburses itself with funds from the borrower’s escrow account or by adding the premium amount to the mortgage’s principal balance. In some cases, the insurer may pay a commission to the servicer or servicer’s agent for the business and can also use a portion of its premium revenue to purchase reinsurance to hedge its risk of loss (see fig. 2). Also in some cases, the company providing reinsurance to the LPI insurer could be affiliated with the servicer who placed the LPI policy. LPI differs from borrower-purchased homeowners insurance in several ways. First, with borrower-purchased insurance, insurers evaluate the risks for individual properties and decide whether to cover a property and how much to charge. Because LPI covers all mortgages in a servicer’s portfolio, insurers do not underwrite properties individually. Instead, they provide coverage without assessing the condition of individual properties and provide coverage for a broader range of risks, including defaults and vacancies. Second, industry officials said that the servicer rather than the borrower is typically the named insured on the LPI policy, although in some cases, borrowers can be additional insureds who have the right to file a claim in the event of a loss, and their interest is included in any settlement. Third, servicers rather than insurers are responsible for determining the amount of coverage. Most servicers purchase the same amount of coverage that was available under the lapsed borrower- purchased policy. This amount approximates the replacement value of the home and protects the borrower’s financial interest and the servicer should the property be damaged. However, in some situations the servicer may not know the amount of coverage under the previous policy and may instead use the mortgage’s unpaid principal balance. Finally, LPI coverage may differ from the coverage provided by borrower-purchased insurance. Industry officials said that LPI policies typically insure the dwelling and other related structures on a property but often do not include the borrower’s belongings or liability risks, as borrower-purchased policies do. However, one industry official said that LPI policies typically provide broader structural coverage, insure against vandalism, and continue coverage in the event of vacancy. Like borrower-purchased insurance, LPI is subject to state insurance regulation, including rate and form reviews and approvals where applicable. The McCarran-Ferguson Act provides that state law governs the business of insurance and is not superseded by federal law unless a federal law specifically relates to the business of insurance. State regulators license agents; review insurance products and premium rates, including LPI products and rates where applicable; and routinely examine insurers’ financial solvency. State regulators also generally perform market examinations in response to specific consumer complaints or regulatory concerns and monitor the resolution of consumer complaints against insurers. NAIC is a voluntary association of the heads of insurance departments from the 50 states, the District of Columbia, and five U.S. territories. While NAIC does not regulate insurers, it provides services to make certain interactions between insurers and state regulators more efficient. These services include providing detailed insurance data to help regulators understand insurance sales and practices; maintaining a range of databases useful to regulators; and coordinating state regulatory efforts by providing guidance, model laws and regulation, and information- sharing tools. NAIC has coordinated state regulatory efforts on LPI by developing a model law for LPI and holding public hearings on LPI. In 1996, NAIC developed the Creditor-Placed Insurance Model Act, which serves as a guide for state legislation on LPI for personal property, such as automobiles. Additionally, in August 2012, NAIC held a public hearing to discuss the use of LPI for mortgages and the effect of the practice on consumers. Although the business of insurance is regulated by the states, federal regulators generally have authority over regulated lenders’ and their servicers’ activities related to flood insurance, including flood LPI. The Board of Governors of the Federal Reserve System (Federal Reserve), Farm Credit Administration (FCA), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and National Credit Union Administration (NCUA) are the regulators responsible for overseeing the mandatory flood insurance purchase requirement for their institutions (see table 1). Since the passage of the Flood Disaster Protection Act of 1973, flood insurance has been mandatory for certain properties in special flood hazard areas within communities participating in the National Flood Insurance Program (NFIP), and federal regulators have been responsible for enforcing compliance with this mandatory purchase requirement. In 1994, the enactment of the National Flood Insurance Reform Act required a regulated lending institution or a servicer acting on its behalf to notify borrowers of lapsed coverage, and if the borrower did not purchase coverage within 45 days of the notice, to purchase flood LPI. The act clarified that servicers could charge the borrower for the cost of premiums and fees for flood LPI. It also required regulators to issue civil money penalties against regulated lending institutions for a pattern or practice of mandatory flood insurance purchase requirement violations, including LPI requirements. In 2012, the Biggert-Waters Flood Insurance Reform Act (Biggert-Waters Act) clarified that servicers could charge for flood LPI from the date of a coverage lapse or from the beginning date of insufficient coverage and also required them to issue refunds to borrowers who provided proof of insurance for any period of duplicate coverage. Each of the federal regulators has issued regulations to implement flood LPI rules for their respective institutions. Federal regulators also have supervision and enforcement authority for their regulated entities’ activities related to homeowners LPI. In 2010, the Dodd-Frank Act amended RESPA with specific provisions for homeowners LPI and granted CFPB rulemaking authority under RESPA. In 2013, CFPB adopted amendments to Regulation X to implement Dodd- Frank Act amendments to RESPA. CFPB’s amendments to Regulation X became effective in January 2014. The rules: prohibit servicers from charging borrowers for homeowners LPI unless they have a reasonable basis for believing that the borrower has not maintained homeowners insurance as required by the loan contract; require all charges to be bona fide and reasonable (does not cover charges subject to state regulation as the “business of insurance” and those authorized by the Flood Disaster Protection Act); require servicers to send two notices to borrowers before placing LPI; specify the content of the notices with model forms; generally prohibit servicers from obtaining homeowners LPI for borrowers with escrow accounts for the payment of hazard insurance whose mortgage payments are more than 30 days overdue unless the servicer is unable to disburse funds from the borrower’s escrow account to ensure that the borrower’s hazard insurance premiums are paid on time. The servicer is not considered unable to disburse funds because the borrower’s escrow account contains insufficient funds or if the loan payment is overdue. A servicer is considered unable to disburse funds from a borrower’s escrow account only if the servicer has a reasonable basis to believe either that the borrower’s insurance has been canceled (or not renewed) for reasons other than nonpayment of premium charges or that the property is vacant. The servicer generally must advance funds through escrow to maintain the borrower’s coverage; and specify procedures for terminating LPI and issuing refunds for duplicative premiums. In addition to homeowners LPI provisions, amendments to Regulation X included new provisions related to escrow payments; error resolution and information requests; general servicing policies, procedures, and requirements; loss mitigation activities; and mortgage servicing transfers. Mortgage servicers that service loans for investors in mortgage-backed securities must also comply with LPI rules required by their investors, particularly from Fannie Mae and Freddie Mac. In November 2013, the Federal Housing Finance Agency (FHFA), which oversees these entities, directed Fannie Mae and Freddie Mac to issue guidance to their servicers on LPI. In December 2013, the entities issued corresponding guidance, prohibiting their servicers and affiliated entities from receiving commissions or similar incentive-based compensation from LPI insurers and servicers’ affiliated companies from providing LPI insurance, including any reinsurance arrangements. See figure 3 for a summary of these and other key events related to LPI oversight. Mortgage servicers and LPI insurers use tracking and notification processes to determine when required coverage lapses and LPI is necessary. They ultimately place LPI on about 1 percent to 2 percent of mortgages in their portfolios, usually resulting from borrowers not paying their insurance premiums or the original insurers canceling or not renewing coverage. Servicers and insurers said that they use the tracking and notification systems to ensure that LPI placement is as accurate as possible, but that they must refund premiums when the borrower provides proof of coverage, which occurs on about 10 percent of policies. Finally, the Federal Emergency Management Agency (FEMA) offers flood LPI through its Mortgage Portfolio Protection Program (MPPP), but servicers generally said that they prefer private flood LPI coverage for a number of reasons, including more comprehensive coverage and lower premium rates. Mortgage servicers place LPI on a small percentage of mortgages when required coverage lapses, usually as a result of nonpayment by the borrower or cancelation or nonrenewal by the insurer. According to industry officials, mortgage servicers ultimately place homeowners LPI coverage on 1 percent to 2 percent of the mortgages in their portfolio. They said that placement rates were often under 2 percent prior to the 2007-2009 financial crisis but peaked at about 3 percent at the height of the crisis due to increased delinquencies. Industry officials said that placement rates increased as borrowers stopped paying their homeowners or flood insurance premiums along with their mortgage payments. One consumer advocate said that LPI placement rates were much higher for subprime lenders and may have peaked at 15 percent to 20 percent for some of them. Industry officials also said that placement rates were much higher for mortgages that were delinquent or in foreclosure. For example, one official said that its company’s placement rate was 0.6 percent for current loans, compared with 17 percent for noncurrent loans. Industry officials said that even as the housing market has improved, properties can remain in foreclosure for an extended period of time in some states, keeping the placement rate above its pre- crisis level. However, they said that they expected the rate to continue to decline as older foreclosures were resolved. As discussed earlier, some LPI insurers perform tracking and notification services for servicers both to manage their exposure and to meet the needs of servicers. As part of the tracking process, the insurer (or insurer’s agent) monitors mortgages on behalf of the servicer for possible lapses in borrower-purchased coverage—for example, when coverage has been canceled or is about to expire. One industry official said that this process involves obtaining and reviewing millions of insurance documents each year, many of which are in hard copy and not in a standardized format, and updating the servicers’ records accordingly. Industry officials said that within about 2 weeks of a borrower-purchased policy’s expected renewal date, the insurer generally receives renewal documentation on behalf of the servicer, and at this point, they have confirmed coverage for all but about 14 percent of mortgages (see fig. 4). If the insurer does not receive this documentation, it contacts borrowers’ insurers, their agents, and the borrowers themselves for proof of coverage. This process typically reduces the number of mortgages whose coverage status is unknown to about 9 percent around the expiration date. If renewal documentation does not arrive and the renewal date passes, the insurer sends a first letter to the borrower asking for proof of coverage. If the borrower does not provide proof of coverage, the insurer must send a second letter at least 15 days before charging the borrower for LPI (and at least 30 days after sending the first notice), this time with the cost or a reasonable estimate of the LPI policy’s premium. This second letter is sent to about 3 percent of loans whose coverage status has not yet been confirmed. Industry officials said that insurers had such notification procedures in place prior to the CFPB regulations, but noted that the regulations had helped standardize and clarify the notification letters. By the end of this process, the insurer is generally able to confirm borrower-purchased coverage for most of the mortgages in a servicer’s portfolio, but servicers ultimately place new coverage on the approximately 1 percent to 2 percent of borrowers who do not respond to the notifications. Industry officials said that because CFPB regulations require servicers to complete the 45-day notification process before charging for LPI coverage, most LPI policies are not issued until at least 60 days after the borrower’s insurance lapses. However, they said that most LPI policies are retroactive to the date of the insurance lapse. Industry officials said that LPI policies had a 1-year term but that most were canceled before the policy expired because borrowers eventually obtained the required borrower-purchased coverage to replace the LPI policy. According to industry officials and consumer advocates with whom we spoke, most LPI policies are placed on mortgages without escrow accounts when borrowers stop paying premiums on their required homeowners insurance policies. Industry officials said that mortgages with escrow accounts require LPI less often, because Regulation X requires mortgage servicers to use escrow funds to maintain borrower- purchased coverage—even when the escrow funds are insufficient. Industry officials noted that these regulations had had little effect on the LPI industry because servicers already maintained coverage for escrowed borrowers, including when escrow funds were insufficient. Additionally, industry officials with whom we spoke also estimated that 60 percent to 75 percent of U.S. mortgages had escrow accounts. Industry officials said that mortgages without escrow accounts are more likely to require LPI because servicers do not have escrow accounts to draw on to continue paying borrower-purchased insurance premiums. However, CFPB regulations do not require servicers to maintain borrower-purchased coverage for mortgages with escrow accounts if they believe the property is vacant or that the borrower-purchased coverage was canceled or not renewed for reasons other than nonpayment. Regulatory and industry officials said that, as a result, LPI placement on escrowed mortgages primarily occurred when the previous insurer canceled or declined to renew coverage. Regulatory and industry officials said that cancelation or nonrenewal happens for a number of reasons, most commonly because of a change in occupancy status, especially vacancy, often in connection with a foreclosure. They also cited other reasons, including a history of large losses on the property, a change in the condition or risk of the property, the borrower’s failure to maintain or repair the property, a misrepresentation of the property’s characteristics on the insurance application or other violations of the insurance contract, or a desire by the insurer to limit their concentration of risk in a particular high-risk geographic area. Even state residual insurance programs, which are designed to be insurers of last resort, may refuse to insure some high-risk properties, particularly those that are vacant. In addition, industry officials said that high risks in some areas could make borrower- purchased coverage difficult to obtain—for example, parts of the Gulf Coast and especially Florida—and result in placement of LPI. Industry officials said that a much less frequent cause of LPI placement was administrative errors that occurred, for instance, when a mortgage was transferred to a new servicer and the insurer was not notified. Industry officials said these errors were rare, but they did not provide more specific data. LPI insurers with whom we spoke said that they used the tracking and notification process to ensure that flood and homeowners LPI placement was as accurate as possible. However, industry officials and a consumer advocate said that insurers generally determined that placement was unnecessary for about 10 percent of the LPI policies they issued. Industry officials said that this unnecessary placement usually occurs because the borrower does not provide proof of coverage until after the LPI policy is placed, despite multiple requests from the servicer. CFPB regulations require the insurer to cancel the LPI and refund all homeowners LPI premiums and related fees for any overlapping coverage within 15 days of receiving proof of coverage. Industry officials told us that insurers had no incentive to place LPI unnecessarily, because doing so generated administrative expenses without a corresponding receipt of premium. For example, insurers incur expenses for corresponding with borrowers through calls and letters, issuing the policy, processing the cancelation, and issuing the premium refund. In addition to avoiding unnecessary expenses, industry officials said that insurers also want to avoid exposing their clients (the servicers) to borrower dissatisfaction and complaints. However, consumer advocates have cited unnecessary placements as an issue that needs to be addressed. While borrowers eventually receive a full refund of any unnecessary premiums, they may also be inconvenienced by having to initially pay the premium and go through the process of getting the policy canceled. One consumer advocate also cited concerns about unnecessary placement of flood LPI, particularly that borrowers incurred costs, such as hiring surveyors, to refute the servicer’s determination that flood insurance was necessary. LPI is also used when mandatory flood insurance policies lapse. The Flood Disaster Protection Act of 1973 requires flood insurance for properties in special flood hazard areas located in communities participating in NFIP that secure mortgages from federally regulated lenders. FEMA offers flood LPI coverage through MPPP, but most servicers obtain coverage through private insurers. FEMA officials said that as of March 2015, MPPP had about 800 policies, a small number compared with the approximately 5.2 million policies in its National Flood Insurance Program, the primary provider of borrower-purchased flood coverage. Industry officials told us that MPPP was mostly used by smaller servicers that did not have access to LPI insurers that offer flood LPI. Industry officials cited a number of reasons that servicers preferred to do business with private flood LPI insurers rather than FEMA’s MPPP. First, industry officials said that private insurers would provide coverage from the date of lapse. Industry officials said that MPPP policies, in contrast, do not allow for automatic coverage upon lapse of borrowers’ policies, resulting in the possibility of short periods with no coverage in place, while investors require the servicer to ensure continuous coverage. Second, industry officials said that private flood LPI rates are lower than MPPP rates, although they are still higher than rates for borrower-purchased flood insurance. For example, some told us that MPPP policies were about 4 times more expensive than private LPI flood policies, making MPPP a less attractive option. Further, some industry officials said that using MPPP for flood LPI would require servicers to have two insurers, one for homeowners LPI and one for flood, but that most servicers preferred to have the same insurer for both lines. According to one actuary who works with LPI, premium rates are determined by looking at expected losses (both catastrophic and noncatastrophic), expected other expenses, and target profit commensurate with the exposure and risk. Several industry officials said that some of the ways that LPI insurance differs from typical homeowners insurance can make LPI rates higher than borrower-purchased insurance. These differences include the following: Covering all properties regardless of associated risk: LPI insurers do not underwrite individual properties, but instead agree to cover all properties in a servicer’s mortgage portfolio and cannot reject coverage for high-risk borrowers. Insurers told us previously that to manage risk, they need the ability to accept and reject applicants as necessary. Some industry officials told us that because of the lack of information on the risks associated with the covered properties, insurers set LPI premium rates higher than rates for fully underwritten borrower-purchased insurance. Higher geographical concentrations of high-risk properties: Some industry officials told us that the inability to reject coverage for high-risk borrowers resulted in LPI insurance portfolios having large concentrations of high-risk properties—including in coastal states prone to catastrophic damage—that did not generally exist in borrower-purchased insurance portfolios. For example, one LPI insurer said that approximately 70 percent of its premiums in 2014 were in what it considered to be hurricane-exposed states. Higher concentrations of delinquent mortgages: Several industry officials said that LPI policies were more likely than borrower- purchased insurance policies to cover mortgages that were in delinquency and foreclosure. According to one insurer, 30 percent to 35 percent of its LPI policies as of March 2015 were on mortgages that had been delinquent for at least 90 days. Several industry officials said that properties in foreclosure are often vacant and inadequately maintained, increasing the risk and therefore the potential cost to the insurer. Additional administrative costs: Several industry officials also told us that LPI policies carried additional administrative costs. These costs can include tracking mortgages, obtaining reinsurance, and notifying homeowners of potential lapses. According to one LPI insurer, these efforts require significant and ongoing investments in technology that help effectively manage risk exposure and lower unnecessary placements. Further, several insurers said they also incur costs for communicating with borrowers during the notification process and when LPI is placed unnecessarily. Several industry officials also pointed out that investors and servicers bore at least some of the cost of LPI, especially on delinquent mortgages. One LPI insurer said that based on its own calculations, 35 percent of LPI premiums were paid by someone other than the borrower, usually the investor, and that this percentage had decreased in recent years. According to industry officials, when borrowers do not recover from delinquencies, investors—which could include Fannie Mae and Freddie Mac—typically reimburse servicers for the cost of LPI premiums once the foreclosure process is complete, which in some cases can take years. According to several consumer advocates and state regulators, some LPI premiums were higher than they should be. NAIC’s general principles for determining premium rates state that they should not be inadequate, excessive, or unfairly discriminatory. Some of the advocates and regulators cited low loss ratios—claims and adjustment expenses as a percentage of premiums—as evidence that the policies were priced too highly. For example, one study by a consumer advocate examined loss ratios from 2004 through 2012 and found that the average LPI loss ratio was 25.3 percent, compared with 63 percent for borrower-purchased insurance. Further, it found that the LPI loss ratio was lower than the borrower-purchased loss ratio in each of the 9 years in that time period. Industry officials responded to these assertions by noting that LPI claims were highly volatile and needed to be examined over much longer loss histories. They said that insurers set rates prospectively using models to estimate the full range of expected losses before they occurred and that these rates were reviewed by most state regulators as part of the rate filing process. They added that a loss ratio analysis, instead, is a retrospective process because it examines rates after the losses have occurred and is only one of many factors that state regulators consider when conducting an actuarial review of the filed rates. Some insurers also said that the potential for catastrophic losses in some years requires rates that may exceed losses in other years. For example, some LPI insurers have said that LPI may have lower losses in many years but significantly higher losses in catastrophic years, offsetting the profits from lower loss years. However, California and New York required insurers in their states to resubmit rate filings with lower rates because, based on their review of some insurers’ loss histories in recent years, they did not see the pattern of profits from lower loss years offsetting significantly higher losses in catastrophic years. Consumer advocates said that the primary cause of higher LPI rates was reverse competition—a market structure that drives up prices for consumers because insurers compete for mortgage servicers’ business rather than consumers’ business—by providing financial incentives to the servicer. They said that borrowers had little or no influence over the price of the insurance because the servicer was responsible for selecting it and that the costs of the financial considerations were passed on to the borrower. They also said that some insurers have paid commissions to servicers or servicers’ agents and that the servicers and agents did little work to justify them. They said that these commissions contribute to higher premium rates. One industry official, however, said that commissions were a standard industry practice and that their costs were within reasonable ranges. After reviewing proposals from Fannie Mae and Freddie Mac on reducing expenditures related to LPI, FHFA in November 2013 instructed the enterprises—i.e., Fannie Mae and Freddie Mac—to prohibit servicers from receiving commissions paid for LPI. FHFA, as well as an insurer and a servicer with whom we spoke, told us that the use of commissions had decreased since then. Some state regulators noted that some insurers provided tracking and other services for free or below cost, benefitting the servicer, but included the costs of such services in what they charge consumers. One regulator and a consumer advocate said that some LPI insurers have purchased reinsurance at inflated prices from reinsurers owned by the lender. They said this overpayment to the reinsurer affiliated with the servicer could be a benefit to the servicer for purchasing LPI coverage from the insurer. One insurer and an industry official with whom we spoke commented that the use of affiliated reinsurers had decreased in recent years, with the industry official adding that this was at least in part due to the enterprises’ guidance, which also prohibited their servicers from entering into reinsurance arrangements with LPI providers. Some consumer advocates also said that the concentrated LPI market further contributed to high premiums. Two insurers account for most of the LPI market, with estimates of their market share ranging from 70 percent to 90 percent. Industry officials said that the two largest insurers had extensive systems to track large servicers’ mortgage portfolios, and one consumer advocate said that the expense of setting up such systems could be a barrier to entry for smaller insurers that must often outsource tracking services to independent agents. Some industry officials said that recent state and federal actions—for example, state actions establishing minimum loss ratio requirements—could have the unintended consequence of forcing smaller insurers out of the market because of increased compliance costs. This limited competition, they said, could contribute to higher premium rates. One insurer said that there were at least 10 major LPI insurers in the United States in 1992. The insurer said that since then, catastrophic losses—notably Hurricane Andrew in 1992— and other related factors have resulted in the majority of them choosing to exit the market. The insurer told us that most insurance companies were not willing to assume the level of risk involved in LPI. Finally, consumer advocates and some state regulators said that LPI had other negative effects on consumers in addition to the financial hardship of higher premiums. For example, they said LPI offers more limited coverage than borrower-purchased insurance. In particular, the policies purchased by the servicer for the borrower to protect the mortgage holder do not cover contents (personal property), liability, or additional living expenses. The servicer, not the borrower, is typically the primary insured party on an LPI policy and therefore determines the amount of coverage. Some state regulators said that as a result, the servicer may, in some cases, select coverage for the mortgage’s unpaid principal balance, which would not cover the property’s replacement cost. Some industry officials, however, said that servicers prefer to use the coverage amount the borrower had in place for the lapsed policy when it is known. Oversight of homeowners LPI varied across selected states in terms of requirements, reviews of LPI practices, and the rate filing process. NAIC does not have a model law or guidelines to address LPI for real property. We found variations in the regulatory treatment of LPI among the seven states we reviewed. For example, of the states we reviewed, only New York had adopted regulatory requirements applicable to LPI insurer practices. New York’s LPI regulations applicable to insurers include requirements for insurers and affiliates to notify the borrower before issuing LPI and for renewing or replacing LPI. Additionally, the New York LPI regulations prohibit the amount of LPI coverage from exceeding the last known coverage amount and prohibit insurers from engaging in several practices, including issuing LPI on property serviced by affiliated servicers, paying commissions, and providing insurance tracking to a servicer or affiliate for free or reduced charge. Six of the states (California, Florida, Illinois, Ohio, New Jersey, and Texas) did not have statutory or regulatory requirements specifically for LPI insurers in connection with mortgages (see table 2). Some states had LPI laws and regulations for mortgage servicers in addition to what the federal regulators required, as the following examples illustrate. The Texas Finance Code includes a chapter on LPI, which requires that the creditor (servicer) notify the debtor (borrower) no later than 31 days after the LPI is charged to the debtor. It also provides that a creditor may obtain LPI that will cover either the replacement cost of improvements or the amount of the unpaid indebtedness. The debtor is obligated to reimburse the creditor for the premium, the finance charge, and any other charges incurred by the creditor in connection with the placement of insurance. Illinois has a law that applies to servicers using LPI. Specifically, the law requires that notification forms include language similar to the “Notice of Placement of Insurance” forms set out in the act. The notice must be provided within 30 days following the purchase of the insurance. In 2014, the Illinois Collateral Protection Act was amended to provide that a servicer subject to Regulation X that places LPI in substantial compliance with Regulation X would be deemed in compliance with the Illinois law. New York has emergency regulations setting out business conduct rules for mortgage loan servicers. Servicers are prohibited from placing homeowners or flood insurance on the mortgaged property when the servicer knows or has reason to know that the borrower has an effective insurance policy. Servicers also must provide written notice to a borrower on taking action to place LPI on a property. LPI premium rates are subject to different levels of review across states. In most states, LPI is considered commercial lines coverage—that is, the policy is considered to cover the interests of a business (the servicer) rather than a consumer. NAIC officials stated that LPI is usually considered commercial lines coverage because insurers typically sell LPI to the servicer as a commercial product. States can use different rate review systems for commercial insurance, and some states may not have a rate review system for all commercial lines. According to NAIC officials, state regulators generally review every rate filing for personal lines coverage but may review only some rate filings for commercial lines. The officials told us that state insurance regulators often decided how to allocate resources for rate reviews based on consumer complaints, and personal lines typically generated more complaints than commercial lines. The seven states we selected all considered LPI to be commercial insurance but varied in whether they conducted rate reviews, how they conducted rate reviews, and how often rates were reviewed (see table 2), as the following examples illustrate. In New Jersey, commercial lines are subject to the use and file system—that is, the insurers can begin using new rates before filing but must file within a specified period. However, New Jersey does not require insurers to file LPI rates because the state considers it to be a deregulated product. In Ohio and Texas, commercial lines are subject to the file and use system, which, unlike use and file, generally allows them to begin using rates as soon as they are filed while the state regulator reviews the filing. In Florida, commercial lines and LPI are subject to the file and use system, which as previously noted, requires approval before the rates can be used, or use and file, which allows insurers to use rates as soon as they are filed as long as they are filed no later than 30 days after implementation, subject to refunds if the rates are determined to be excessive. Additionally, Florida requires annual rate filings from its top two LPI insurers. In California, commercial lines are subject to the prior approval system, which requires insurers to get state approval before using new rates. For example, after the first filing, California requires property-casualty insurers, including LPI insurers, to refile whenever their rates become inadequate or excessive. New York uses the file and use rating system for commercial lines. New York also requires LPI insurers to file rates that reflect loss ratios of at least 62 percent and to refile rates following any year in which the actual loss ratio falls below 40 percent. As of 2015, New York required LPI insurers to file rates at least every 3 years. Illinois does not have a rate filing system for all commercial lines. As with reviews of rate filings, reviews of LPI insurer practices also differed across states. Of the states we selected, those with the highest incidence of LPI were generally the most active in overseeing LPI. According to 2012 NAIC data, California, Florida, New York, and Texas were the top four states in LPI premium volume. Since 2011, three of them—California, Florida, and New York—have reviewed LPI practices in their states in response to increased attention from consumer advocates and NAIC. For example, the New York State Department of Financial Services (NYDFS) took several steps to review LPI practices in its state, which resulted in development of regulations on the LPI activities of insurers and servicers. According to NYDFS officials, the department began an investigation of LPI in October 2011 after receiving complaints from consumer advocates that LPI loss ratios were significantly lower than loss ratios for borrower-purchased insurance. In May 2012, NYDFS subpoenaed LPI insurers and servicers and held public hearings on LPI premiums and the financial relationship between servicers and insurers. In March, April, and May 2013, when NYDFS reached settlements with the four largest LPI insurers, the agency noted in its findings that payments of commissions to affiliated servicers and reinsurance agreements could have led to the high premium rates. The settlements required the LPI insurers to refile premium rates with a permissible loss ratio of 62 percent; to refile rates every 3 years; to annually refile any rates that have an actual loss ratio of less than 40 percent; to have separate rates for LPI and borrower-purchased insurance; and prohibited certain practices, including the payment of commissions. The settlements also required the four LPI insurers to pay restitutions to eligible claimants and pay a combined total of $25 million in civil money penalties to NYDFS. Additionally, four other LPI insurers agreed to sign codes of conduct implementing New York’s LPI reforms. As noted earlier, effective February 2015, New York regulations began addressing several practices, including the use of affiliated insurers, commissions, tracking services, loss ratios, and borrower notification. NYDFS officials stated that since these hearings and settlements, LPI insurers had reduced their rates in New York. California’s and Florida’s actions did not result in revised regulations, but both states did require reduced LPI rates. Officials from the California Department of Insurance said that in March 2012, they contacted LPI insurers and ultimately required four of them to refile their LPI rates. They said that after examining the insurers’ annual financial statement data, they found that the insurers’ loss ratios were low, and required four insurers to lower their rate schedules. The officials said that these refilings resulted in rate reductions ranging from about 21 percent to 35 percent. Similarly, officials from the Florida Office of Insurance Regulation said that the New York settlements, NAIC hearing, and information from consumer advocates on LPI prompted them to review LPI practices. In July 2012 and May 2013, it held public rate hearings on two of its LPI insurers. Both hearings resulted in orders for the insurers to reduce rates and other reforms, including a prohibition on payment of commissions to the mortgage servicer, borrower notification requirements, and annual rate filings. Florida officials said that the annual rate filings have resulted in rate reductions of about 14 percent and 22 percent for the two insurers. In a 2014 filing, a third LPI insurer agreed to reduce its rates by 4 percent. According to NAIC data, Illinois, New Jersey, Ohio, and Texas were among the seven states with the highest market share of LPI premiums, but officials from these states stated they have not taken specific actions regarding LPI. Illinois officials stated that although they had not taken actions related to LPI, their market conduct unit was conducting examinations of three LPI insurers and planned to publish the findings in 2015. New Jersey officials stated that in the past 2 years they had received one consumer complaint related to LPI. They added that in general when they receive consumer complaints about any issue, they conduct market examinations and consider regulatory changes if the issue is widespread. Ohio officials said that they had not received consumer complaints related to LPI or identified any issues related to LPI in their state. Federal regulators have recently revised regulations related to flood and homeowners LPI. In 2010, the Dodd-Frank Act amended RESPA to add provisions on homeowners LPI, which CFPB implemented through amendments to Regulation X. Federal regulators have monitored mortgage servicers’ flood LPI activities since the 1994 amendments to NFIP. The Flood Disaster Protection Act of 1973 made flood insurance mandatory for properties with mortgages from federally regulated lenders in special flood hazard areas and in communities participating in NFIP. Among other things, the Flood Disaster Protection Act required regulators—including FDIC, the Federal Reserve, NCUA, OCC, the Federal Home Loan Bank Board (FHLBB), and the Federal Savings and Loan Insurance Corporation (FSLIC)—to issue regulations prohibiting lending institutions from approving loans without adequate flood insurance where available. The National Flood Insurance Reform Act of 1994 (1994 Act) included specific provisions on placement of flood insurance by lenders. The 1994 Act also replaced the FHLBB and FSLIC with the Office of Thrift Supervision and added FCA as a regulator for flood insurance compliance, and required the six regulators to impose civil money penalties for patterns or practices of violations of the mandatory flood insurance purchase requirement, including violations of flood LPI rules. The 1994 Act also required regulated lending institutions to notify borrowers of a coverage lapse and to purchase flood LPI on their behalf if the borrower failed to obtain coverage within 45 days after notice. The 2012 Biggert-Waters Flood Insurance Reform Act (Biggert-Waters Act) included new requirements for flood LPI, among other items. Like the Dodd-Frank Act for homeowners insurance, the Biggert-Waters Act established rules for refunding flood LPI premiums when the borrower provided proof of existing coverage and clarified that the lender could charge for flood LPI from the date the borrower-purchased insurance lapsed. The act also increased the civil money penalty amounts for violations of flood insurance requirements and eliminated the per year cap on the amount of civil money penalties for regulated institutions. In March 2013, the regulators published interagency guidance on amendments resulting from the Biggert-Waters Act with a section specifically about flood LPI. In July 2015, the regulators published a joint final rule implementing the provisions of the Biggert-Waters Act related to LPI. Each of the five financial regulators has adopted flood insurance examination procedures that address flood insurance requirements, including requirements for LPI. Specifically, the examination procedures discuss borrower notification regarding the need to purchase an adequate amount of flood insurance, and as required by statute, provide that if the borrower does not purchase such coverage within 45 days from notification, the lender or servicer will purchase insurance on behalf of the borrower and may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance. To enforce the flood insurance requirements, the regulators identify flood insurance-related violations, including flood LPI violations, through their examinations. These examinations are risk based, so examiners may not address all policies and procedures or review flood LPI policies and procedures during every examination. For example, NCUA’s examiner’s guide states that although they must review flood compliance in every examination, depending on scope, an examiner may review one or more of the following: coverage and internal controls, property determination requirements, LPI requirements, and flood insurance checklists. Since the amendments to Regulation X became effective in 2014, the five financial regulators and CFPB have been responsible for supervising the regulated entities’ activities related to homeowners LPI. Rule-making authority for Regulation X, which implements RESPA, was transferred to CFPB from the Department of Housing and Urban Development under the Dodd-Frank Act. As discussed earlier, for homeowners LPI, Regulation X, as amended, requires servicers to send two notices to borrowers to confirm that the borrowers do not have the required homeowners insurance before charging the borrower for LPI. Among other requirements, the regulation also prohibits servicers from obtaining LPI if the borrower has an escrow account for homeowners insurance, unless the servicer is unable to disburse funds from the account. Under the regulations, inability to disburse funds does not exist when the borrower’s escrow account contains insufficient funds to pay the premiums, but it exists when the servicer has a reasonable basis to believe either that the borrower’s coverage has been canceled (or not renewed) for reasons other than nonpayment of premiums, or that the borrower’s property is vacant. Of the five financial regulators and CFPB, CFPB, FCA, FDIC, the Federal Reserve, and OCC have adopted revised examination procedures for RESPA compliance, including compliance with homeowners LPI requirements. NCUA is in the process of updating its examiner’s guide and related materials to include the new requirements for homeowners LPI. CFPB’s, FDIC’s, the Federal Reserve’s, and OCC’s manuals discuss RESPA requirements for escrow accounts, notifying borrowers, and canceling and renewing LPI, among other requirements. Similar to the procedures they use for flood LPI, examiners also identify violations of homeowners LPI through risk-based examinations of financial institutions. Because Regulation X’s mortgage servicing requirements for homeowners LPI became effective in January 2014, regulators had limited data on the servicers’ compliance with them compared to the data on compliance with flood LPI requirements as of May 2015. CFPB officials said that because consumers might not know about LPI until their coverage lapsed, there might be a greater lag in complaint and violations data than there would be for other housing issues. Of the six regulators responsible for enforcing homeowners LPI rules, CFPB, FDIC, Federal Reserve, and OCC had cited violations as of June 2015. The regulators may also impose civil money penalties for servicer violations of homeowners LPI requirements under RESPA and Regulation X, but they stated that as of June 2015 they had not imposed any. CFPB and several state regulators have reached joint settlements with some servicers for alleged violations of federal and state laws, including some violations related to homeowners LPI. In February 2012, 49 states and the District of Columbia (excepting Oklahoma) and federal government partners reached a settlement with banks and mortgage servicers over similar mortgage servicing violations, including LPI, requiring them to provide $20 billion in consumer relief and $5 billion in other payments. In December 2013, CFPB, along with 49 states and the District of Columbia, filed a civil action against a nonbank mortgage servicer alleging misconduct related to servicing mortgages. The complaint identified mortgage servicing violations, including the placement of LPI when the servicers knew or should have known that borrowers already had adequate coverage. In February 2014, CFPB and the states reached a settlement with the servicer, requiring the servicer to pay over $2 billion to borrowers and to follow certain servicing standards. Additionally, in December 2014, NYDFS reached a settlement with this servicer over mortgage servicing rules, alleging the servicer had conflicts of interest related to LPI, among other violations. CFPB and the same states also reached a joint settlement with another servicer in September 2014 over similar mortgage servicing violations. The consent judgment required the servicer to pay $540 million to borrowers and to follow certain servicing standards. FHFA has also taken actions to address LPI concerns (as noted earlier). In November 2013, FHFA instructed Fannie Mae and Freddie Mac to prohibit their servicers from receiving commissions for LPI and from using servicer-affiliated entities to insure or reinsure LPI. Effective June 2014, Freddie Mac prohibits servicers from receiving commissions from LPI insurers, and Fannie Mae requires servicers to exclude from premiums charged to borrowers any commissions received from LPI insurers. Also in June 2014, FHFA’s Office of Inspector General (OIG) published a report on FHFA’s oversight of LPI and stated that in 2012 the enterprises paid approximately $360 million in LPI premiums, including, potentially, an estimated $158 million in excessive LPI rates. The FHFA OIG noted that during a foreclosure, the enterprise that owns or guarantees the mortgage is responsible for the cost of the borrower’s unpaid LPI premiums. The OIG recommended that FHFA assess whether the enterprises should pursue litigation against their servicers and LPI insurers to remedy potential damages caused by past abuses in the LPI market. FHFA accepted the recommendation and stated that they completed the assessment in June 2015. Limited reliable data exist at the state and federal levels to evaluate the LPI industry and ensure that consumers are being protected. As part of its efforts to collect financial data on the insurance industry, NAIC updated its Credit Insurance Experience Exhibit (CIEE) in 2004 to require insurers to submit data on LPI to NAIC and state regulators. NAIC and state regulators are responsible for reviewing and analyzing data from insurers, including the CIEE. The CIEE data include information on premiums, claims, losses, compensation, and expenses. However, we determined that these data were unreliable for our purposes. For example, a number of LPI insurers did not submit data to state regulators for CIEE, as required. Also, data in some states and for some years were incomplete. For example, one company reported data for some states but not for others. NAIC officials stated that another company reported LPI data in the wrong section of the CIEE. NAIC officials stated that they performed some basic reviews and tests to identify data errors, such as significant fluctuation between years related to premiums and claims, and worked with the state regulators to address such issues. However, they said that state regulators were responsible for resolving incomplete submissions, such as ensuring that insurers provided answers for every field. Each state, for example, determines its own policies and procedures for reviewing annual statements, including CIEE data, from insurers. As a result, states may not review and analyze similar levels of LPI data. In addition, NAIC officials stated that in 2013 they updated their data submission instructions to request that the insurers report LPI data separately from the borrower-purchased data. NAIC officials said that state regulators allocate their resources on what they deem to be the most cost-effective activities. LPI is a relatively small insurance line, representing only about 0.1 percent of the overall U.S. insurance industry, but its relatively high premium rates can have a significant impact on affected consumers. Given recent state and federal actions regarding the LPI industry, it has become more important for NAIC and state regulators to have adequate data to effectively oversee the industry. Without more comprehensive and reliable data and adequate policies and procedures to ensure the usefulness of the data, NAIC is limited in its ability to coordinate LPI regulation nationwide, and state and federal regulators lack reliable data about the industry. As a result, they are unable to analyze the relationship between LPI prices and the underlying costs to make sure premium rates are reasonable and cannot ensure that consumers are receiving fair and equitable treatment from the LPI industry. Recognizing a need to better understand the LPI industry, federal and state regulators have begun coordinating in recent years to collect more detailed data about the LPI industry. FHFA and NAIC officials stated that in 2013 they held discussions about LPI and potential strategies for collecting data to better understand the LPI industry and evaluate whether recent concerns raised were valid. These discussions resulted in an interagency working group, consisting of state and federal regulators, to discuss LPI. FHFA officials said that in addition to examining the need to obtain more data on the LPI industry, this working group opened a dialogue between several entities, including state regulators, insurers, and servicers. The working group created a template to obtain about 80 LPI industry data variables and tasked a committee with requesting the LPI data (the data call effort). The 80 variables included the type of loan; whether the mortgage had an escrow account; the property’s occupancy status; the reason for the coverage lapse; and the company, premium, coverage amount, and deductible for the LPI policy as well as the last known borrower-purchased policy. These data are more granular than what is collected through the annual CIEE in that they include policy-level data that would, among other things, allow for a more direct analysis of LPI premium rates, whereas the CIEE data contain substantially fewer variables and are aggregated at the state and insurer level. According to NAIC officials, NAIC tasked the Mississippi Insurance Department’s Commissioner, chair of NAIC’s Property and Casualty Committee, to lead the data call effort. Mississippi officials requested that the top three LPI insurers—which NAIC estimated accounted for about 90 percent of the LPI market—provide the 80 variables. Mississippi officials requested the data in April 2014 for submission by July 2014. However, the insurers and servicers did not submit their final data until December 2014. NAIC and Mississippi officials said the delay was due to the need to clarify data issues with the insurers and correct errors, such as missing fields and missing and outlier values. But the final data lacked values for many of the variables, and some insurers and servicers said that certain information was not available. For example, all three insurers reported annual LPI premium amounts, but only one insurer reported the premium amount of the last known borrower-purchased insurance, and only for some policies. Both of these variables are necessary to determine the difference in cost between LPI and borrower-purchased insurance and understand whether premium rates are reasonable. Additionally, only one insurer reported the lapse date of the borrower-purchased insurance, which would help determine how quickly insurers and servicers are identifying coverage lapses, but this insurer did not consistently report the lapse dates for all policies. According to NAIC and Mississippi officials, one insurer said it did not maintain much of the requested data itself and was unable to get approval from many of its servicers to release the data. As a result, state and federal regulators lack the comprehensive and reliable data necessary to assess LPI industry practices and premium rates and their effects on consumers. NAIC and Mississippi officials said that they were surprised that the insurers were unable to produce some of the requested data because much of the data seemed necessary for the insurers to maintain. As a result, NAIC members have opened multistate examinations of the LPI practices of the top two LPI insurers which, among other things, officials expected would help produce the remaining data. As of August 2015, 42 jurisdictions—mostly states—had committed to participate in the examinations, and officials expect to have preliminary findings in the fall of 2015. NAIC is working to address the issue of missing data through the multistate examinations, but it is unclear when such data will be available. Some state and federal regulators have taken action to improve oversight of LPI. However, NAIC and state insurance regulators lack comprehensive and reliable data on LPI premium rates and industry practices to assess their effects on consumers. For example, NAIC has attempted to collect some data aggregated at the state and company levels, but these efforts have yielded incomplete data. Recognizing the need for more robust data on the LPI industry, NAIC and FHFA have coordinated to collect policy- and servicer-level data on LPI. However, LPI insurers and their servicers did not provide all of the requested data. NAIC was created to coordinate insurance regulation across states, and the agency needs quality information to evaluate the LPI industry and the effects of its premium rates and practices on consumers. Although NAIC is working to obtain the missing data, it is unclear when such data might be available, or that its efforts will be effective without additional action. Without more comprehensive and reliable data, state and federal regulators are lacking an important tool to help them fully evaluate the LPI industry and ensure that consumers are adequately protected. To help ensure that adequate data collection efforts by state insurance regulators produce sufficient, reliable data to oversee the LPI market, we recommend that NAIC: work with the state insurance regulators to develop and implement more robust policies and procedures for the collection of annual data from LPI insurers to ensure they are complete and reliable; and work with the state insurance regulators to complete efforts to obtain more detailed national data from LPI insurers. We provided a draft of this report to NAIC, as well as CFPB, FCA, FDIC, Federal Reserve, FEMA, FHFA, FIO, FTC, NCUA, and OCC for their review and comment. NCUA provided written comments that we reprinted in appendix II. CFPB, FCA, FDIC, Federal Reserve, FHFA, NAIC, NCUA, and OCC provided technical comments that were incorporated, as appropriate. NAIC officials said they understand the importance of ensuring reliable data and will consider the recommendations as part of NAIC’s continuing work in the area, which includes multistate examinations and potential revisions to model laws. We are sending copies of this report to the appropriate congressional committees and the agencies listed above. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you 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 III. We were asked to review the lender-placed insurance (LPI) industry and the role of federal and state regulators in monitoring LPI practices. This report (1) describes the extent to which LPI is used, (2) discusses stakeholder views on the cost of LPI, and (3) describes state and federal oversight of LPI. To address these objectives, we reviewed relevant laws and regulations on lender-placed insurance. We conducted a literature review and reviewed relevant articles, hearings, settlements, and agency guidance on the LPI industry. We also reviewed past GAO reports on homeowners and flood insurance. We interviewed officials from federal agencies, including the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Department of the Treasury’s Federal Insurance Office, Farm Credit Administration, Federal Deposit Insurance Corporation, Federal Emergency Management Agency (FEMA), Federal Housing Finance Agency (FHFA), Federal Trade Commission, National Credit Union Administration, and Office of the Comptroller of the Currency. We selected these agencies because they regulate mortgage servicers’ LPI activities or might have an interest in LPI issues. Further, we interviewed officials from the National Association of Insurance Commissioners (NAIC) as well as officials from seven state insurance regulators—California, Florida, Illinois, New Jersey, New York, Ohio, and Texas. We selected these states because they had higher LPI premium volumes and some had taken regulatory action in LPI. In selecting states, we also reviewed publicly available information as well as LPI laws and regulations, whether they had adopted NAIC’s model law for personal property LPI and adapted it to real property LPI, whether they had separate banking and insurance offices, and rate approval methods. This selection of states is not generalizable to all states. In addition to the selected states, we met with officials from Mississippi’s insurance department to discuss their involvement in NAIC’s LPI data request. Finally, we met with four LPI insurance providers of varying sizes, as well as four mortgage servicers, four industry associations, and two consumer advocates. We selected these stakeholders based on their level of involvement in the LPI industry and mortgage servicers to get a mix of bank and nonbank servicers with large and mid-sized mortgage volume. When we refer to “industry officials” in this report we mean officials of the insurance industry associations, insurance companies, and bank and nonbank mortgage servicing companies we interviewed. To describe the extent to which LPI is used, we reviewed studies, testimonies, and public comments on related regulations to obtain a wide variety of views on how LPI operates. We interviewed the same consumer advocates, industry associations, and a selection of state insurance regulators, insurers, and mortgage servicers to better understand how each party is involved in LPI and the circumstances surrounding its use. Specifically, we interviewed insurers and servicers to understand their processes for tracking mortgage portfolios, notifying borrowers, and placing LPI. We also interviewed FEMA to understand its flood LPI program—the Mortgage Portfolio Protection Program—and the reasons servicers might choose it versus private flood LPI coverage. To discuss stakeholder views on the cost of LPI, we interviewed state insurance regulators, consumer advocates, and industry officials about their opinions on the reasons for differences in premium rates between LPI and borrower-purchased insurance and their opinions on the effects on consumers. We reviewed studies, testimonies, and public comments on proposed regulations on flood and homeowners LPI. We obtained premiums and claims data for LPI and borrower-purchased insurance so that these might be compared. We first reviewed NAIC’s Credit Insurance Experience Exhibit (CIEE) database—financial data collected annually from insurers that are aggregated at the state and company levels—with the intended purpose of comparing LPI premiums to those of borrower- purchased insurance. However, we determined that these data were unreliable for our purposes. For example, a number of LPI insurers did not submit CIEE data, and there appeared to be missing data in some years. Further, NAIC officials said that they perform some basic tests on the CIEE data to identify data errors but that state regulators are responsible for resolving incomplete data submissions. We discuss these data issues in greater detail in the report. We also obtained and reviewed data from a data call effort coordinated by NAIC and FHFA that requested policy- and servicer-level data from what they believed to be the top three LPI insurers to get a better understanding of the LPI industry. NAIC and FHFA estimated that these three insurers represented 90 percent of LPI premium revenue in the U.S. However, the total number of LPI insurers as well as the total LPI premium volume are unclear because of a lack of comprehensive national data on the LPI industry. Further, we cannot assume that these three insurers are representative of the other insurers in the industry. Moreover, most of the variables were incomplete for one or more of the insurers. To address these omissions, we limited our analysis to high-level figures summarizing variables that were at least 90 percent complete for each of the top two insurers. We determined that variables where more than 10 percent of the values were missing could produce invalid results. Because of the missing data, we were unable to analyze most of the variables, including those that could have compared LPI premiums to the premiums of the last-known borrower-purchased policies. To describe state and federal oversight of LPI, we reviewed and summarized federal laws, regulations, and policies and procedures relating to agencies’ enforcement of LPI-related requirements. Further, we interviewed federal agency officials, including examiners and enforcement officials, on flood and homeowners LPI monitoring and enforcement activities. We interviewed insurers, mortgage servicers, and lenders for their perspectives on federal regulations and their enforcement. We reviewed and summarized selected state laws and regulations related to LPI, particularly those related to rate setting, and interviewed NAIC officials and selected state insurance regulatory officials on LPI oversight activities. We conducted this performance audit from March 2014 to September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Patrick Ward (Assistant Director); Christopher Forys (Analyst-in-Charge); Abby Brown; Emily Chalmers; William Chatlos; Juliann Gorse; Camille Keith Jennings; John Karikari; John Mingus; Patricia Moye; Jena Sinkfield; and Heneng Yu made key contributions to this report. | Mortgage servicers use LPI to protect the collateral on mortgages when borrower-purchased homeowners or flood insurance coverage lapses. The 2007-2009 financial crisis resulted in an increased prevalence of LPI. Because LPI premiums are generally higher than those for borrower-purchased coverage, state insurance regulators and consumer groups have raised concerns about costs to consumers. This report addresses (1) the extent to which LPI is used; (2) stakeholder views on the cost of LPI; and (3) state and federal oversight of LPI. GAO examined documentation, studies, and laws and regulations related to LPI, and interviewed stakeholders including state insurance and federal financial regulators, consumer advocates, insurers, servicers, and industry associations. GAO selected interviewees based on their involvement in the LPI market and other factors to obtain a diverse range of perspectives. GAO selected the seven state insurance regulators to interview based on a number of factors including LPI premium volume and involvement in the LPI market. Mortgage servicers purchase lender-placed insurance (LPI) for mortgages whose borrower-purchased insurance coverage lapses, most often because of nonpayment by the borrower or cancellation or nonrenewal by the original insurer. The limited information available indicates that LPI generally affects 1 percent to 2 percent of all mortgaged properties annually and has become less prevalent since the 2007-2009 financial crisis as foreclosures have declined. Although used more often when borrowers without escrow accounts (about 25 percent to 40 percent of borrowers) stop paying their insurance premiums, servicers also use LPI when an insurer declines to renew a policy. LPI insurers often provide services such as tracking properties to help servicers identify those without insurance and confirming coverage. LPI insurers said they must refund premiums if a borrower provides evidence of coverage, which occurs on about 10 percent of policies. The Federal Emergency Management Agency offers flood LPI, but industry officials said most servicers prefer private coverage because of more comprehensive coverage and lower rates, among other things. LPI premium rates are higher than rates for borrower-purchased insurance, and stakeholders disagreed about whether the difference is justified. Insurers pointed out that they provide coverage for any property in a servicer's portfolio without a rigorous underwriting process, and the limited information requires higher rates. They added that LPI properties tended to have higher risk characteristics, such as higher-risk locations (along the coast) and higher vacancy rates because of foreclosures. But some consumer advocates and state regulators said that the factors that insurers cite for higher rates, as well as the insurers' limited loss histories, do not justify the magnitude of the premium differences. They also said borrowers have little influence over the price of LPI and that some insurers competed for the servicers' business by providing commissions to the servicer that passed the costs on to the borrower through higher premium rates. Insurers, however, said that LPI premium rates were filed with and approved by state regulators and that commissions were a standard industry practice, but their use had decreased. State insurance regulators have primary responsibility for overseeing LPI insurers, but federal financial regulators generally oversee the servicers that purchase LPI coverage for their portfolios. However, a lack of comprehensive data at the state and national levels limits effective oversight of the LPI industry. For example, regulators lack reliable data that would allow them to evaluate the cost of LPI or the appropriateness of its use. The National Association of Insurance Commissioners (NAIC), which helps coordinate state insurance regulation, requires insurers to annually submit state-level LPI data, but the data were incomplete and unreliable. NAIC provides guidance for the reporting of these data and shares responsibility with state regulators for reviewing and analyzing the data, but neither has developed policies and procedures sufficient for ensuring their reliability. State and federal regulators have coordinated to collect more detailed national data to better understand the LPI industry, but insurers failed to provide them all of the requested information, and whether and when they will is unknown. Without more comprehensive and reliable data, state and federal regulators lack an important tool to fully evaluate LPI premium rates and industry practices and ensure that consumers are adequately protected. GAO recommends that NAIC work with state insurance regulators to collect sufficient, reliable data to oversee the LPI market. This includes working with state insurance regulators to develop and implement more robust policies and procedures for LPI data collected annually from insurers and to complete efforts to obtain more detailed national data from insurers. NAIC said it would consider the recommendations as part of its ongoing work in the area. |
HUD’s CDBG, HOME, and HOPE VI programs and Treasury’s CDFI, Low- Income Housing Tax Credit, and New Markets Tax Credit programs are among a number of federal programs that fund housing and community and economic development. In varying degrees, these programs leverage other funds to help finance their initiatives and projects. As we reported in a May 2007 report, some of these programs define leveraging as using one source of funds to attract additional sources of funds, while others define leveraging more broadly as the layering or combining of different sources of funds. Further, and as described below, some of these programs leverage at the institutional and project levels, while some leverage only at the project level. At the institutional level, an organization (such as a group of investors or a community or other development authority) pools funds from multiple sources, which are then used to finance a portfolio of projects. At the project level, an organization (such as a state or local agency) leverages funds as necessary to finance discrete projects. We highlight below the purpose, structure, and activities of the three HUD programs and three Treasury programs that we reviewed. Appendix II describes in more detail how leveraging occurs in the selected Treasury programs. The CDBG program is the federal government’s principal community development program. It provides annual grants on a formula basis to entitlement communities—principal cities of metropolitan statistical areas, other metropolitan cities with populations of at least 50,000, and qualified urban counties—and states to develop viable urban communities by providing decent housing and a suitable living environment, and by expanding economic opportunities, principally for low- and moderate- income persons. Under the CDBG program, communities and states develop their own programs and funding priorities. However, all funded activities must meet one of three national objectives: primarily benefit low- and moderate-income persons, aid in the prevention or elimination of slums and blight, or meet community development needs of particular urgency (because existing conditions pose a serious and immediate threat to the health or welfare of the community and other financial resources are not available to meet such needs). Although the CDBG program has no statutory or regulatory leveraging requirement, some projects funded under the program use CDBG funds to leverage additional funds to finance development costs. In fiscal year 2007, Congress appropriated approximately $3.7 billion to the CDBG program for formula distribution, and HUD allocated these funds to 1,133 entitlement communities, 49 states, and Puerto Rico. HOME provides formula grants to states and localities—certain cities, counties, or consortiums of cities and counties—to fund a wide range of activities to benefit low-income people. Under the HOME program, states and localities may use program funds to finance a broad range of activities, such as providing eligible homeowners and new homebuyers with home purchase or rehabilitation financing assistance and building or rehabilitating housing for rent or ownership. States and localities also may use HOME funds to provide tenant-based rental assistance. The program requires states and localities to match 25 percent of expended program funds with monetary or certain in-kind contributions, such as donated materials or voluntary labor. This match requirement was designed to elicit local resources in support of affordable housing. Like the CDBG program, the HOME program has no statutory or regulatory leveraging requirement; however, some projects funded under the program use HOME funds to leverage additional funds to finance development costs. In fiscal year 2007, Congress appropriated approximately $1.8 billion to the HOME program, and HUD allocated these funds to 589 localities, the 50 states, and Puerto Rico. HOPE VI is part of HUD’s effort to transform public housing. By providing funds for a combination of capital improvements and community and supportive services, the HOPE VI revitalization grant program seeks to (1) improve the living environment for residents of severely distressed public housing through the demolition, rehabilitation, reconfiguration, or replacement of obsolete units; (2) revitalize sites on which such severely distressed 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. Any public housing agency (PHA) that has severely distressed public housing units in its inventory is eligible to apply for a HOPE VI revitalization grant. Recipients of revitalization grants must match 5 percent of the grant with other funds, and HUD awards PHAs that demonstrate an ability to leverage additional points in the HOPE VI application process. In fiscal year 2006, HUD made four HOPE VI revitalization grants totaling approximately $72 million. Through the CDFI program, Treasury’s CDFI Fund provides CDFIs with financial assistance in the form of grants, loans, equity investments, and deposits to enhance their ability to make loans and investments and provide services for the benefit of designated investment areas, targeted populations, or both. CDFIs must match (leverage) their financial assistance awards dollar-for-dollar with funds of the same type (equity investment, loan, deposit, or grant) from nonfederal sources. CDFI funds can be used for economic development (job creation, business development, and commercial real estate development), affordable housing (housing development and homeownership), and community development financial services (provision of basic banking services to underserved communities and financial literacy training). In 2007, Treasury made approximately $26 million in financial assistance awards to 49 CDFIs. Under the Low-Income Housing Tax Credit program, states are authorized to allocate federal tax credits to private investors as an incentive to develop rental housing for low-income households. The equity generated by the sale of the credits is used to lower the financing costs of housing developments by reducing the debt or equity the developer otherwise would incur or contribute. Investors who purchase the tax credits may claim the credits annually for 10 years. To receive Low-Income Housing Tax Credit financing, properties must meet certain rent and tenant income requirements: (1) at least 20 percent of the units in the property must be reserved for individuals or families with incomes of 50 percent or less of the area median income, or at least 40 percent of the units must be reserved for individuals or families with incomes of 60 percent or less of the area median income; and (2) rents for affordable units are restricted to 30 percent of the applicable income limit (that is, 50 percent or 60 percent of the area median income). Each state receives an allocation of the greater of $1.75 per capita or $2 million annually, adjusted by a cost of living factor ($1.95 or $2.275 million in 2007). The program costs the federal government an estimated $5 billion annually in forgone tax revenue and is the government’s largest housing production program. The New Markets Tax Credit program permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (CDE), which must in turn make investments in low-income communities. Qualified low-income community investments include (1) any capital or equity investment in, or loan to, any qualified, active, low-income community business; (2) the purchase from another CDE of any loan made by such entity that is a qualified low-income community investment; (3) financial counseling and other services to businesses located in, and residents of, low-income communities; and (4) certain equity investments in, or loans to, a CDE. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a 7-year period. In addition, Treasury scores those applications in which CDEs demonstrate an ability to leverage additional funds more favorably. In fiscal year 2007, Treasury awarded $3.9 billion in New Markets Tax Credits (totaling approximately $1.5 billion in forgone federal tax revenue) to 61 CDEs. The leverage measures (such as ratios) HUD and Treasury reported for the selected programs in performance, budget, and other documents lacked transparency because the agencies generally did not disclose the limitations of the data or the methods used to calculate them. Based on our review of available leveraging data and interviews with HUD and Treasury officials, we found that the leverage measures the agencies reported for the selected programs were based on incomplete data and thus did not capture the actual extent of leveraging in the programs. We also found that while the agencies generally reported measures that described the ratio of all other funds (federal, state, local, and private funds) to program funds, alternative measures that described the total federal investment or total private investment in a program provided considerably different results—also potentially of value to decision makers—about the extent of leveraging in a program. Further, no agency- specific or governmentwide guidance directs what agencies should disclose about the leverage measures they report for the selected programs; however, we regularly have reported that clearly communicating data limitations and their potential impact may foster appropriate use of data. Consequently, absent specific information on how these measures were calculated and their limitations, decision makers would not have sufficient information to understand their meaning and determine how they could and should be used in performance assessment, budgeting, and other contexts. Based on our review of available leveraging data and interviews with HUD and Treasury officials, we found that the leverage measures the agencies reported for the selected programs were based on incomplete data and did not capture the actual extent of leveraging that may have occurred in each of the programs. We also found that HUD and Treasury did not always disclose these limitations when they published the measures. Table 1 describes the limitations associated with the underlying data used for determining leverage measures for each of the selected programs. In our assessment of HUD’s and Treasury’s use of leverage measures in strategic planning, annual performance and budget documents, on their Web sites, and in other published reports, we found that the agencies did not routinely disclose the limitations to the leveraging data (outlined in table 1) they used to compute leverage measures for the selected programs. For example, the only place in which Treasury included discussions of known limitations to the data used to calculate a leverage measure for the CDFI program was in periodic agency reports on the extent of leveraging in the program. Treasury’s Web site and key performance and budgeting documents provide little to no information on data limitations associated with the CDFI program leverage measure. Similarly, while HUD cited leverage measures on its Web site and in budget documents for the HOME and HOPE VI programs, respectively, the agency did not disclose the limitations of the data used to compute the reported leverage measures for the programs. Further, no agency-specific or governmentwide guidance directs what agencies should disclose about the leverage measures they report for the selected programs; however, we regularly have reported on the need for agencies to collect and report on credible and reliable data for performance budgeting and other purposes. For example, cautioning decision makers and others about significant data limitations allows them to judge the credibility of the data and use them in appropriate ways. We also noted that all data have limitations that may hinder their use for certain purposes, and decision makers and others may not have enough familiarity with the data to recognize the significance of the shortcomings. Therefore, we concluded that appropriate use of data may be fostered by clearly communicating how and to what extent data limitations affect assessments of performance. OMB also has stressed the importance of making clear to policymakers and others what individual performance indicators measure. According to OMB, doing so helps decision makers understand what should be expected of an overall program. To the extent that HUD and Treasury were not clear about the limitations of the measures they calculated for the selected programs, they potentially misrepresented (either positively or negatively) the extent of leveraging that occurred in these programs. If decision makers are unaware of the limitations of the agencies’ reported leverage measures and take them at face value, they could misuse them in making funding decisions or performance evaluations on the programs (which also may have implications on the budget process). In our assessment of HUD’s and Treasury’s use of leverage measures in strategic planning, annual performance and budget documents, on their Web sites, and in other published reports, we also found that the agencies did not routinely disclose information on the methods they used to calculate leverage measures for the selected programs. For instance, in its fiscal year 2008 budget justification, HUD reported that the HOPE VI program leveraged $634 million over a 6-month period in 2007, without further explanation of how the measure was derived. Similarly, Treasury’s Web site noted that on average CDFIs leveraged program funds 20 to 1, but did not explain what types of funds (public or private) were leveraged. Based on our discussions with agency officials, we found that the leverage measures HUD and Treasury calculated for each of the selected programs generally described the ratio of all other funds contributed to a program (including other federal, state, local, and private funds) to program funds. However, these measures can be calculated in multiple ways that describe leveraging from different perspectives, such as the extent that federal funds are used with nonfederal funds or public funds are used with private funds, which underscore the importance of disclosing the calculation methods used. As illustrated in figure 1, leverage measures for a single program could vary considerably depending on how funding categories were combined (that is, program funds, other federal funds, state and local funds, and private funds). Scenario A in figure 1 generally represents how the agencies presented leverage measures for the selected programs. The alternate leverage measures presented in scenarios B and C provide additional information that could be more useful to policymakers and investors than measures that describe the ratio of all other funds to program funds. For example, to help inform decisions made as part of the annual appropriations process, policymakers may be interested in determining the extent of total federal contributions made to projects funded under a particular program (scenario B). Alternatively, to assess the potential risk of investing in a federally sponsored development project in a low-income community, a private investor might be interested in knowing the proportion of private investment to public investment in the program (scenario C). Some private investors might perceive a relatively low ratio as an indication that the program carried a high level of investment risk and thus a higher potential for losses. Further, more detailed information on all the different sources of funding could be useful in describing the extent to which one federal program is leveraging funds from another federal program (that is, the extent to which federal programs cross-subsidize one another) and could be particularly relevant to policymakers during annual budget deliberations. In addition, for the CDFI and New Markets Tax Credit programs (which leverage at both the institutional and the project levels), disclosing information on institutional and project-level leveraging could be more useful to policymakers and investors than a total program leverage measure. For example, providing such information would assist policymakers and investors in understanding the extent to which institutional leveraging could be used to manage project-level investment risks—a program with a high institutional leverage ratio but a low project leverage ratio might be one which invests in riskier projects than a program with a low institutional leverage ratio but a high project leverage ratio. As we discussed in our previous report on leveraging federal funds, investments at the institutional level generally are isolated from the investment risks associated with discrete projects. In appendix II we present multiple calculation scenarios for each of the selected programs. Consistent with our hypothetical demonstrations in figure 1, our calculations show considerably different results between the leverage measures the agencies reported (that is, the ratio of all other funds to program funds) and measures that describe either (1) the ratios of nonfederal funds to federal funds and private funds to public funds or (2) institutional and project leverage ratios. As a result of not having more specific information about how these measures were calculated, decision makers would not have sufficient information to understand their meaning and how they can and should be used in performance assessment, budgeting, and other contexts. Further, as previously discussed, there is no agency-specific or governmentwide guidance on what agencies should report about how (or the extent to which) leveraging occurs in their programs. However, in other contexts, our prior work and that of OMB has stressed the value in agencies’ disclosing this type of information to ensure decision makers not only are aware of what is being reported about a program, but how that information can and should be used to inform their budget, performance, and other decisions. Leverage measures can provide basic financial information about the programs included in our review; however, their relevance in assessing the performance of these programs varies considerably. For all of the programs we reviewed, leverage measures can describe inputs, or the resources used to support program activities, and may be useful for conveying basic financial information. To the extent that leveraging is a goal or core (expected) activity of a program (as in the three Treasury programs), leverage measures generally can describe program outputs, or the products or services delivered (such as total leveraged funds), and may be used along with other performance indicators to assess the efficiency and effectiveness of a program in meeting its goals. In cases where leveraging is not clearly and appropriately linked to program goals and activities (as in the three HUD programs), use of such measures to describe program outputs could be misleading and result in adverse consequences, such as giving funding priority to projects that leverage more over those that leverage less, but which may fill a greater or more immediate need within a community. Although leveraging had limited relevance to the goals and activities of the selected HUD programs, we found that OMB and the agency often cited leverage measures for the programs in performance- and budget-related reviews and documents. Their continued use of leverage measures in these contexts could unnecessarily encourage HUD to place more importance on leveraging than meeting the stated goals of the CDBG, HOME, and HOPE VI programs. Leverage measures generally can be used to describe the sources and amounts of funds contributed to a program, and if linked to a program’s goals and core activities, they also can provide more detailed information about the program’s performance. On a basic level and for all of the programs we reviewed, leverage measures convey information on inputs— that is, the specific sources of funds used to implement program activities. For example, leverage measures can provide information on the relative contributions made by different types of investors (private and public) to a program or project and the overall resources committed—this information could be used to inform agency budgeting exercises or financial analyses. To the extent that leveraging is a goal or core (expected) activity of a program, leverage measures generally can describe program outputs (in addition to program inputs) and be used with other performance indicators to measure the efficiency or effectiveness of a program in reaching its goals (see fig. 2). Previously we have reported that for performance measures to be useful in assessing program performance, they should be linked or aligned with program goals and cover the activities that an entity is expected to perform to support the intent of the program. Generally, leveraging would not be an outcome measure for any of the selected programs—outcomes describe program benefits or consequences (such as the impact of leveraging on community development), whereas outputs generally measure quantities produced (total dollars leveraged). Leverage measures can be used to assess the performance of programs that were designed to leverage (that is, in which leveraging is directly related to the goals and core activities of the program), but are less meaningful in assessing the performance programs that do not have explicit leverage requirements. Each of the three Treasury programs was designed to leverage other funds in a number of ways and, as a result, leveraging directly relates to each program’s goals and core activities and leverage measures can be used to describe program outputs. Under the CDFI program, CDFIs must match federal program funds at least dollar- for-dollar with nonfederal funds as a condition of receiving program funds. The match requirement is intended to increase the sustainability of CDFIs (by increasing private-sector investment in them) as well as their ability to make investments serving low-income individuals and communities. Although not required to do so, CDFIs use program and match funds to leverage debt and further increase their lending resources. Funding recipients (for example, small businesses) also may use their grants or loans from CDFIs to leverage additional funds to help finance their projects. In this way, leveraging at the project level also relates closely to the CDFI program’s goal of increasing investment in low-income individuals and communities. Similarly, the tax credit programs were designed to automatically generate private-sector equity investments in the production of affordable housing (in the case of the Low-Income Housing Tax Credit program) and community and economic development (in the case of the New Markets Tax Credit program). Further, the application processes for both programs were designed to encourage additional leveraging. Under the Low-Income Housing Tax Credit program, in order to limit the federal share of housing development project costs, states are to provide no more tax credits to projects than necessary for their financial viability. Under the New Markets Tax Credit program, Treasury considers CDEs’ potential to leverage other sources of funds (in addition to the qualified low-income community investment they plan to make using the tax credit equity) for the projects they sponsor as a factor in scoring the tax credit allocation applications. In cases where leverage measures are not clearly and appropriately linked to program goals and core activities, use of such measures to describe program outputs could result in adverse consequences; for example, by encouraging agencies to place more importance on leveraging than on meeting their stated goals. This trade-off is directly apparent in the use of leverage measures as outputs for the CDBG and HOME programs. While leveraging may be a strategy some funding recipients employ (either by choice or out of necessity) to meet these programs’ goals, none of these programs originally was designed to leverage (meaning, leveraging generally is not a goal or core activity in these programs). Thus, using leveraging to assess the success or impact of these programs in meeting their goals may result in agencies and funding recipients serving fewer lower-income communities or households (as originally intended by these programs) and more moderate-income communities and households (those that are better able to attract additional funds because they pose relatively less risk to investors). HUD set a leveraging goal for the HOPE VI program in the agency’s most recent strategic plan and its fiscal year 2007 annual performance plan and fiscal year 2008 budget justification. According to HUD officials, while leveraging has long been a rating factor in the program’s application process, its relative importance in financing HOPE VI developments has increased over time as program appropriations have declined. While leveraging may help HUD meet the HOPE VI program goal to create mixed-income communities, its use may involve trade-offs, as it may conflict with another program goal—providing housing for extremely-low, very-low, and low-income households. For example, increased reliance on leveraged funds from other programs or sources that may have different requirements (such as higher income limits) potentially could affect the demographic composition of HOPE VI developments. Previously, we have reported several limitations to the usefulness of leverage measures in providing detailed information about federal programs and the projects they fund (regardless of whether or not those programs were designed to leverage). Although leveraging can be a useful tool and public- and private-sector officials regard it favorably, according to many of the officials we contacted, if considered independently of other information, leverage measures can provide misleading information about the success or impact of a program or project. For example, many said that factors such as the local economy or availability of investors within a certain geographic area could have a positive or negative impact on a project’s ability to leverage additional funds, and thus its leverage ratio. That is, projects in vibrant communities likely may have higher leverage ratios than those in distressed communities. As a result, leverage measures are not sufficient to make judgments about the relative success of projects or programs without other descriptive information. Leverage measures also do not account for the level of substitution of federal funds for otherwise available private funds that might occur in programs or projects. Although difficult to measure, information on substitution might be useful in assessing how effectively federal funds were utilized in a program or project. Officials we contacted noted that having information on the risk position of different contributions to a project might be useful in assessing the extent of substitution that occurred. For instance, the level of substitution in a project in which the federal government assumed more risk (by taking a subordinate position) than nonfederal investors could be lower than the level of substitution in a project in which the federal government assumed less risk (by taking a senior position). When OMB and the agencies cited leverage measures in performance- and budget-related reviews and documents, they did not always link leveraging to program goals and core activities—in some cases, OMB and the agencies used leveraging to assess the performance of the selected programs despite its limited relevance to program goals and core activities. According to OMB officials, the agency considers leveraging to be an output measure for each of the selected HUD programs. Consistent with this view, OMB used leveraging as an output measure in its PART reviews of these programs, although leveraging generally was not linked to the goals and core activities of the programs. For example, in its 2003 PART review of the CDBG program, OMB recommended that HUD implement a new performance measurement system that included information on the amount of money leveraged from other sources. The agency developed steps to address this recommendation in the program improvement plan it developed with OMB in 2006 (in response to the PART assessment’s finding that the program lacked specific annual performance measures that demonstrated progress on achieving long-term goals). We have noted that federal programs, in particular federal block grant programs, have faced difficulties but could benefit from defining program goals and performance measures that go beyond describing program activities to describe outcomes or results. However, because leveraging is not a required activity or explicit goal of the CDBG program (as discussed previously), its value in evaluating the performance of the program is limited. Further, in its PART review of the HOME program, OMB used leverage measures to compare the performance of the HOME program with that of the CDBG program. Such a comparison does not facilitate evaluations of these programs in the context of their intended goals (neither of which is to leverage). While using leveraging as an output measure for the CDFI and New Markets Tax Credit programs is consistent with the programs’ goals and core activities as discussed above, OMB identified leveraging as an outcome measure for the CDFI program in its 2004 PART review despite the fact that, as discussed previously, leveraging cannot be used to measure the impact of the program. Further, the agency equated leveraging with program effectiveness in its 2004 PART review of the New Markets Tax Credit program. (As described in fig. 2, outcome measures are used to assess the effectiveness of programs in achieving desired results. As we have discussed throughout this report, outcome measures should be designed to assess the benefits or consequences of a program— leverage measures by themselves cannot provide information on the impact these programs have had on their targeted populations and communities.) As we observed in our 2004 review of OMB’s PART process, the goals and measures OMB defines in its PART reviews are designed to meet the needs of executive decision makers during the budget formulation process, and thus may be inconsistent with the goals and measures federal agencies have developed in response to GPRA, which may be developed at a higher, strategic level and less relevant to OMB’s budget decision-making process. As a result of OMB’s focus on the budget process, we found that its judgment about appropriate goals and measures for a program may be substituted for agency judgments. These findings generally are consistent with our observations on OMB’s use of leverage measures in the PART reviews of the selected programs we reviewed for this report. We observed that the agencies identified leveraging as a performance measure in their performance- and budget-related reports for some of the selected programs despite its sometimes limited relevance to program goals and core activities. Table 2 describes HUD’s use of leverage measures for the HOME and HOPE VI programs in its strategic planning and other performance- and budget-related documents or contexts. In the case of the HOME program, although leveraging was not linked to the program’s goals and core activities, HUD equated more leveraging with better performance by ranking states and localities on their ability to leverage other sources of funds. For the HOPE VI program, HUD primarily used leveraging as a measure for its goal of providing decent, affordable housing through the improvement of the physical quality of public housing. However, HUD generally did not discuss how leveraging would help the agency in achieving this goal. HUD also linked leveraging to the HOPE VI goal of creating mixed-income housing. Although increased leveraging in a program designed to provide affordable housing could result in trade-offs, HUD’s performance- and budget-related documents did not discuss the impact of (or the potential unintended consequences of) leveraging on the ability of the program to meet this goal. Finally, as described in table 3, Treasury generally linked leveraging with the goals and core activities of the CDFI and New Markets Tax Credit programs. For example, Treasury noted that leveraging in the CDFI program helps build CDFIs’ capacity to make loans and other investments in low-income communities. Because Treasury to date has not reported publicly the extent of leveraging in the New Markets Tax Credit program, the agency’s performance- and budget-related documents only discuss the extent of institutional leverage in the program. As with the CDFI program, Treasury linked institutional leveraging to the program’s goal of attracting private-sector capital to low-income communities. With the increased focus of federal agencies on performance management, budgeting, and financial reporting, leveraging has come to be seen as an effective and efficient means of delivering more impact per dollar of federal investment, particularly in a period of increasingly tight budgets and competing funding priorities. While agencies have collected and presented leveraging information in strategic planning, performance, and budget reports, and on their Web sites, agencies disclose little or no information on methods of data collection or how leverage measures were calculated, in part because there is no agency-specific or governmentwide guidance on how to calculate, describe, and use leverage measures in a manner that is consistent with the programs’ design. Information on methodology is important in the leveraging context because of the limitations of leveraging measures and data collection issues. For example, in the case of the CDBG and HOME programs, leveraging may be underestimated because HUD’s database does not distinguish between zero responses (for example, where no leveraging occurred) and blank responses (for example, where leveraging data may be incomplete). Moreover, measures such as ratios may not disclose the details necessary to understand which component funding sources were being compared, and as demonstrated, the ratios can vary considerably depending on what information an agency is trying to convey about a program (for example, the extent of public or private investment in a program). Further, data collection and completeness are issues because not all the programs are required to report leveraging, and in many cases agencies are unable to capture data on all leveraging that may be occurring in a program (for example, project leveraging). Absent specific information on how leverage measures were calculated and their potential limitations, decision makers do not have sufficient information to understand their meaning and how they can and should be used in performance assessment, budgeting, and other contexts. Moreover, the relevance of leveraging to performance measurement is dependent on the context of the program being analyzed. Because leveraging is not an intended activity carried out to achieve program goals or a goal unto itself for some of the selected housing and community and economic development programs in our review, measures such as ratios are not indicative of program or project performance (outcomes and impact). Rather, such measures are indicative only of resource utilization. Nevertheless, even in cases where they were not reflective of program performance, agencies presented leverage measures in strategic plans, annual performance plans, performance and accountability reports, and budget justifications. The use of leverage measures in such contexts could lead decision makers to presuppose that the information was indicative of program impacts in cases where leveraging actually might say very little about the success of a program, such as the ability of a program to improve the living conditions of the urban poor. Despite the issues surrounding the utility of leverage measures, we note the valid and useful purposes for which the measures may be used, particularly in instances where leveraging is an intended activity or goal. For instance, decision makers and practitioners in the area of affordable housing and community and economic development may utilize leverage measures to report basic information on how federal funds were combined with other funds for a program or project. Such information could be instructive in ascertaining trends in the involvement of private- sector investors or local governments in federally sponsored initiatives, or identifying demographic trends that could adversely or positively affect the ability of program funds to attract other funds. Additionally, the measures may aid management and Congress in their oversight of programs and strategic planning for future budgets. Further, when directly linked to program goals and activities and considered with other performance measures, leverage measures also could provide insight into the success of a program, including its impact on targeted populations and communities. The valid and useful purposes to which leverage measures may be put underline the importance of transparency for federal agencies in communicating the limitations of such measures and how they are calculated. The agencies administering the housing and community and economic development programs we reviewed could improve the transparency of the leverage measures they use by including information about the completeness and accuracy of the data and methods used to compute the measures. Further, the agencies could discuss the relevance of leveraging to a program’s stated goals and activities. The publication of such information in conjunction with the measures themselves would increase the accuracy of the information being conveyed and provide perspectives that would allow various users to assess the potential of the measures to serve as relevant and accurate indicators of program or project outputs and, in some cases, outcomes or impact. However, the opportunities to better describe, assess, and report the role of leveraging in housing and community and economic development programs do not rest solely with the agencies administering those programs. OMB, because it plays a key role in assessing the performance of federal agencies and developing and tracking compliance with performance goals, has an opportunity to refine its understanding and use of leverage measures in future PART and other performance reviews by carefully considering the role of leveraging in carrying out program goals and activities. Specifically, in its performance assessments of the selected programs, OMB could provide information on how leveraging may support or conflict with a program’s intended purpose. This is particularly important because the accuracy of measures and the relationship of leveraging to program goals and thus performance can vary considerably across the housing and community and economic development programs we reviewed. To ensure that leverage measures provide accurate, useful, and relevant information to Congress and others, we recommend that the Secretaries of HUD and the Treasury consider disclosing the following when they publish such measures for the programs included in our review: Presentation of leverage measures should be accompanied by information about the completeness and accuracy of the data and the method(s) used to calculate the measures (for example, with leverage ratios, information on what sources of funds were compared, such as private funds to public funds or nonfederal funds to federal funds). Presentation of leverage measures should be accompanied by a discussion of the relevance of the measure in assessing the program’s performance. For example, the agencies should discuss the extent to which leverage measures are linked to program goals and core activities. We further recommend that the Director of OMB provide guidance to help agencies determine how to calculate, describe, and use leverage measures in a manner consistent with the programs’ design; and re-evaluate the use of leverage measures and disclose their relevance to program goals and activities in future PART or other performance reviews of the selected programs. We received written comments on a draft of this report from HUD and Treasury, which are included in appendixes V and VI, respectively. HUD’s Office of Public and Indian Housing also provided technical comments related to the HOPE VI program, which we incorporated as appropriate. We also provided a draft of this report to OMB for review, but no comments were provided. In a letter from the Acting Deputy Assistant Secretary for Grant Programs, HUD noted that it was pleased with the results presented in our draft report, but provided several detailed comments on and suggested changes to our findings related to the CDBG and HOME programs (see app. V). Specifically, HUD expressed concern that the draft report (1) did not sufficiently emphasize that the CDBG and HOME programs do not have statutory or regulatory leveraging requirements; (2) did not sufficiently emphasize that the agency currently does not publish a leverage measure for the CDBG program; (3) incorrectly stated that the agency did not disclose limitations to the data or methods used to calculate leverage measures for the HOME program, which are reported on HUD’s Web site; and (4) contends that leveraging affects the funding decisions HUD makes for CDBG and HOME (HUD noted that all funding decisions are made at the state or local level and are not approved by the agency). With respect to HUD’s first two concerns, we incorporated additional language into the report to further emphasize that the CDBG and HOME programs do not have leveraging requirements and that the agency does not publish a leverage measure for the CDBG program. In its letter, HUD agreed to work to improve the quality of leveraging data CDBG grantees report to the agency, which would address, in part, our recommendation that the agencies disclose information about the completeness and accuracy of the data and the method(s) used to calculate leverage measures. Concerning HUD’s comment that the draft report incorrectly stated that the agency did not disclose limitations to the data or methods used to calculate leverage measures for the HOME program, which are reported on HUD’s Web site, we acknowledge that HUD’s Web site included information on the method used to calculate leverage measures for the HOME program (that is, the ratio of other funds to program funds). However, HUD has not provided information on the limitations to the data used to calculate those measures. Specifically, the database HUD used to collect leveraging data for the program did not distinguish between nonresponses, which default to zero, and actual entries of zero; assuming that some grantees failed to enter funding information, the total amount of leveraging that occurred in the program (or in a specific state or locality) potentially would be underestimated. Accordingly, we did not change the report. Finally, with respect to HUD’s concern that the draft report contends that leveraging affects the funding decisions HUD makes for CDBG and HOME, our report did not state that HUD or grantees make funding decisions based on leveraging; rather, the report noted the potential consequences of using leveraging as a performance indicator for programs that were not designed to leverage. Specifically, we found that leveraging may be a strategy some funding recipients employ, either by choice or out of necessity, to meet the goals of the CDBG and HOME programs. Thus, using a leverage measure to assess the impact or success in meeting goals may create adverse or conflicting incentives for the agency and its grantees as well as Congress and other decision makers; for example, by giving funding priority to projects that leverage more over those that leverage less, but which may fill a greater or more immediate need within a community. In response to this comment, we added language to the report to emphasize that HUD has not identified leveraging as a performance measure for either program. In a letter from the Director of the Community Development Financial Institutions Fund, Treasury expressed appreciation for our finding that each of the agency’s programs included in our review was designed to leverage. Although Treasury did not specifically comment on our recommendations, it provided several detailed comments primarily related to the agency’s calculation of leverage measures for the CDFI and New Markets Tax Credit programs (see app. VI). Specifically, Treasury commented on our findings that (1) the leverage measures Treasury reported for its programs lacked transparency because the agency did not disclose the limitations of the data or the methods used to calculate them; (2) the leverage measures did not reflect the actual extent of leveraging in the CDFI program due to incomplete data; (3) missing project-level data for the New Markets Tax Credit program potentially led to misestimations of leveraging in the program; and (4) the leverage measure Treasury calculated for the New Markets Tax program was a multiplier ratio, not a leverage ratio. With respect to its first comment on our findings, Treasury stated that on multiple occasions the agency has publicly disclosed its calculation method for the CDFI program. In the report, we listed two publications in which Treasury disclosed its calculation methodologies and limitations to the data it used to compute a leverage ratio for the CDFI program. To this list, we added the additional report Treasury cited in its letter. However, we continue to believe that disclosure of the methodologies and limitations of the data used to calculate the leverage measures is important, particularly in key budget and performance documents, which policymakers often rely on to make funding and management decisions. As discussed in the report, Treasury did not disclose such information about its leverage calculation for the CDFI program in these key documents. For example, in the fiscal year 2006 Performance and Accountability Report and Justification for Appropriations and Performance Plans, Treasury reported leverage ratios for the CDFI program and emphasized its importance in achieving program goals, but did not include any discussions of the measures’ data limitations or calculation methods. Accordingly, we did not change our finding that Treasury’s reporting of such information was inconsistent and that it should further disclose its data limitations and calculation methods in key budget and performance documents. Concerning Treasury’s comment on our finding that the leverage measure the agency calculated for the CDFI program did not reflect the actual extent of leveraging due to incomplete data, Treasury stated that although it was aware that the match leverage—that is, the ratio of nonfederal match funds to program funds—may actually exceed the statutory requirement of a 1 to 1 ratio, it is not appropriate or necessary to include excess matching funds that exceed the requirement. We continue to believe that excluding excess matching funds from the leverage calculation (which typically includes all other sources of funds) understates the actual extent of leveraging that occurs in the program. Accordingly, we did not change the report in this regard. If Treasury chooses to continue to exclude such amounts from future, published leverage calculations for the program, we believe that it should disclose this and its potential impact on the leverage measure, consistent with the recommendations included in this report. Concerning Treasury’s comment on our finding that missing project-level data for the New Markets Tax Credit program potentially led to misestimations of leveraging in the program, Treasury stated in its letter that the leverage measure for the program would not substantially be different if complete data were available and that the calculated measures provided a reasonable approximation of the leveraging that occurs in the program. We reported that (1) leverage data were not available for 26 percent of New Markets Tax Credit projects and (2) Treasury assumed that CDEs contribute 100 percent of tax credit equity to qualified low- income community investments, even though CDEs are permitted to retain up to 15 percent of such equity for administrative and other purposes. We noted that the former case could lead to an underestimation of the extent of leveraging and the latter an overestimation of the extent of leveraging that occurred in the program. As discussed above with respect to the CDFI program, these data limitations potentially could have an impact on the leverage measure Treasury calculated for the program. In its letter, Treasury agreed with our description of these limitations, but did not provide any specific evidence of the impact of missing project-level data on these measures. Treasury also acknowledged the importance of disclosing such information, stating it would make every effort to include a discussion of these and other data limitations, as well as its calculation methodologies, when and if it publishes leverage measure for the program. In response to these comments, we did not change the report. Finally, with respect to our finding that the leverage measure Treasury calculated for the New Markets Tax Credit program for purposes of this report was a multiplier ratio, Treasury stated that the measure was a leverage ratio, calculated consistent with GAO guidance outlined in the report. However, we reported the measure Treasury reported for the New Markets Tax Credit program was not a leverage ratio, but rather a money multiplier or multiplier ratio. A multiplier ratio measures the total amount of investment $1 in tax credits potentially can generate in low-income communities, whereas a leverage ratio measures the additional amount of investment relative to a source of funds (such as program funds). According to Treasury officials with whom we spoke, the agency included the cost of the credit ($0.25) on “both sides of the ratio,” consistent with the calculation of a multiplier ratio, but overstating the extent of leveraging that occurred in the program. Our purpose in making a distinction between leverage ratios and multiplier ratios was to highlight the need for adequate disclosure of calculation methods and data limitations so that decision makers understand how to interpret these measures and how these measures compare with those reported by other programs. Without such information, it would not be possible for decision makers to assess the reliability of the measures or the comparability of the measures reported by other programs. If Treasury publishes the measure it calculated for the New Markets Tax Credit program, we believe it is incumbent upon the agency to provide a discussion as to how the measure was calculated in an attempt to provide complete information to decision makers (see app. III). Further, Treasury acknowledged in its letter it would do so, stating it would “make every effort to include a discussion of data methodologies and limitations” when it publishes leverage measure for the program. Accordingly, we did not change the report in response to this comment. HUD’s and Treasury’s letters also included several comments that were technical in nature, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Ranking Member, Subcommittee on Housing and Community Opportunity, Committee on Financial Services, the Secretaries of Housing and Urban Development and the Department of the Treasury, the Director of the Office of Management and Budget, and other interested congressional committees. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8678 or at [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. The objectives of this report were to examine (1) the leverage measures the Department of Housing and Urban Development (HUD) and the Department of the Treasury (Treasury) reported for the selected housing and community and economic development programs and the transparency of the data and methods used to calculate them and (2) the relevance of leverage measures in assessing the performance of the selected programs. Our review focused on HUD’s Community Development Block Grant (CDBG), HOME Investment Partnership (HOME), and HOPE VI programs and the Treasury’s Community Development Financial Institutions (CDFI), Low-Income Housing Tax Credit, and New Markets Tax Credit programs. To examine the leverage measures HUD and Treasury reported for each of the selected programs and the transparency of the data and methods used to calculate them, we reviewed relevant program regulations and guidance, our prior reports, and reports of others, and interviewed agency officials and other stakeholders. Based on this information, we requested from HUD and Treasury data they use to measure the extent of leveraging (for example, data on the sources and amounts of funds, or other financial data, commonly referred to as “leveraging data”) in the CDBG, HOME, and HOPE VI programs and the CDFI and New Markets Tax Credit programs, respectively. We did not request Low-Income Housing Tax Credit data from HUD or Treasury because neither maintains a database with detailed information on leveraging. For both the CDBG and HOME programs, we requested leveraging data on completed program activities that were aggregated at the local level from HUD’s Integrated Disbursement and Information System (IDIS), which contains information on activities funded by a number of grant programs (including the CDBG and HOME programs). The CDBG data were from December 1, 2005, and May 1, 2007, and the HOME data were from October 1, 2005, and September 30, 2006. To assess the reliability of the data for both programs we (1) performed basic electronic testing of data elements associated with the financing used by state and local agencies that administer the programs—for example, we checked for missing data; (2) reviewed existing information about the data and IDIS; (3) replicated the leverage measure that HUD reported for each program; and (4) interviewed agency officials knowledgeable about the data. As a result of these tests, we found several limitations with these data, specifically that they were largely self-reported by program administrators and were not validated. In addition, IDIS does not distinguish between nonresponses, which default to zero, and actual zero (that is, $0) responses; as such, the data may underreport the total amount of leveraging that occurred in the programs. Further, the data may be incomplete because HUD does not require state and local agencies to report leveraging data because leveraging is not a required activity in either the CDBG or the HOME program, and HUD only started collecting leveraging data for the CDBG program in December 2005 (only about half of all program administrators have reported relevant data to the agency). Due to these limitations, we were unable to determine the reliability of the precise dollar amounts that were used in combination with the CDBG and HOME funds. We use the leverage measures that HUD derived from the data to illustrate how leverage measures can be calculated in different ways, but the values should not be used to represent actual dollars leveraged. To assess the reliability of HUD’s HOPE VI program leveraging data on the 55 HOPE VI projects completed (that is, projects in which all phases of construction were fully completed and actual funding amounts were reported) as of March 2006, we (1) performed basic electronic testing of data elements associated with the financing used by the public housing agencies that administer the program; (2) reviewed existing information about the data and HUD’s HOPE VI Internet-based Grant Management Reporting System Prototype (HOPE VI database); and (3) interviewed HUD officials knowledgeable about the data. In addition, we interviewed officials from five randomly selected public housing agencies (PHA) that received a HOPE VI grant to determine the accuracy and completeness of the data in the HOPE VI database as it pertained to the PHAs’ specific HOPE VI project. We determined that the data were sufficiently reliable for the purpose of this report. For the CDFI program, we discussed with agency officials the calculation method used to compute the program’s leverage measure, including any assumptions made, the completeness and accuracy of the data used in the calculation, and any other known limitations to the measure or the data used to calculate it. Unlike the CDBG, HOME, and HOPE VI programs, we did not request project-level data Treasury uses to calculate a leverage measure for the program. Rather, Treasury provided us with a spreadsheet containing the calculation method and nationally aggregated data used to calculate leverage measures for each of the last 6 reporting years. We determined that Treasury’s calculation method was appropriate and supporting data were sufficiently reliable for the purpose of calculating an approximation of the funds being leveraged in the program. However, based on our conversations with agency officials, we also noted several limitations in Treasury’s calculation method and the supporting data. Specifically (1) the data were largely self-reported by CDFIs and were not validated and (2) Treasury assumed that matching contributions do not exceed $1 for every $1 in program funds, which likely understates the extent of institutional-level leveraging in the program (because many of the CDFIs exceed the match requirement, according to Treasury officials). To assess the reliability of the data Treasury provided on project-level leveraging in the New Markets Tax Credit program, we (1) performed basic electronic tests of the data elements associated with the financing used by Community Development Entities (CDE), (2) reviewed existing information about the data, (3) replicated the project-level leverage measure Treasury calculated for the program, and (4) interviewed agency officials knowledgeable about the data. We determined that the project- level data were sufficiently reliable for purposes of calculating a project- level leverage measure for the program. However, we also noted some limitations in the project-level data, specifically that (1) they were largely self-reported by CDEs and were not validated, and (2) about 26 percent (139 out of 538) of the CDEs that were awarded New Markets Tax Credits did not report data. To determine what leveraging data were available for the Low-Income Housing Tax Credit program at the state level and whether such data were maintained electronically, we conducted a telephone survey of the entire population of 57 allocating agencies, which included 50 state agencies, the District of Columbia, Puerto Rico, and the Virgin Islands; one suballocating agency in the District of Columbia; two suballocating agencies in the State of New York; and a suballocating agency in Chicago. Our pretested survey achieved a 79 percent response rate. On the basis of 45 responses to the following questions—(1) Does your agency have data in its database on the specific types of financing sources that are used in each Low-Income Housing Tax Credit project? and (2) Does your agency have the dollar amounts contributed by each financing source used in the project in the database?—we found that 25 allocating agencies collect the dollar amounts contributed by specific financing sources and keep that data electronically. Because not all allocating agencies collected leveraging data and those that did used different software applications to maintain their data, we determined that it would be difficult to collect aggregate data to report a national leverage measure for the program. To examine the relevance of leverage measures in assessing the performance of the selected programs, we reviewed our reports and those of the Office of Management and Budget (OMB) on performance measurement; agency strategic plans and annual performance plans, budget justifications and performance and accountability reports; and industry, and other literature such as agency press releases and Web sites. We also interviewed representatives from Treasury, HUD, and OMB. Additionally, we interviewed representatives of the following industry groups and other organizations involved in housing and community and economic development initiatives: City of Chicago Department of Housing; Coalition of Community Development Financial Institutions; Coastal Enterprises, Inc.; Council of State Community and Economic Development Agencies; International Economic Development Council; Harvard University’s Joint Center for Housing Studies; John D. and Catherine T. MacArthur Foundation; Living Cities: The National Community Development Initiative; Local Initiatives Support Corporation; National Association of Affordable Housing Lenders; National Association of Development Organizations; National Association of Housing and Redevelopment Officials; National Community Development Association; National Community Investment Fund; National Council of State Housing Agencies; New Hampshire Community Loan Fund; New Markets Tax Credit Coalition; Western Massachusetts Enterprise Fund, Inc. Further, as part of this work, we conducted site visits and collected information on how federal funds have been leveraged in housing and community and economic development projects, 20 of which we toured. Specifically, we conducted site visits in Chicago, Illinois; Laredo and San Antonio, Texas; Chester and Philadelphia, Pennsylvania; Portland and Salem, Oregon; and Seattle and Tokeland, Washington. We selected these areas to obtain perspectives from a variety of regions with attributes such as difficult-to-develop areas, rural and urban classifications, and lower- and higher-cost areas that affect the extent of leveraging. We used a nongeneralizable, illustrative sampling approach to select a range of housing and community and economic development projects or initiatives to tour. More specifically, our criteria were (1) projects were substantially completed in the last 5 years, (2) funds of each of the programs in our review were utilized in at least one of the projects selected, and (3) projects had two or more funding sources. In the cases where program officials maintained comprehensive lists of projects, we used such lists to randomly select projects; otherwise, we used available project information (for example, from program administrator Web sites) in conjunction with information from program administrators to select projects that generally met our criteria. In selecting the projects we illustrate in this report, we further considered several factors including the availability and completeness of leveraging data, the creativity in the projects’ financing and design, the type of development or initiative, whether the project was located in a rural area, and the general geographic location of the project. Appendix II provides examples of how federal funds have been leveraged in the selected programs. We conducted this performance audit in Chicago, Illinois; San Antonio and Laredo, Texas; Philadelphia and Chester, Pennsylvania; Portland and Salem, Oregon; Seattle and Tokeland, Washington; and Washington, D.C., from November 2006 to January 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Figures 3 through 6 describe how the CDFI, Low-Income Housing Tax Credit, and New Markets Tax Credit programs leverage funds for housing and community and economic development. As illustrated in figure 3, CDFIs must match CDFI program funds dollar- for-dollar with funds from nonfederal sources such as local governments or private foundations (match leverage). CDFIs use these program and match funds to attract private debt from lenders (debt leverage). Together, match and debt leverage represent institutional leverage in the CDFI program. CDFIs use the pooled equity and debt to make loans to a number of development projects. Additional leverage also may occur at the project level—individual projects may use their CDFI funds to leverage funding (equity or debt) from other investors, such as foundations, nonprofits, banks, and local governments. Projects (borrowers) repay principal and interest to their investors, including the CDFI. CDFIs use these payments to make subsequent loans to additional projects and repay lenders. As illustrated in figure 4, states, through their state housing finance agencies, are authorized to allocate Low-Income Housing Tax Credits to housing projects. Project developers can sell their tax credits directly to an investor(s) or a syndicator (which assembles a group of investors and acts as the group’s representative). The money investors pay for the tax credits is paid into the projects as equity financing. Generally, investors (including individuals, foundations, and state and local governments) contribute this equity, which is combined with non-tax credit financing sources (such as mortgages) in individual projects to fund development costs. As illustrated in figure 5, under the New Markets Tax Credit program, Treasury competitively awards tax credits to CDEs (such as a financial institution or nonprofit organization), which offer the credits to investors (including individuals, groups of investors, or corporations). The equity or debt generated from such an offering is used to finance eligible investments or projects, as described above. In turn, these investments and projects may use New Markets Tax Credit equity to leverage additional equity and debt to finance development or related costs. As illustrated in figure 6, rather than offering tax credits directly to investors, under a leveraged transaction structure, a CDE may offer credits to an investment fund. The investment fund pools equity generated from the credit offering with other equity and debt, and loans the funds to the CDE, which in turn makes qualified low-income community investments. Table 4 outlines the leverage measures HUD and Treasury calculated for the CDBG, HOME, HOPE VI, CDFI, Low-Income Housing Tax Credit, and New Markets Tax Credit programs. Following table 4, we present several leverage measure calculation scenarios for the selected programs. Figures 7, 8, and 9 illustrate the leverage ratios HUD reported for the CDBG, HOME, and HOPE VI programs, respectively (scenario A), and our recalculations of the those measures to convey the ratio of nonfederal funds to federal funds (scenario B) and public funds to private funds (scenario C). Based on cumulative data from December 1, 2005, to May 1, 2007, HUD estimated the leverage ratio for the CDBG program to be 4.98 to 1 (other funds to CDBG program funds). However, we could not determine in which category some CDBG funding data belonged; thus, we excluded these data and revised the 4.98 to 1 ratio to 4.04 to 1 (scenario A in fig. 7). Using the revised dataset, we then recalculated the measure to convey the ratio of nonfederal funds to federal funds (1.84 to 1, scenario B in fig. 7) and the ratio of private funds to public funds (0.55 to 1, scenario C in fig. 7). Based on data on HOME activities completed in fiscal year 2006, HUD estimated the leverage ratio for the HOME program to be 4.00 to 1 (all other funds to HOME program funds). Using these same data, we recalculated the measure to convey the ratio of nonfederal funds to federal funds (1.15 to 1, scenario B in fig. 8), and the ratio of private funds to public funds (0.62 to 1, scenario C in fig. 8). Using data on the 55 HOPE VI projects completed (that is, projects in which all phases of construction were fully completed) as of March 31, 2006, we determined the leverage ratio of other funds to program funds to be 1.13 to 1 (scenario A in fig. 9). Using the same data, we recalculated the measure to convey the ratio of nonfederal funds to federal funds (0.67 to 1, scenario B in fig. 9). Unlike the HUD programs, we generally were not able to recalculate the leverage measures Treasury reported for the CDFI and New Markets Tax credit programs to convey the extent of public and private investment in them because available leveraging data did not distinguish between or correctly categorize public and private contributions in either program. However, we were able to deconstruct the measures to approximate the extent of institutional and project leverage in them (see figs. 10 and 11). In the CDFI program, match leverage (that is, the ratio of nonfederal match funds to program funds) represented approximately one-fifth of total institutional leverage, while debt leverage (that is, additional private debt CDFIs were able to attract with program funds and matched funds combined) represented four-fifths of total institutional leverage, according to Treasury data. A majority of the total leverage that occurred in the CDFI program in fiscal year 2005 occurred at the project level—according to Treasury data, for every $1 of federal funds the agency contributed to CDFIs, they were able to leverage an additional $21.31 at the project level (see fig. 10). In the New Markets Tax Credit program, institutional leverage (that is, net equity generated through the offering of the credits) represented approximately 58 percent of total leveraging that occurred in the program, while project leverage represented approximately 42 percent of total leveraging (see fig.11). To determine how federal funds have been leveraged in HUD’s CDBG, HOME, and HOPE VI programs and Treasury’s CDFI, Low-Income Housing Tax Credit, and New Markets Tax Credit programs, we toured and obtained information on a number of projects that used funds from the selected programs in combination with other federal, state, local, and private funds for housing and community and economic development. Appendix I describes how we selected the communities to visit and the projects to include in this report. HUD’s CDBG, HOME, and HOPE VI programs and Treasury’s CDFI, Low- Income Housing Tax Credit, and New Markets Tax Credit programs are among a number of federal programs that fund housing and community and economic development. Specific information about the features of these programs follows: CDBG provides annual grants on a formula basis to entitlement communities and states to develop viable urban communities by providing decent housing and a suitable living environment, and by expanding opportunities, principally for low- and moderate-income persons. Under CDBG, communities and states develop their own programs and funding priorities. HOME provides formula grants to states and localities to fund a range of activities that buy, build, and rehabilitate affordable housing for rent or homeownership or provide direct rental assistance to low-income households. HOPE VI is part of HUD’s effort to transform public housing by providing grants that fund the demolition of severely distressed public housing; the capital costs of major rehabilitation, new construction, and other physical improvements; and other resident-related services. Through the CDFI program, Treasury provides CDFIs with financial assistance in the form of grants, loans, equity investments, and deposits to enhance their ability to make loans and investments and provide services for the benefit of low-income communities and persons. CDFI funds can be used for economic development, affordable housing, and community development financial services. Under the Low-Income Housing Tax Credit program, states are authorized to allocate federal tax credits as an incentive to private investors to develop rental housing for low-income households. The equity generated by the sale of tax credits is used to lower the financing costs of housing developments by reducing the debt or equity the developer otherwise would incur or contribute. The New Markets Tax Credit program permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in CDEs. CDEs use the equity generated by the sale of the credits to make investments in qualified low-income businesses. Figures 12 through 14 illustrate several projects that leveraged federal funds for the development of affordable housing. Figures 15 through 20 illustrate several projects that leveraged federal funds for community and economic development activities. In addition to the contact named above Marianne Anderson, William Bates, Elizabeth Curda, Daniel Garcia-Diaz, Terence Lam, Alison Martin, John McGrail, Jackie Nowicki, Josephine Perez, Barbara Roesmann, Cory Roman, and Charles Wilson Jr. made key contributions to this report. Leveraging Federal Funds for Housing, Community, and Economic Development. GAO-07-768R. Washington, D.C.: May 25, 2007. Performance Budgeting: PART Focuses Attention on Program Performance, but More Can Be Done to Engage Congress. GAO-06-28. Washington, D.C.: October 28, 2005. Performance Budgeting: Observations of the Use of OMB’s Program Assessment Rating Tool for the Fiscal Year 2004 Budget. GAO-04-174. Washington, D.C.: January 30, 2004. Tax Administration: IRS Needs to Further Refine Its Tax Filing Season Performance Measures. GAO-03-143. Washington, D.C.: November 22, 2002. Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not Met Annual Reporting Requirement. GAO-03-91. Washington, D.C.: November 15, 2002. Performance Reporting: Few Agencies Reported on the Completeness and Reliability of Performance Data. GAO-02-372. Washington, D.C.: April 26, 2002. Managing for Results: Challenges Agencies Face in Producing Credible Performance Information. GAO/GGD-00-52. Washington, D.C.: February 4, 2000. Performance Plans: Selected Approaches for Verification and Validation of Agency Performance Information. GAO/GGD-99-139. Washington, D.C.: July 30, 1999. Agency Performance Plans: Examples of Practices that Can Improve Usefulness to Decisionmakers. GAO/GGD/AIMD-99-69. Washington, D.C.: February 26, 1999. Grant Programs: Design Features Shape Flexibility, Accountability, and Performance Information. GAO/GGD-98-137. Washington, D.C.: June 22, 1998. Managing for Results: Analytic Challenges in Measuring Performance. GAO/HEHS/GGD-97-138. Washington, D.C.: May 30, 1997. | This is the second of two reports on the leveraging of federal funds in housing and community and economic development programs. Leveraging involves using a source of funds to attract other funds or combining multiple sources of funds. This report examines (1) the leverage measures and the transparency of the data and methods used to calculate them, and (2) the relevance of such measures in assessing performance that the Department of Housing and Urban Development (HUD) and the Department of the Treasury (Treasury) reported for six selected programs. To complete this work, GAO reviewed agency policies and reports, interviewed officials, and analyzed agency data. The leverage measures (such as ratios) HUD and Treasury reported for the selected programs in performance, budget, and other documents lacked transparency because the agencies generally did not disclose the limitations of the data or the methods used to calculate them. Based on its review of available leveraging data and interviews with HUD and Treasury officials, GAO found that the leverage measures the agencies reported for the selected programs were based on incomplete data and thus did not capture the actual extent of leveraging in the programs. GAO also found that while the agencies generally reported measures that described the ratio of all other funds (federal, state, local, and private funds) to program funds, alternative measures that described the total federal investment or total private investment in a program provided considerably different results--also potentially of value to decision makers--about the extent of leveraging in a program. GAO regularly has reported that clearly communicating data limitations and their potential impact may foster appropriate use of data; however, no agency-specific or governmentwide guidance directs what agencies should disclose about the leverage measures they report for the selected programs. Consequently, absent specific information on how these measures were calculated and their limitations, decision makers would not have sufficient information to understand their meaning and determine how they could and should be used in performance assessment, budgeting, and other contexts. Leverage measures can provide basic information about the programs GAO reviewed; however, their relevance in assessing the performance of these programs varies considerably. For all of the programs GAO reviewed, leverage measures can describe inputs, or the resources used to support program activities, and may be useful for conveying basic financial information. To the extent that leveraging is a goal or expected activity of a program (as in the three Treasury programs), leverage measures generally can describe program outputs, or the products or services delivered (such as total leveraged funds), and may be used along with other performance indicators to assess the efficiency and effectiveness of a program in meeting its goals. In cases where leveraging is not clearly and appropriately linked to program goals and activities (as in the three HUD programs), use of such measures to describe program outputs could be misleading and result in adverse consequences. Although leveraging had limited relevance to the goals and activities of the selected HUD programs, GAO found that the Office of Management and Budget (OMB) and the agency often cited leverage measures for the programs in performance- and budget-related reviews and documents. Their continued use of leverage measures in these contexts could unnecessarily encourage HUD to place more importance on leveraging than meeting the stated goals of the selected programs. |
Until fiscal year 1998, Indian housing authorities and tribes received most of their funding for low-income housing through programs established under the U.S. Housing Act of 1937 and administered by HUD’s Office of Native American Programs. Through its headquarters and six field offices, and with the help of 217 Indian housing authorities, HUD administered the housing programs that benefited Native American families that live in or near tribal areas. HUD provided funding to construct, maintain, and rehabilitate low-income housing through programs such as Development, Operating Subsidies, and Modernization. On October 26, 1996, the Native American Housing Assistance and Self-Determination Act was signed into law, separating Indian housing from public housing, administratively and financially. The regulations implementing NAHASDA were developed by a negotiated rulemaking committee. The committee had 58 members, 48 of them from geographically diverse small, medium, and large tribes; the other 10 were HUD employees. After review by the Office of Management and Budget, HUD published the final rule implementing NAHASDA on March 12, 1998; it went into effect on April 13, 1998. NAHASDA eliminated 9 of HUD’s 14 separate Indian housing programs, replacing them with a single block grant program with one set of funding criteria for HUD to administer and, according to HUD officials, one system for managing and accounting for funds. The new act also allowed tribes to designate themselves, new housing entities, or existing Indian housing authorities as the housing entity to manage existing housing, to plan and implement housing programs, and to administer block grant funding. This change resulted in the number of housing entities more than doubling, from 217 housing authorities to 575 tribally designated housing entities. Under NAHASDA, to receive funding, each housing entity must submit an Indian housing plan to HUD describing 1-year and 5-year housing goals and objectives, housing needs, and financial resources. Prior to NAHASDA, HUD provided funding directly to Indian housing authorities and tribes through 14 programs for which a total of $2.8 billion was appropriated in fiscal years 1993 through 1997. Each program had its own criteria for awarding and allocating funds and its own system for managing and accounting for the funds. For nine of the programs, Indian housing authorities or tribes competed for funding. The Indian housing authorities and tribes submitted project proposals, which HUD then scored and ranked, awarding grants for the highest-ranked projects. For the other five programs, HUD allocated funds to Indian housing authorities or tribes noncompetitively through a formula or on a first-come, first-served basis. Tables I.1 and I.2 in appendix I describe each program and the criteria used to provide funding. Funding for HUD’s Indian housing programs has remained relatively consistent in recent years, ranging from a low of $491 million in fiscal year 1996 to a high of $593 million in fiscal year 1995, as shown in figure 1. In fiscal year 1997, the last year these programs were funded separately, funding was approximately $562 million, of which almost $322 million, or 57 percent, was awarded through competitive programs. The approximately $240 million (43 percent) remaining was allocated noncompetitively. Figure 2 shows how the fiscal year 1997 funds were distributed. With the start of the NAHASDA program, HUD applied the act’s allocation formula to determine the amounts of the fiscal year 1998 block grants. The formula considers tribes’ housing needs, but did not include a factor for housing authorities’ past performance. HUD determined that the Department was legally constrained from considering the past management performance of Indian housing authorities. The formula also did not factor in $929 million provided in past years but not yet spent by the Indian housing authorities and tribes. Most of the unspent funding was provided in fiscal years 1993 through 1997 for the Development and Modernization programs, which were intended to assist Indian housing authorities in building new housing and modernizing existing units. The housing entities can continue to use these unspent funds as originally planned or as proposed in their Indian housing plans. The NAHASDA block grant formula consists of two components: (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing. A housing entity’s total block grant amount is the sum of the amounts determined under each of these two components—or the amount an Indian housing authority received in fiscal year 1996 for modernization and operating subsidy. To determine funding for the first component—operating and modernizing—HUD calculates the number of existing housing units an entity has and the operating costs of providing that housing. HUD then calculates the modernization costs of keeping these units in good working order. These two cost figures are combined as the entity’s funding amount under the first component of the NAHASDA formula. To calculate funding of the second component of the NAHASDA formula—need for affordable housing—HUD uses various factors. These factors reflect each housing entity’s Native American population, income levels, local housing costs and housing conditions, and the extent of housing shortages. Hence, it is through the calculation of this component that tribal housing needs are considered in the distribution of NAHASDA funding. In allocating funds in the first year of the NAHASDA program, HUD recognized that the data used to calculate block grants may need to be improved. HUD has hired a contractor to review alternative data sources to use when applying the NAHASDA formula. In addition, NAHASDA regulations require that HUD, with the consultation and involvement of the tribes, review the formula and, if necessary, revise the formula within 5 years. Appendix II provides a more detailed description of the current formula. HUD interpreted NAHASDA as legally constraining the Department from considering Indian housing authorities’ past management performance as a factor in determining the eligibility of housing entities for fiscal year 1998 NAHASDA block grants. Indian housing authorities’ past performance came under the requirements and regulations for programs created under the U.S. Housing Act of 1937, requirements and regulations that are no longer in effect since NAHASDA eliminated most of these programs. According to HUD’s Office of General Counsel, there is no provision under NAHASDA allowing HUD, when awarding block grant funding under the act, to consider Indian housing authorities’ failure to comply with requirements and regulations that are no longer in effect. Consequently, the housing entities were given the opportunity to demonstrate good management and performance under NAHASDA. However, HUD does have the authority and has, in several instances, placed conditions, such as additional monitoring and oversight, on the use of grant funds by a housing entity that has a history of poor performance in administering federal grant programs. For example, for a tribe with problems administering its Indian Community Development Block Grant and HOME programs, HUD plans to more closely monitor expenditures of NAHASDA block grant funds and to require that the tribe submit quarterly program and financial reports. In future fiscal years, regulations permit HUD, when dispensing new grants, to consider how well housing entities have managed past NAHASDA grants. NAHASDA regulations allow HUD to sanction poorly managed housing entities by (1) reducing or eliminating future grant funding or (2) replacing the housing entity managing the program. Such actions may be taken if HUD determines, through activities such as reviewing reports provided by tribes or making site visits, that housing entities are substantially noncompliant with NAHASDA regulations. HUD plans to closely monitor housing entities that are having performance problems and to provide them with technical assistance to help them comply with NAHASDA requirements. To monitor and assist these entities, HUD is using Internet e-mail to facilitate the submission and review of Indian housing plans and to respond to housing entities’ questions about the program. Providing additional monitoring and technical assistance may pose a challenge for HUD, given the Department’s decreasing resources. HUD’s Inspector General has stated that effectively overseeing housing entities while simultaneously implementing the NAHASDA program may prove difficult with current HUD staffing because the number of housing entities served by HUD under NAHASDA will more than double. Until the first year of NAHASDA is completed, HUD will not know what the impact this increase in the number of housing entities served will have on its workload. The Deputy Assistant Secretary, Office of Native American Programs, estimated that 221 staff years will be needed to fully implement Indian housing programs. Meanwhile, several changes are planned to accommodate the future workload with the present staffing level of 178 employees. The planned changes include addressing the length and frequency of site visits, modifying some work processes, and using technology to improve efficiency. The Deputy Assistant Secretary added that because of the resource limitations, the office may have to reduce the number of site visits to tribal housing entities during fiscal year 1999. HUD plans to visit only 20 percent of the housing entities, instead of 33 percent as originally planned. Under NAHASDA regulations, the tribes also have a responsibility to monitor the performance and compliance of their housing entities. For example, tribes are required to ensure that their entities prepare periodic progress reports, including annual compliance assessments and performance and audit reports. The unspent $929 million in Indian housing funding was not a factor in calculating the fiscal year 1998 block grants because, according to HUD officials, the unspent funding addresses needs that continue to exist. This funding, awarded in previous years, remains available for housing entities to complete ongoing work or for eligible NAHASDA activities. NAHASDA regulations require housing entities to use unspent funding for housing planned under earlier housing programs if contracts have already been signed. However, if such contracts have not been signed, NAHASDA regulations allow the entities to integrate the funding into their overall NAHASDA housing plan. Housing entities report these unspent funds and the plans for their use as part of the Indian housing plans they submit for HUD’s approval. Officials from HUD’s Office of the Chief Financial Officer told us that some funds, particularly the Development and Modernization funds, have remained unspent because of the construction difficulties some projects on Indian lands have encountered. These difficulties include legal disputes and the remoteness of the Indian lands, which makes access difficult for the builders and other individuals, businesses, and suppliers needed to construct housing. Most of the unspent funding, almost $903 million of it, was provided in fiscal years 1993 through 1997 and was for the Development and Modernization programs. The unspent funding provided in fiscal years 1993 through 1997 is shown by program in figure 3. Over this same 5-year period, HUD provided a total of $2.8 billion for Indian housing programs; thus, about 30 percent of this funding remains unspent. In appendix III, table III.1 shows the unspent Indian housing funding by program over an 18-year period. Table III.2 shows the unspent Indian housing funding over the same period for 15 Indian housing authorities and tribes that have unspent funding of more than $10 million each. Other ($35.9) Operating Subsidies ($12.0) Section 8 Rental Assistance ($10.0) Drug Elimination ($8.6) Economic Development and Support Services ($3.4) Emergency Shelter Grants ($1.0) HOPE I ($0.7) Youth Sports ($0.2) HOME Investment Partnership ($38.9) Development ($511.3) Modernization ($316.5) As of September 30, 1998, HUD had allocated most of the fiscal year 1998 NAHASDA block grants and had requested funds from the Congress for fiscal year 1999 block grants. To receive grants from the $590 million available for the NAHASDA program in fiscal year 1998, each of the 575 housing entities had to submit an Indian housing plan by July 1, 1998. HUD had received plans representing over 97 percent of the entities by the deadline. As of September 30, 1998, HUD had approved 327 plans representing approximately $548 million and was in the process of reviewing 40 additional plans representing $39 million—for a total of 367 plans and $587 million in fiscal year 1998 block grants. Appendix IV shows the fiscal year 1998 block grant amount for each housing entity. For the fiscal year 1999 program, HUD requested $600 million from the Congress. As of September 30, 1998, however, HUD had not calculated the final fiscal year 1999 block grant allocations because it had not yet received its appropriation. Fiscal year 1999 Indian housing plans are due by July 1, 1999, for HUD’s review and approval. Passage and implementation of NAHASDA presents HUD and the Native American tribes with both opportunities and challenges. NAHASDA allows HUD to manage and monitor most housing assistance to tribes through a single program. At the same time, NAHASDA more than doubled the number of grantees that must be assisted and monitored—during a period of declining resources at the Department. As for the tribes, they gained the freedom to set their own priorities and to determine how to best meet their housing needs with the resources available. Yet the tribes will ultimately be responsible for making sure that grant funds are spent efficiently and appropriately. It is too soon to determine how well HUD and the tribes will meet the challenges presented by NAHASDA. We provided the Department of Housing and Urban Development with a draft of this report for review and comment. HUD generally agreed with the report but commented that we should recognize that the Department merely administers the NAHASDA formula. The formula was a product of the negotiated rulemaking process, and the Department did not determine or control the elements of the formula. We have expanded the discussion in our report to reflect this concern. HUD also suggested that we include information on standard spend-out rates for the Development and Modernization programs in our discussion of unspent program funding to allow for a more comprehensive understanding of the issue. We believe that our discussion of the unspent program funding addresses this concern. We point out that most of the unspent funding was appropriated over a recent 5-year period—fiscal years 1993 through 1997. Furthermore, we describe the difficulties of building on Indian lands and point out that Development and Modernization funds can remain unspent because of these difficulties. Consequently, we did not make the suggested change to the report. Additionally, HUD provided a number of suggested technical and clarification comments that we have incorporated as appropriate. To determine how HUD awarded and allocated funding to Indian housing authorities and tribes before NAHASDA’s enactment, we reviewed regulations governing HUD’s grant award programs. In addition, we reviewed the applicable HUD handbooks and guidebooks and interviewed officials from HUD’s headquarters Office of Native American Programs in Washington, D.C., and Denver, Colorado, who were familiar with the programs’ funding. To determine the aggregate funding amounts for Indian housing programs in fiscal years 1993 through 1997, we obtained data from HUD’s annual reports. To determine what factors HUD used to allocate Indian housing block grant funding to housing entities under NAHASDA, we reviewed NAHASDA, the final rule developed under the act, notices, and plans for implementing NAHASDA. We also analyzed the NAHASDA block grant allocation formula. We discussed the NAHASDA block grant allocation process and formula with officials of HUD’s Office of Native American Programs who were responsible for NAHASDA’s implementation. In addition, we interviewed members of the NAHASDA Negotiated Rulemaking Committee who participated in drafting the final rule and the block grant allocation formula. To determine the amount, type, and “age” of unspent Indian housing program funds, we analyzed data obtained for us by HUD from its Program Accounting System. We did not systematically verify the accuracy of HUD’s data or conduct a reliability assessment of HUD’s databases as part of this assignment. To determine the status of Indian housing block grant funding for fiscal year 1998, we reviewed HUD’s reports on housing entities’ status in meeting NAHASDA funding requirements and the associated funding amounts. We also interviewed officials of HUD’s Office of Native American Programs who were responsible for calculating and allocating the fiscal year 1998 block grants. We performed our work from June 1998 through November 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of HUD and the Director, Office of Management and Budget. We will make copies available to others on request. Please call me at (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix V. Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Bureau of Indian Affairs housing needs assessment — Percentage of the area’s total need — Estimated number of units to be funded — Weighted average cost of developing housing within each area — Indian housing authority established under state law or a HUD-approved tribal ordinance — Indian housing authority had the capacity to administer the program as demonstrated by compliance with HUD standards for housing development, modernization, and operations — Indian housing authority met performance eligibility thresholds to apply for housing development funding: environmental review, fiscal closeout, final site approval and control, utility supplier’s firm commitment, and preconstruction certification — Relative unmet need for housing — Relative Indian housing authority occupancy rate compared with the occupancy rates of other eligible Indian housing authorities — Time since last Development grant was approved compared with that for other eligible Indian housing authorities — Current Indian housing authority development “pipeline” activity already in progress — For fiscal year 1997, HUD applied additional factors for scoring and ranking that included clear Indian housing authority demonstration of preplanning housing project activities, site selection that results in cost savings, and innovative approaches to development or financing that reduce housing delivery time or increase the number of units — $1 million base amount for each field office — Additional amount calculated by a formula that considered the latest Census data for the eligible Native American population residing in each area and the extent of poverty and housing overcrowding — Reasonableness of project’s cost — Project’s appropriateness for intended use — Project can be achieved within 2 years — Tribe’s administrative, managerial, and technical capacity — Tribe’s past grants administration — Tribe’s actions to impede development of housing for low- and moderate-income individuals — Outstanding block grant obligations to HUD — Need for project and its design — Project planning — Leveraging of block grant funding (continued) Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Nonemergency) Degree to which — project addressed the housing needs of the tribe and maximized benefits to low-income families — tribe had taken the financial, administrative, and legal actions necessary to undertake the proposed project and had the administrative staff to carry out the project — tribe would use other sources of funding, such as state grants, private mortgage insurance, private contributions, and other federal grants, to leverage funding for the project — Plan for evaluating activities — Plan for establishing a relationship with local law enforcement entities — Coordination with empowerment zone and welfare reform efforts — Description of use of community facilities and bringing back community focus to housing authority properties — Assurance that Indian housing authority has a broad range of tools for making and maintaining a safe community — Indian housing authority’s administrative capacity and relevant experience — Problem’s extent — Support of residents, local government, and community in implementing activities — Soundness of proposed plan — Extent of coordination and participation with other organizations in community planning (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Formula calculating emergency shelter needs for tribes within each field office area — Form, timeliness, and completeness of application — Tribe’s eligibility as determined by Department of Treasury Office of Revenue Sharing — Eligibility of persons to be served for program assistance — Tribe’s building compliance with disability requirements — Tribe’s capacity to carry out the proposed activities successfully and within a reasonable time — Tribe’s service to the homeless population that is most difficult to reach and serve — Existence of an unmet need for the proposed project — Appropriateness of proposed activities to meet the needs of the served population — Extent of coordination with other community programs — 51 percent or more of the residents included in the proposed project are affected by welfare reform — Proposed activities must take place in a community facility that is easily accessible for applicants — Community resources must be firmly committed to the project — Indian housing authority’s compliance with current programs — Troubled housing authority must use a contract administrator — Indian housing authority’s administrative capacity and relevant experience — Extent of problem and need for project — Soundness of program approach and methodology — Indian housing authority’s ability to leverage project resources — Extent of coordination with community to identify and address problems — Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families — Families, not Indian housing authorities or tribes, must be eligible for assistance — Funding provided to field offices to assist Indian housing authorities in providing funds for eligible families (continued) Fiscal year 1997 funding (dollars in millions) For scoring and ranking proposals — Funding awarded directly to organizations by HUD’s Office of Public and Indian Housing — 51 percent or more of the residents included in the proposed project are affected by welfare reform — Signed agreement between the applicant and the housing authority describing each of their roles and responsibilities — Proposed activities must take place in a community facility that is easily accessible for applicants — Must use the services of a contract administrator or mediator — Must be a registered nonprofit organization — Compliance with current programs and no unresolved audit findings — Contract administrator must not be in default — Letters of support from project participants — Certification of resident organization board elections — Resident organization’s administrative capacity to carry out the project and its relevant experience — Need for the project and extent of the problem — Soundness of program approach and methodology — Resident organization’s ability to leverage project resources — Extent that project reflects a coordinated community-based process identifying and addressing the problem — HUD ONAP awarded a small portion of the funding using a lottery system Fiscal year 1997 funding (dollars in millions) Comprehensive Improvement Assistance Program for modernization(Emergency) For allocating funding to Indian housing authorities or tribes — Funding allocated directly to field offices by HUD’s Office of Public and Indian Housing — HUD approval of Indian housing authority’s comprehensive plan identifying all physical condition and management improvements of existing housing and action plan for achieving them — Coordination with local officials in developing comprehensive plan — Indian housing authority board resolution approving comprehensive plan — Additional assurances or information required from HUD monitoring, audit findings, civil rights compliance findings, or corrective action orders — Formula calculating housing modernization needs of Indian housing authorities — Funding allocated directly to field offices by HUD’s Office of Public and Indian Housing — Indian housing authorities must meet HUD financial management and occupant income requirements — Performance Funding System formula for calculating what a well-managed Indian housing authority would need to operate its housing programs — Compliance with Fair Housing, Civil Rights, and environmental statutes — Housing projects have to be fully available for occupancy — All eligible applications funded subject to the availability of funds — HUD does not allocate funding for loan guarantees to field offices — Tribe must have developed eviction and foreclosure procedures — HUD guarantees loans made by private lenders to applicants that meet loan qualifications (continued) Fiscal year 1997 funding (dollars in millions) Using the block grant formula established under the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), the Department of Housing and Urban Development (HUD) allocates funds to Indian housing entities for (1) the costs of operating and modernizing existing housing units and (2) the need for providing affordable housing activities. In calculating grant amounts for operating and modernizing existing housing, HUD, as specified in the formula, considers inflation since 1996 in the cost of providing these services, the number of housing units an entity operates, and the entity’s cost of providing these services compared with the average cost for all entities. In calculating grant amounts for the need to provide affordable housing activities, HUD considers seven weighted factors specified in the formula indicating the need for housing activities and the cost of obtaining the activities. Additionally, once the block grants are calculated, HUD ensures that the funding amounts meet certain minimum levels. HUD calculates an entity’s grant amount for operating and modernizing existing housing using fiscal year 1996 national average funding per housing unit and increasing it to reflect cost increases. After this inflation adjustment, HUD adjusts the national average amount to reflect geographic differences in the cost of operating and modernizing housing for each Indian housing entity. HUD then multiplies each entity’s cost per unit by the number of housing units the entity operates to arrive at its grant amount. Figure II.1 illustrates the formula for calculating funding for operating and modernizing existing housing. Housing entities operate a variety of units that are classified into three major types: (1) low-income rental units built under the U.S. Housing Act of 1937, (2) units operated under the Section 8 Rental Assistance program, and (3) Turnkey III and Mutual Help homeownership units. For the NAHASDA block grants, HUD separately calculates grant amounts that reflect the operating and modernizing needs of each of these types of housing units. An entity’s funding reflects these needs and is the sum of two calculations. Table II.1 shows a hypothetical sample calculation of an entity’s funding for operating housing. In calculating funding for operating housing, HUD uses the 1996 national average funding for each of the three types of housing. In our hypothetical sample calculation, we assume that the inflation cost adjustment is 5.3 percent and that the entity’s geographic cost factor is 14 percent above the national average. We also assume that the entity is responsible for operating 150 low-income housing units, 50 Section 8 housing units, and 20 Turnkey III and Mutual Help units. We use the fiscal year 1996 national average funding amount for each type of housing unit in our hypothetical calculation. The national average funding amount for low-income units in fiscal year 1996 was $2,440 per unit. We increase this amount by 5.3 percent for inflation and by 14 percent for operating costs above the national average, and consider that the entity operates 150 low-income units. Given these assumptions, our hypothetical housing entity would receive a grant amount of $439,354 for low-income units. Similar calculations for Section 8 units and for Turnkey III and Mutual Help units yield grant amounts of $217,576 and $12,676, respectively. Adding these three figures together yields a total operating housing grant amount of $669,606. In calculating funding for modernizing housing, HUD bases the average 1996 funding amount on the number of low-income and Turnkey III and Mutual Help units. Section 8 units are excluded in this calculation. The national average funding amount for modernizing housing units in fiscal year 1996 was $1,974 per unit. The block grant uses the same inflation adjustment factor for both operating and modernizing housing. Consequently, we assume a 5.3-percent inflation adjustment for this calculation. Under the block grant, the geographic cost factor for modernizing housing differs from that used for operating housing. In our sample calculation, we assume that the entity’s geographic cost factor is 2 percent below the national average. The resulting grant calculation for modernizing housing is shown in table II.2. We increase the fiscal year 1996 modernizing funding amount by 5.3 percent for inflation, reduce it by 2 percent for below average costs, and consider the 170 housing units the entity operates (150 low-income units and 20 Turnkey III and Mutual Help units). These calculations result in a modernizing grant amount of $346,298. Adding this amount to the $669,606 the entity receives for operating housing results in a total grant of $1,015,904 for operating and modernizing housing. For fiscal year 1998, HUD derived the number of housing units and areas served from reports submitted by Indian housing authorities or tribes. The numbers reported were confirmed by the Department. HUD adjusted costs for inflation using the housing cost component of the Consumer Price Index, published annually by the Bureau of Labor Statistics. HUD adjusted for geographic differences in the cost of operating housing (for example, the costs of maintenance and tenant services) using the larger of the entity’s historical Allowable Expense Levels for calculating operating subsidies under the Public Housing Program (prior to October 1, 1997) or the private sector housing Fair Market Rents, data collected and published annually by HUD. Fair Market Rents represent the rental cost of private sector housing units and reflect geographic differences in rental housing supply and demand in local U.S. housing markets. HUD based the geographic cost factor used to calculate funding for modernizing housing on the cost of building a standard housing unit of moderate design in various geographic locations. Given moderate housing design specifications, HUD calculates the labor, materials, and other costs required to construct such a unit in various locations. These amounts are based on cost surveys conducted by private firms. Thus, the geographic cost factor reflects labor, materials, and other costs in the housing construction industry. Once funding for operating and modernizing housing is determined for each entity, HUD totals the funding amounts and deducts the amounts from available appropriations. This calculation results in the amount of funding available to all housing entities to address the need to provide affordable housing activities. The formula for the need for housing activities allocates available funding among entities based on their proportionate share of seven weighted factors and the cost of building a standard housing unit of moderate design in various geographic locations. The geographic cost adjustment factor is the same as or similar to that used in the formula to calculate funding for modernizing housing. Figure II.2 shows the formula for calculating funding for the need for housing activities. The formula for calculating funding for the need to provide affordable housing activities uses various weighted need factors. The factors capture the portions of the national population that fall into seven categories and are American Indians or Alaska Natives living in areas where a tribe has jurisdiction or has provided substantial housing services. These categories include the Native American population, low-income households, households with housing cost exceeding half their income, low-income households in need of housing, and households living in overcrowded conditions or without kitchen or plumbing facilities. Table II.3 shows each factor and its associated weight. HUD multiplies each housing entity’s share of each factor by the factor’s assigned weight and adds the total for all factors to produce the entity’s weighted share for the seven need factors. Population (American Indians and Alaska Natives) The third column of table II.3 shows the weight for each of the seven need factors. For example, in our sample calculation, we assume that a housing entity’s jurisdiction covers, or that the entity has provided, substantial housing services to one-half of 1 percent of the total American Indian and Alaska Native population (see factor 1 in the table). This factor receives a weight of 11 percent in the formula. Multiplying the entity’s share of the American Indian and Alaska Native population by the factor’s weight produces the entity’s weighted share for the factor. To produce the entity’s weighted share of the seven factors, we make similar computations for each factor and add the entity’s weighted shares together. HUD uses the formula shown in figure II.3 to calculate an entity’s funding for the need to provide affordable housing activities. To illustrate, we assume that $100 million of the program’s total appropriation remains after the operating and modernizing grants have been allocated. We use the weighted share of the seven need factors as calculated in table II.3, 0.00622. We also assume that the entity’s geographic cost factor is 2 percent below the national average. Multiplying these amounts results in a grant calculation of $609,560 for need for housing activities. Funding for Need for Housing Activities After calculating funding for operating and modernizing housing and for the need for housing activities, HUD combines the amounts into a single block grant. The total grant amount of our hypothetical sample calculation is $1,267,736. For fiscal year 1998, HUD used the same geographic cost factor to calculate funding for the need to provide affordable housing activities as it did for modernizing existing housing. HUD obtained data for each of the seven need factors from the 1990 U.S. Census, which HUD updated to reflect current conditions. Housing entities can challenge the Census data by conducting their own surveys subject to HUD guidelines and by submitting the data to HUD for use in calculating grant amounts for need for housing activities. The NAHASDA regulations establish two kinds of minimum funding levels for housing entities. Consequently, when HUD calculates funding amounts that are below the legislated minimums, housing entities are given additional funds. The first minimum funding level guarantees every entity an allocation that at least equals its fiscal year 1996 funding for operating and modernizing housing. The second minimum funding level guarantees every housing entity an allocation of at least $50,000 for funding the need for affordable housing activities. In subsequent years, HUD will reduce the second minimum funding guarantee to $25,000, and in fiscal year 2002, it will be eliminated. Indian housing authority/tribe and programs Navajo Housing Authority, Arizona Choctaw Nation Housing Authority, Oklahoma Association of Village Council Presidents Housing Authority, Alaska Cherokee Nation Housing Authority, Oklahoma Tagiugmiullu Nunamiullu Housing Authority, Alaska Tohono O’odham Housing Authority, Arizona (continued) Indian housing authority/tribe and programs Standing Rock Housing Authority, South Dakota Northern Circle Housing Authority, California Bering Straits Regional Housing Authority, Alaska Navajo Nation of Arizona, New Mexico and Utah Yurok Housing Authority, California Karuk Tribe Housing Authority, California 0 (continued) Alaska Office of Native American Programs (Anchorage, Alaska) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing Eastern/Woodlands Office of Native American Programs (Chicago, Illinois) (continued) Operating and modernizing existing housing (continued) Northern Plains Office of Native American Programs (Denver, Colorado) (continued) Operating and modernizing existing housing Southern Plains Office of Native American Programs (Oklahoma City, Oklahoma) (continued) Operating and modernizing existing housing (continued) Southwest Office of Native American Programs (Phoenix, Arizona) (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Operating and modernizing existing housing (continued) Northwest Office of Native American Programs (Seattle, Washington) (continued) Carol Anderson-Guthrie Robert J. 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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 Housing and Urban Development's (HUD) implementation of the Native American Housing Assistance and Self-Determination Act of 1996 (NAHASDA), focusing on: (1) how HUD allocated funding to Indian housing authorities and tribes before NAHASDA's enactment, and how much was appropriated for Indian programs in fiscal years (FY) 1993 through 1997; (2) identifying the factors HUD used to allocate Indian housing block grant funding to tribes and tribally designated housing entities under NAHASDA, and whether HUD considered current tribal housing needs, past tribal housing management performance, and the magnitude of unspent housing grant funding for incomplete housing projects; (3) the amount, type, and age of unspent funding for incomplete housing projects; and (4) the status of HUD's Indian housing block grant funding for fiscal years 1998 and 1999. GAO noted that: (1) before NAHASDA became effective, HUD distributed funding to Indian housing authorities and tribes through 14 different programs, each having its own criteria for awarding and allocating grant funding; (2) for nine of these programs, funding was awarded competitively, requiring the Indian housing authorities or tribes to submit project proposals, which HUD then scored and ranked; (3) for the other five programs, HUD allocated funding to Indian housing authorities or tribes noncompetively, using formulas or distributing the funds on a first-come, first-serve basis; (4) over fiscal years 1993 through 1997, HUD provided a total of $2.8 billion to Indian housing authorities and tribes through these 14 programs; (5) after NAHASDA went into effect for FY 1998, eliminating 9 of the 14 separate Indian housing programs and replacing them with a single block grant program, HUD used the act's noncompetitive allocation formula to determine the grant amounts for the 575 Indian housing entities; (6) the formula has two components: (a) the costs of operating and modernizing existing housing units; and (b) the need for providing affordable housing activities; (7) the allocation formula does not include a factor for past management performance; (8) HUD's rationale was that there is no authority under the new act for it to consider the authorities' failure to comply with requirements and regulations that are no longer in effect; (9) relying on other guidance, HUD has placed conditions on the use of NAHASDA grant funds if a housing entity has a history of problems with administering other federal grant programs; (10) in subsequent years, HUD can consider performance under NAHASDA when dispensing new grants; (11) the block grant formula also did not consider the approximately $929 million in total unspent Indian housing program funding awarded in previous years because the funding addresses needs that continue to exist; (12) most of the unspent funds were provided in fiscal years 1993 through 1997 through two programs--Development and Modernization; (13) entities must report their planned use of those funds to HUD as part of their Indian housing plans; (14) for FY 1998, $590 million was appropriated for the Indian housing block grants awarded under the new act; (15) as of July 1, 1998, over 97 percent of the housing entities had submitted the required Indian housing plans to HUD describing their planned use of block grant funds and HUD approved 327 of those plans; and (16) for FY 1999, HUD requested $600 million for the program. |
Based on state responses to our survey, we estimated that nearly 617,000, or about 89 percent of the approximately 693,000 regulated tanks, had been upgraded with the federally required equipment by the end of fiscal year 2000. EPA data showed that about 70 percent of the total number of tanks that its regions regulate on tribal lands had also been upgraded. With regard to the approximately 76,000 tanks that we estimated have not been upgraded, closed, or removed as required, 17 states and the 3 EPA regions we visited reported that they believed that most of these tanks were either empty or inactive. However, another five states reported that at least half of their non-upgraded tanks were still in use. EPA and states assume that the tanks are empty or inactive and therefore pose less risk. As a result, they may give them a lower priority for resources. However, states also reported that they generally did not discover tank leaks or contamination around tanks until the empty or inactive tanks were removed from the ground during replacement or closure. Consequently, unless EPA and the states address these non-compliant tanks in a more timely manner, they may be overlooking a potential source of soil and groundwater contamination. Even though most tanks have been upgraded, we estimated from our survey data that more than 200,000 of them, or about 29 percent, were not being properly operated and maintained, increasing the risk of leaks. The extent of operations and maintenance problems varied across the states, as figure 1 illustrates. The states reported a variety of operational and maintenance problems, such as operators turning off leak detection equipment. The states also reported that the majority of problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. The states attributed these problems to a lack of training for tank owners, installers, operators, removers, and inspectors. These smaller businesses and local government operations may find it more difficult to afford adequate training, especially given the high turnover rates among tank staff, or may give training a lower priority. Almost all of the states reported a need for additional resources to keep their own inspectors and program staff trained, and 41 states requested additional technical assistance from the federal government to provide such training. To date, EPA has provided states with a number of training sessions and helpful tools, such as operation and maintenance checklists and guidelines. One of EPA’s tank program initiatives is also intended to improve training and tank compliance with federal requirements, such as setting annual compliance targets with the states. The agency is in the process of implementing its compliance improvement initiative, which involves actions such as setting the targets and providing incentives to tank owners, but it is too early to gauge the impact of the agency’s efforts on compliance rates. According to EPA’s program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. However, only 19 states physically inspect all of their tanks at least once every 3 years—the minimum that EPA considers necessary for effective tank monitoring. Another 10 states inspect all tanks, but less frequently. The remaining 22 states do not inspect all tanks, but instead generally target inspections to potentially problematic tanks, such as those close to drinking water sources. In addition, not all of EPA’s own regions comply with the recommended rate. Two of the three regions that we visited inspected tanks located on tribal land every 3 years. Figure 2 illustrates the states’ reported inspection practices. According to our survey results, some states and EPA regions would need additional staff to conduct more frequent inspections. For example, under staffing levels at the time of our review, the inspectors in 11 states would each have to visit more than 300 facilities a year to cover all tanks at least once every 3 years, but EPA estimates that a qualified inspector can only visit at most 200 facilities a year. Moreover, because most states use their own employees to conduct inspections, state legislatures would need to provide them additional hiring authority and funding to acquire more inspectors. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all tanks, in part because they expect that such a mandate would provide them needed leverage to obtain the requisite inspection staff and funding from their state legislatures. In addition to more frequent inspections, a number of states stated that they need additional enforcement tools to correct problem tanks. EPA’s program managers stated that good enforcement requires a variety of tools, including the ability to issue citations or fines. One of the most effective tools is the ability to prohibit suppliers from delivering fuel to stations with problem tanks. However, as figure 3 illustrates, 27 states reported that they did not have the authority to stop deliveries. In addition, EPA believes, and we agree, that the law governing the tank program does not give the Agency clear authority to regulate fuel suppliers and therefore prohibit their deliveries. Almost all of the states said they need additional enforcement resources and 27 need additional authority. Members of both an expert panel and an industry group, which EPA convened to help it assess the tank program, likewise saw the need for states to have more resources and more uniform and consistent enforcement across states, including the authority to prohibit fuel deliveries. They further noted that the fear of being shut down would provide owners and operators a greater incentive to comply with federal requirements. Under its tank initiatives, EPA is working with states to implement third party inspection programs, using either private contractors or other state agencies that may also be inspecting these business sites for other reasons. EPA’s regions have the opportunity, to some extent, to use the grants that they provide to the states for their tank programs as a means to encourage more inspections and better enforcement. However, the Agency does not want to limit state funding to the point where this further jeopardizes program implementation. The Congress may also wish to consider making more funds available to states to improve tank inspections and enforcement. For example, the Congress could increase the amount of funds it provides from the Leaking Underground Storage Tank trust fund, which the Congress established to specifically provide funds for cleaning up contamination from tanks. The Congress could then allow states to spend a portion of these funds on inspections and enforcement. It has considered taking this action in the past, and 40 states said that they would welcome such funding flexibility. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from regulated tanks, although the Agency and many of the states could not verify whether the releases had occurred before or after the tanks had been upgraded. According to our survey, 14 states said that they had traced newly discovered leaks or releases that year to upgraded tanks, while another 17 states said they seldom or never detected such leaks. The remaining 20 states could not confirm whether or not their upgraded tanks leaked. EPA recognizes the need to collect better data to determine the extent and cause of leaks from upgraded tanks, the effectiveness of the current equipment, and if there is a need to strengthen existing equipment standards. The Agency has launched studies in several of its regions to obtain such data, but it may have trouble concluding whether leaks occurred after the upgrades. In a study of local tanks, researchers in Santa Clara County, California, concluded that upgraded tanks do not provide complete protection against leaks, and even properly operated and maintained tank monitoring systems cannot guarantee that leaks are detected. EPA, as one of its program initiatives, is working with the states to gather data on leaks from upgraded tanks in order to determine whether equipment requirements need to be strengthened, such as requiring double-walled tanks. The states and the industry and expert groups support EPA’s actions. In closing, the states and EPA cannot ensure that all regulated tanks have the required equipment to prevent health risks from fuel leaks, spills, and overfills or that tanks are safely operated and maintained. Many states are not inspecting all of their tanks to make sure that they do not leak, nor can they prohibit fuel from being delivered to problem tanks. EPA has the opportunity to help its regions and states correct these limitations through its tank initiatives, but it is difficult to determine whether the Agency’s proposed actions will be sufficient because it is just defining its implementation plans. The Congress also has the opportunity to help provide EPA and the states the additional inspection and enforcement authority and resources they need to improve tank compliance and safety. | Hazardous substances that leak from underground storage tanks can contaminate the soil and water and pose continuing health risks. Leaks of methyl tertiary butyl ether--a fuel additive--have forced several communities to close their wells. GAO surveyed all 50 states and the District of Columbia to determine whether tanks are compliant with the Environmental Protection Agency's (EPA) underground storage tank (UST) requirements. About 1.5 million tanks have been closed since the program was created, leaving about 693,000 tanks subject to UST requirements. Eighty-nine percent of these tanks had the required protective equipment installed, but nearly 30 percent of them were not properly operated and maintained. EPA estimates that the rest were inactive and empty. More than half of the states do not meet the minimum rate recommended by EPA for inspections. State officials said that they lacked the money, staff, and authority to conduct more inspections or more strongly enforce tank compliance. States reported that even tanks with the required leak prevention and detection equipment continue to leak, although the full extent of the problem is unknown. EPA is seeking better data on leaks from upgraded tanks and is considering whether it needs to set new tank requirements, such as double-walled tanks, to prevent future leaks. |
FAA provides facilities and equipment at airport terminal areas to help aircraft begin and end their flights. FAA’s acquisition policy provides the framework for initiating and managing national facilities and equipment projects. The projects are funded through the agency’s facilities and equipment appropriation. FAA’s Airway Planning Standard Number One (APS-1) contains the policy and criteria the agency uses to establish the eligibility of terminal locations for facilities and equipment. This standard requires that traffic activity levels are the criteria to be used for “less expensive” equipment, whereas for “more expensive” equipment, locations must also meet minimum benefit-cost criteria. However, the standard does not define what is meant by less expensive or more expensive. Recognizing that it is not always economically possible to satisfy all requirements, the standard requires that equipment be allocated to locations where the greatest benefit will be derived from its cost or where there is the greatest operational need. The standard also requires that economics be the primary factor in considering improvements to existing facilities or services. The Department of Transportation and the Office of Management and Budget (OMB) have not requested nor has the Congress provided all funds requested by FAA’s nine regional offices in recent years. Total requests have outpaced budgetary resources for facilities and equipment in terminal areas, as illustrated in figure 1. FAA’s annual budget Call for Estimates requires that regional offices assign a numerical ranking to all locations recommended to receive funding for facilities and equipment. After the regions submit their requests to FAA headquarters, program sponsors for these projects, along with regional representatives, develop a priority list of locations for funding within the overall budget limitations for a given year. If the Office of the Secretary of Transportation or OMB makes changes to budget line items for these projects, program sponsors are expected to review and reprioritize locations for funding. The locations that are not funded must recompete for future-year budget funds. The Congress may also make changes to budget line items for these projects. For two of the three projects we reviewed, the Congress added funding for locations that were not requested by FAA. (See app. I.) For the three projects we reviewed, FAA’s process for locating facilities and equipment ensured that candidate locations qualified for funding consideration and that high-priority locations were funded in accordance with agency guidance. This resulted in facilities and equipment being distributed in a fairly equal manner among FAA’s nine regional offices on the basis of the priority assigned by each regional office and the availability of the regional office’s work force to implement the projects. However, we found that FAA generally did not rank locations numerically from a national perspective, use benefit-cost analysis as a tool for ranking eligible locations, and document the factors used to select certain locations over others. Modern air commerce and transportation depend on consistently completing scheduled flights safely and on time. ILS is a critical component of an all-weather aviation system, because it provides the technology for allowing aircraft to approach and land at airports during adverse weather. Each year, FAA’s Budget Office initiates a Call for Estimates requesting that regional offices submit candidate locations for ILS equipment. Once locations are identified, FAA’s planning standard requires that ILS locations meet two-phase criteria. FAA regional offices use the Phase 1 criterion to determine which locations will be submitted to headquarters for further consideration. Under Phase 1, a ratio is computed by dividing the actual number of instrument approaches at a runway by FAA’s standard for the minimum number of such approaches that qualify locations to have an ILS. Runways with a ratio of at least 1.0 are eligible for funding. The traffic activity ratio is an efficiency measure; runways with higher ratios are presumed to accommodate more traffic with given resources. The Phase 2 criterion is a benefit-cost analysis that FAA headquarters prepares on all locations that met the Phase 1 criterion. But since the number of locations meeting the Phase 2 criterion is much larger than budget constraints will allow, some locations may not be funded, even if economically justified. A location that is not funded must recompete in the following year and be subject to the reevaluation process. Because of special safety considerations, some locations will receive ILS equipment regardless of the criteria. For fiscal years 1992 through 1994, the program sponsor for the ILS project—the Flight Standards Service—told us that FAA regional offices developed the necessary justifications needed for each eligible ILS location submitted in response to the annual Call for Estimates. Regional offices also assign a numerical ranking to all locations within their respective regions. Priorities are established at the regional level on the basis of an analysis of such factors as weather history and air traffic needs. The program sponsor then ensures that candidate locations at the national level meet the Phase 1 criterion. Once the program sponsor ensures that candidate locations qualify for funding, cost estimates are finalized. The number of ILS locations that make it into FAA’s annual budget submission depends on the funding levels of the agency’s facilities and equipment budget and the ILS program. The program sponsor said that each regional office’s number one priority location was generally selected for inclusion in the budget submissions for fiscal years 1992 and 1993. For fiscal year 1992, seven regions submitted requests and received funding for their first-priority location. In addition, one system was designated for the FAA Academy, and one region also received its second priority. For fiscal year 1993, seven regions submitted requests and received funding for their first priority, and two regions also received funding for their second priority. In addition to the locations FAA requested in its budget submission, the Congress added a total of 27 ILS locations in fiscal years 1992 and 1993, along with additional funding for those locations. (See app. I for more details.) The sponsor told us that in 1992 and 1993, locations were not ranked numerically from a national perspective. Furthermore, there was no documentation of what factors—including benefit-cost analysis—were considered in deciding which terminal locations received the new ILS. For fiscal year 1994, the ILS program sponsor decided to institute a numerical ranking system in which each eligible ILS location that the regions submitted in response to the Call for Estimates would be prioritized. The sponsor and regional representatives met to decide how to rank 179 candidate ILS locations on a national basis. Priorities for the first 78 locations were established on the basis of an analysis of 12 factors, such as safety, weather, and potential to improve air traffic flow. However, the program sponsor could not show how each factor was used to develop this national priority list. The program sponsor then requested benefit-cost analyses for the top 16 locations that were to be submitted to OMB for funding in order to ensure that they met the minimum Phase 2 criterion. Priorities for the candidate locations numbered 79 to 179 were based on Phase 1 traffic activity ratios. As OMB and the Congress made reductions to this FAA budget line item, the program sponsor deleted lower-ranked locations. The sponsor told us that changing conditions, such as a problem with an environmental impact statement or a delay in an anticipated land acquisition, could also force modification to the overall priorities. Seven regions received funding for between one and four new ILSs. The Congress did not direct additional ILS locations in fiscal year 1994. Despite the agency’s additional emphasis on ILS in fiscal year 1994, the program sponsor told us that documentation does not exist to show how the 12 factors were used to select certain locations over others. As a result, while fiscal year 1994 was an improvement over prior years, questions remain about the ranking of ILS locations. For example, the program sponsor could not explain how traffic activity ratios were factored into the ranking process. The sponsor could not show why one location with a Phase 1 traffic activity ratio of 3.71 was ranked 6th nationally, yet another location with a Phase 1 traffic activity ratio of 49.08 was ranked 81st nationally. Nor could the sponsor show why a location with a ratio of 1.67 was ranked 4th nationally, yet another with a ratio of 35.66 was ranked 39th nationally. A more documented process would enhance FAA’s ability to quantitatively support its decisions to fund projects at certain locations but not at others. This project replaces airport traffic control towers that are past their 20-year design life. Approximately six to eight towers are replaced each year. FAA’s Air Traffic Plans and Requirements Service is the program sponsor for the Tower Replacement project. The program sponsor said that FAA used a consistent methodology based on APS-1 and agency policy for selecting locations for replacement towers in fiscal years 1992 through 1994. Each year, regional offices screened and ranked eligible locations on the basis of an analysis of operational requirements, space requirements, facility condition, airport traffic activity, safety conditions, and future growth. Because of funding limitations, the program sponsor told the nine regional offices to submit only their top three locations in any given budget year. An important element in the regional decision as to which location or locations are submitted is the availability of the regional office’s work force to implement the projects. The program sponsor then reduced the 25 to 30 locations submitted by the regions to a top-priority group of 8 to 10, without any numerical ranking, after reviewing the regions’ written justifications for tower replacement projects. The program sponsor could not show how each factor used by the regions—such as airport traffic activity or facility condition—was considered and how each factor was weighed in developing this list of 8 to 10 top locations. The sponsor did not use benefit-cost analyses to develop the list. According to the sponsor, the original tower siting was based on a benefit-cost analysis, and tower replacement is based on a review of continuing need, so the sponsor did not believe further analysis was needed. Generally one priority location was recommended for funding in each FAA regional office, although in some cases a regional office had two candidate locations funded in one year. Once the top locations had been identified, the program sponsor and regional representatives conducted an on-site inspection of these locations. If the on-site inspection revealed that the location was not in need of a replacement, it was removed as a replacement candidate. Moreover, the sponsor told us that changing conditions do arise that force modifications to the list of top locations, such as the identification of asbestos in a facility, a major shift of traffic activity, or natural disasters that weaken existing structures. Another factor that the sponsor told us affects FAA’s decision-making process regarding tower replacement is congressional additions to FAA’s budget request. In fiscal year 1992, the Congress added seven Tower Replacement locations to FAA’s funding request. However, in fiscal years 1993 and 1994, the Congress added no additional locations for funding. (See app. I.) FAA recognizes the importance of congressional direction as a major determinant in naming towers for replacement and occasionally defers otherwise qualified locations to accommodate congressionally directed locations. “ built in 1972. . . . The height of the control tower is not adequate to provide adequate depth perception for runways. . . . Controllers cannot visually determine if aircraft holding short of these runways are actually clear of the runways. This situation is more pronounced at night. . . . A new runway is currently under construction which will increase the airport capacity. The air conditioning and heating systems are inadequate and personnel must use a public access elevator to reach the tower cab.” “ is an old Air Force Tower that was constructed in 1947 and transferred to the FAA in 1954. The tower cab is limited in size and not adequate to handle the current and projected staffing levels for a safe and efficient air traffic operation. The support facilities are limited in area and very poorly arranged for a functional office environment. Support systems, such as the cab heating and air conditioning system, the power supply system, and the basic utility system, have either outlived their normal useful lives or are in need of extensive refurbishing and maintenance.” Had FAA documented the factors it considered in arriving at its list of tower replacements to be funded and prioritized those locations, its ability to show why certain locations were selected over others would be enhanced. The D-BRITE system is an extension of an airport surveillance radar system. D-BRITE provides additional radar display positions at busy air traffic control towers and establishes positions at remote towers that do not currently have a radar display. The new equipment also reduces the need for verbal coordination and increases safety at both hub and remote towers. Additionally, the equipment assists the air traffic controller in identifying and sequencing aircraft traffic and provides traffic advisories to aircraft in visual flight rules conditions. Regional offices screened and ranked eligible locations for the D-BRITE project on the basis of traffic activity levels and the operational needs of the towers associated with a surveillance radar. Locations with the highest traffic activity were given the highest regional priorities. The program sponsor—FAA’s Air Traffic Plans and Requirements Service—grouped the regional priorities into a national delivery schedule. According to the sponsor, this schedule takes into consideration the regional offices’ ranking of locations, funding levels, and the ability of the offices’ work force to install systems. The individual currently acting as the program sponsor was not involved with D-BRITE funding decisions for fiscal years 1992 to 1994. However, this individual believed that, in those years, each regional office generally received funding for its top-priority locations. The program sponsor said that D-BRITE locations were not ranked numerically from a national perspective. The sponsor also said that the locations were not analyzed from a benefit-cost perspective because they were linked to the establishment of airport surveillance radars for which benefit-cost analysis had already been considered. Moreover, the sponsor could not provide documentation to explain why some D-BRITE locations were recommended to receive equipment over others for any of the 3 years in question. While we found that FAA’s process for selecting locations for facilities and equipment generally complied with the agency’s current guidance, we believe that it could be improved if FAA ranked locations numerically from a national perspective, considered the results of benefit-cost analyses as a key factor when appropriate, and documented the rationale for its decisions. Program sponsors told us that a numerical national ranking was not done for these projects for two major reasons. First, national directives, such as APS-1, the Call for Estimates, and FAA’s acquisition policy, do not require program sponsors to rank locations numerically from a national perspective. The officials pointed out that current guidance only requires regional offices to assign a numerical priority to all locations recommended to receive equipment. Second, although a national ranking may result in the allocation of equipment unevenly across regions, some program sponsors said that no useful purpose would be served in trying to determine whether one regional office’s number two or lower-priority location was of a higher national importance than another office’s number one location. According to the program sponsors, the cost of conducting such an analysis would consume significant resources and would create tension among regional offices about methodologies used to justify individual locations. We believe that because regional offices are required to rank candidate locations numerically for funding in their geographic area, FAA headquarters could do the same from a national perspective. This would provide FAA and the Congress with greater assurance that scarce resources are targeted to the highest-priority needs. Such a ranking would also expedite decision-making as program sponsors review, reprioritize, and defer lower-priority locations in response to changes made during each phase of the budget cycle. Moreover, such a ranking would quickly identify the importance of each location at any given point in time and demonstrate that FAA is taking a businesslike approach to investment decisions. While some FAA program sponsors said that no useful purpose is served in trying to determine whether one office’s number two or lower-priority location is of a higher national importance than another office’s number one priority, we believe that such analyses are warranted, under today’s budget constraints, to ensure that the highest-priority locations are selected as the first to receive equipment. According to FAA’s guide for Economic Analysis and Investment and Regulatory Decisions, rational decision-making requires that those activities with greater returns be undertaken before those with smaller returns. FAA program sponsors told us that the results of benefit-cost analyses were not a primary consideration when prioritizing locations under the three projects. For the ILS project, sponsors used benefit-cost analysis to screen locations for compliance with minimum criteria, not to rank alternative locations. Sponsors believe that regional staff have the most up-to-date information on locations in need of equipment. Therefore, they believe that the process for ILS selection must look beyond benefit-cost analysis and emphasize other factors, such as safety, weather, and potential to improve air traffic flow. Otherwise, benefit-cost considerations bias the selection process in favor of projects at large airports if qualitative criteria and judgment are excluded from the process. For the Tower Replacement and the D-BRITE establishment projects, program sponsors told us that FAA guidance currently does not call for any location-specific benefit-cost analysis. This is because the original tower siting was based on a benefit-cost analysis, and tower replacement is based on a review of continuing need. Decisions on D-BRITE siting are dependent on the airport surveillance radar siting decision, which is itself based on benefit-cost analysis. Furthermore, the sponsors believe that such analysis would serve no useful purpose but would overwhelm FAA’s resources. The sponsors contended that 25- to 30-year-old towers must be replaced in order to continue serving an established need and that no useful purpose is served if the cost of conducting a benefit-cost study for an eligible D-BRITE location exceeded the cost of the project. We believe that good business management practices suggest that benefit-cost analysis can provide a useful, quantifiable means for weighing the value of alternative investments. We recognize that there are other considerations, such as a major shift in traffic activity or congressional direction. However, benefit-cost ratios provide a good starting point for ranking eligible locations. FAA’s guidance also states that sound economic justification should be an important factor in the evaluation process. This guidance recognizes that benefit-cost analysis enables FAA to prioritize alternative investments so as to maximize the return on investment dollars. We recognize that the cost of an elaborate benefit-cost analysis for less expensive projects such as D-BRITE may be prohibitive, but a less rigorous analysis could be appropriate. For example, a simplified methodology, to save analytical resources, may allow FAA to approximate benefits. The Call for Estimates and APS-1 provide detailed guidance for how regional offices should prepare location justifications and assign priorities to locations recommended for funding. However, the orders provide no guidance for how program sponsors should document their funding decisions. FAA officials told us, however, that they do keep track of locations that were funded or deferred during each phase of the budget cycle. We believe that the process for selecting locations for funding would be improved if program sponsors maintained minutes of meetings where decisions are made and maintained an up-to-date system that tracked the status of and rationale for funding decisions. This system, if available to inspection by offices within FAA, the Congress, and aviation system users, would facilitate answers to queries from those groups about the relative ranking of locations. Moreover, documentation would greatly help program sponsors to explain to these groups the small differences that can determine whether a location is approved or not approved for funding. In addition, GAO’s Standards for Internal Controls in the Federal Government stresses the need for agencies to clearly document significant events so that they are readily available for examination. The lack of documentation was a problem for the current ILS and D-BRITE program sponsors because various personnel changes—such as retirement, promotion, or resignation—had left their offices with no one available to answer questions about past decisions. We recognize that FAA views safety as its major responsibility, allocates facilities and equipment to high-priority locations, and responds to dynamic changes in traffic activity. Moreover, we found no evidence that FAA’s decisions for locating and replacing air traffic control equipment are not meeting the critical needs of the nation’s aviation system. However, FAA’s process for selecting locations for facilities and equipment was not consistent among the three projects reviewed, and documentation was not available to show what factors program sponsors considered in location-selection decisions. Current FAA guidance does not require a numerical ranking of locations on a national basis, define what emphasis should be given to location-specific benefit-cost analyses and other factors, or specify what documentation is required when evaluating and selecting locations. If FAA improved its guidance, we believe that the agency would be in a better position to assure the Congress and aviation system users that the maximum value from investments in facilities and equipment is being received. Furthermore, the agency would help its internal decisionmakers when they review and reprioritize locations in response to changes made during each phase of the budget cycle. We recommend that the Secretary of Transportation direct the Administrator, FAA, to revise current guidance—APS-1, the Call for Estimates, and the agency’s acquisition policy—as necessary to ensure that program sponsors (1) use consistent approaches and (2) document what factors they used in location-selection decisions, including benefit-cost analyses when warranted by the project’s cost. This would allow FAA to rank eligible locations from a national perspective and help ensure that scarce facilities and equipment resources are targeted to the highest-priority needs. We discussed a draft of this report with FAA’s Assistant Administrator for Budget and Accounting and FAA program sponsors for the three projects. The officials expressed serious concerns about the tone and conclusions of the draft because it implied that FAA does not attempt to allocate facilities and equipment using a rational process. The officials said that given budget constraints, congressionally directed locations, and limited regional office work forces, FAA does a good job in allocating facilities and equipment to high-priority locations. In response to the officials’ concerns, we have made it clear in this report that FAA’s process for locating facilities and equipment ensured that candidate locations qualified for funding consideration and that high-priority locations were funded in accordance with current agency guidance. Nevertheless, FAA recognized that improvements can be made in documenting its decision-making process. FAA officials also said that location-specific benefit-cost analysis would serve no purpose other than to overwhelm the agency’s resources. While we recognize that an elaborate benefit-cost analysis is not appropriate in all cases, we continue to believe that, where warranted by a project’s cost, it helps ensure that equipment will be allocated to locations where the greatest benefit will be derived from the cost. FAA officials also made several other suggested changes to improve the accuracy and clarity of the report. We made these changes throughout the text where appropriate. We performed our work from July 1993 through September 1994 in accordance with generally accepted government auditing standards. A detailed description of our objectives, scope, and methodology is contained in appendix II. We are providing copies of this report to interested congressional committees; the Secretary of Transportation; the Administrator, FAA; and the Director, OMB. We will also make copies available to others upon request. This work was performed under the direction of Allen Li, Associate Director, who may be reached at (202) 512-3600 if you or your staff have any questions. Major contributors to this report are listed in appendix III. The following are general descriptions and funding histories for the three Federal Aviation Administration (FAA) terminal modernization projects that we reviewed. These new landing systems provide precision approach guidance which allows aircraft to approach and land at airports during adverse weather. The ILS establishment project was terminated in 1982 when the Microwave Landing System was adopted as the precision landing system for the National Airspace System beyond the year 2000. However, FAA determined that there was an immediate need for precision approach systems at large and medium hub airports and their associated reliever airports as an interim solution prior to Microwave Landing System implementation. FAA recently terminated the Microwave Landing System project. A 3-year funding history for ILS establishment is shown in table I.1. This project replaces airport traffic control towers that are past their 20-year design life. FAA estimates that within the next 10 years nearly 150 towers will need to be replaced to enhance air safety and meet operational requirements. Approximately six to eight towers are replaced each year. Table I.2 provides a 3-year funding history for air traffic control tower replacement. D-BRITE will provide additional display positions at busy air traffic control towers and establish positions at remote towers that do not currently have a radar display. The new equipment will reduce verbal coordination and increase safety at both the hub and remote towers. Additionally, the equipment is used to help the air traffic controller identify and sequence aircraft traffic and will provide traffic advisories to aircraft in visual flight rules conditions. A 3-year funding history for D-BRITE establishment is shown in table I.3. NA = not available from FAA program sponsors. Our objective in this review was to determine how FAA decides where to locate and/or replace air traffic control facilities and equipment at or near airports when it cannot economically satisfy all operational requirements. To assess FAA’s efforts in this area, we evaluated how FAA (1) prioritized locations to receive facilities and equipment, (2) considered benefit-cost analysis in its decisions, and (3) documented all considerations that would establish a location’s priority for the receipt of facilities and equipment. To attain our objectives, we interviewed FAA headquarters and field personnel responsible for making decisions on locating facilities and equipment for these projects. Through interviews and reviews of agency documentation, we collected information on a location’s justification, benefit-cost ratio, and national ranking. We reviewed federal regulations and guidelines pertaining to system acquisition, compared FAA’s actions to the guidance, and identified key issues that could affect how the agency determines where to locate terminal facilities and equipment. We conducted our review between July 1993 and September 1994 at FAA headquarters in Washington, D.C., and FAA’s New England Regional Office in Burlington, Massachusetts. We performed this review in accordance with generally accepted government auditing standards. We discussed the results of our work with FAA officials and have incorporated their views in the report as appropriate. Robert E. Levin, Assistant Director Robert D. Wurster, Assignment Manager Peter G. Maristch, Evaluator-in-Charge Amy Ganulin, Staff 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 Federal Aviation Administration's (FAA) process for selecting locations for its three terminal area projects, focusing on how FAA: (1) prioritizes locations; (2) analyzes the costs and benefits of its decisions; (3) documents its location decisions; and (4) could improve its decisionmaking process. GAO found that: (1) FAA has funded the three projects in accordance with its own guidance and has fairly distributed facilities and equipment among its nine regional offices on a priority basis; (2) although FAA bases its project funding decisions on the availability of regional staff to implement the projects, it generally does not rank locations nationally or numerically, use cost-benefit analyses to rank eligible locations, or document the factors used to prioritize certain locations; (3) FAA believes that its approach for locating facilities and distributing equipment ensures that its limited resources are targeted to high-priority needs; (4) FAA believes that ranking each location on a national basis would be cost-prohibitive, create tensions among regional offices, favor large airports, and exclude safety factors that outweigh economic considerations; (5) current FAA guidance does not include provisions that specify how prospective locations will be evaluated; (6) FAA needs to develop a more analytically based decisionmaking process for ranking eligible locations; and (7) improved selection guidance could help FAA better ensure that it is making the best use of available resources in allocating facilities and equipment to high-priority locations. |
As computer technology has advanced, federal agencies and our nation’s critical infrastructures—such as power distribution, water supply, telecommunications, and emergency services—have become increasingly dependent on computerized information systems to carry out their operations and to process, maintain, and report essential information. Public and private organizations rely on computer systems to transfer increasing amounts of money and sensitive and proprietary information, conduct operations, and deliver services to constituents. The security of these systems and data is essential to protecting national and economic security, and public health and safety. Conversely, ineffective information security controls can result in significant risks, including the loss of resources, such as federal payments and collections; inappropriate access to sensitive information, such as national security information, personal information on taxpayers, or proprietary business information; disruption of critical operations supporting critical infrastructure, national defense, or emergency services; and undermining of agency missions due to embarrassing incidents that diminish public confidence in government. Threats to systems supporting critical infrastructure and federal information systems are evolving and growing. Government officials are concerned about attacks from individuals and groups with malicious intent, such as criminals, terrorists, and foreign nations. Federal law enforcement and intelligence agencies have identified multiple sources of threats to our nation’s critical information systems, including foreign nations engaged in espionage and information warfare, criminals, hackers, virus writers, and disgruntled employees and contractors. These groups and individuals have a variety of attack techniques at their disposal that can be used to determine vulnerabilities and gain entry into targeted systems. For example, phishing involves the creation and use of fake e- mails and Web sites to deceive Internet users into disclosing their personal data and other sensitive information. The connectivity between information systems, the Internet, and other infrastructures also creates opportunities for attackers to disrupt telecommunications, electrical power, and other critical services. For example, in May 2008, we reported that the Tennessee Valley Authority’s (TVA) corporate network contained security weaknesses that could lead to the disruption of control systems networks and devices connected to that network. We made 19 recommendations to improve the implementation of information security program activities for the control systems governing TVA’s critical infrastructures and 73 recommendations to address weaknesses in information security controls. TVA concurred with the recommendations and has taken steps to implement them. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Consistent with the evolving and growing nature of the threats to federal systems, agencies are reporting an increasing number of security incidents. These incidents put sensitive information at risk. Personally identifiable information about U.S. citizens has been lost, stolen, or improperly disclosed, thereby potentially exposing those individuals to loss of privacy, identity theft, and financial crimes. Agencies have experienced a wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches, underscoring the need for improved security practices. Further, reported attacks and unintentional incidents involving critical infrastructure systems demonstrate that a serious attack could be devastating. When incidents occur, agencies are to notify the federal information security incident center—the United States Computer Emergency Readiness Team (US-CERT). Over the past 5 years, the number of incidents reported by federal agencies to US-CERT has increased dramatically, from 5,503 incidents reported in fiscal year 2006 to about 41,776 incidents in fiscal year 2010 (a more than 650 percent increase). The three most prevalent types of incidents and events reported to US-CERT during fiscal year 2010 were: (1) malicious code (software that infects an operating system or application), (2) improper usage (a violation of acceptable computing use policies), and (3) unauthorized access (where an individual gains logical or physical access to a system without permission). Additionally, according to Department of Homeland Security (DHS) officials, US-CERT detects incidents and events through its intrusion detection system, supplemented by agency reports, for investigation (unconfirmed incidents that are potentially malicious or anomalous activity deemed by the reporting entity to warrant further review). Reports of cyber attacks and information security incidents against federal systems and systems supporting critical infrastructure illustrate the effect that such incidents could have on national and economic security. In July 2010, the Department of Defense (DOD) launched an investigation to identify how thousands of classified military documents (including Afghanistan and Iraq war operations, as well as field reports on Pakistan) were obtained by the group WikiLeaks.org. According to DOD, this investigation was related to an ongoing investigation of an Army private charged with, among other things, transmitting national defense information to an unauthorized source. In 2010, the Deputy Secretary of Defense stated that DOD suffered a significant compromise of its classified military computer networks in 2008. It began when a flash drive’s malicious computer code, placed there by a foreign intelligence agency, uploaded itself onto a network and spread on both classified and unclassified systems. In February 2011, media reports stated that computer hackers broke into and stole proprietary information worth millions of dollars from the networks of six U.S. and European energy companies. The federal government has a variety of roles and responsibilities in protecting the nation’s cyber-reliant critical infrastructure, enhancing the nation’s overall cybersecurity posture, and ensuring the security of federal systems and the information they contain. In light of the pervasive and increasing threats to critical systems, the executive branch is taking a number of steps to strengthen the nation’s approach to cybersecurity. For example, in its role as the focal point for federal efforts to protect the nation’s cyber critical infrastructures, DHS issued a revised national infrastructure protection plan in 2009 and an interim national cyber incident response plan in 2010. Executive branch agencies have also made progress instituting several governmentwide initiatives that are aimed at bolstering aspects of federal cybersecurity, such as reducing the number of federal access points to the Internet, establishing security configurations for desktop computers, and enhancing situational awareness of cyber events. Despite these efforts, the federal government continues to face significant challenges in protecting the nation’s cyber- reliant critical infrastructure and federal information systems. The administration and executive branch agencies have not yet fully implemented key actions that are intended to address threats and improve the current U.S. approach to cybersecurity. Implementing actions recommended by the president’s cybersecurity policy review. In February 2009, the president initiated a review of the government’s cybersecurity policies and structures, which resulted in 24 near- and mid-term recommendations to address organizational and policy changes to improve the current U.S. approach to cybersecurity. In October 2010, we reported that 2 recommendations had been implemented and 22 were partially implemented. Officials from key agencies involved in these efforts (e.g., DHS, DOD, and the Office of Management and Budget (OMB)) stated that progress had been slower than expected because agencies lacked assigned roles and responsibilities and because several of the mid-term recommendations would require action over multiple years. We recommended that the national Cybersecurity Coordinator (whose role was established as a result of the policy review) designate roles and responsibilities for each recommendation and develop milestones and plans, including measures to show agencies’ progress and performance. Updating the national strategy for securing the information and communications infrastructure. In March 2009, we testified on the needed improvements to the nation’s cybersecurity strategy. In preparation for that testimony, we convened a panel of experts that included former federal officials, academics, and private sector executives. The panel highlighted 12 key improvements that are, in its view, essential to improving the strategy and our national cybersecurity posture, including the development of a national strategy that clearly articulates strategic objectives, goals, and priorities. Developing a comprehensive national strategy for addressing global cybersecurity and governance. In July 2010, we reported that the U.S. government faced a number of challenges in formulating and implementing a coherent approach to global aspects of cyberspace, including, among other things, providing top-level leadership and developing a comprehensive strategy. Specifically, we found that the national Cybersecurity Coordinator’s authority and capacity to effectively coordinate and forge a coherent national approach to cybersecurity were still under development. In addition, the U.S. government had not documented a clear vision of how the international efforts of federal entities, taken together, support overarching national goals. We recommended that, among other things, the national Cybersecurity Coordinator develop with other relevant entities a comprehensive U.S. global cyberspace strategy. The coordinator and his staff concurred with our recommendations and stated that actions had already been initiated to address them. Finalizing cybersecurity guidelines and monitoring compliance related to electricity grid modernization. In January 2011, we reported on efforts by the National Institute of Standards and Technology (NIST) to develop cybersecurity guidelines and Federal Energy Regulatory Commission (FERC) efforts to adopt and monitor cybersecurity standards related to the electric industry’s incorporation of IT systems to improve reliability and efficiency—commonly referred to as the smart grid. We determined that NIST had not addressed all key elements of cybersecurity in its initial guidelines or finalized plans for doing so. We also determined that FERC had not developed an approach for monitoring industry compliance with its initial set of voluntary standards. Further, we identified six key challenges with respect to securing smart grid systems, including a lack of security features being built into certain smart grid systems and an ineffective mechanism for sharing information on cybersecurity within the industry. We recommended that NIST finalize its plans for updating its cybersecurity guidelines to incorporate missing elements and that FERC develop a coordinated approach to monitor voluntary standards and address any gaps in compliance. Both agencies agreed with these recommendations. Creating a prioritized national and federal cybersecurity research and development (R&D) agenda. In June 2010, we reported that while efforts to improve cybersecurity R&D were under way by the White House’s Office Science and Technology Policy (OSTP) and other federal entities, six major challenges impeded these efforts. Among the most critical was the lack of a prioritized national cybersecurity research and development agenda. We found that despite its legal responsibility and our past recommendations, a key OSTP subcommittee had not created a prioritized national R&D agenda, increasing the risk that research pursued by individual organizations will not reflect national priorities. We recommended that OSTP direct the subcommittee to take several actions, including developing a national cybersecurity R&D agenda. OSTP agreed with our recommendation and provided details on planned actions. We are in the process of verifying actions taken to implement our recommendations. In addition, we have ongoing work related to cyber CIP efforts in several other areas including (1) cybersecurity-related standards used by critical infrastructure sectors, (2) federal efforts to recruit, retain, train, and develop cybersecurity professionals, and (3) federal efforts to address risks to the information technology supply chain. In addition to improving our national capability to address cybersecurity, executive branch agencies, in particular DHS, also need to improve their capacity to protect against cyber threats by, among other things, advancing cyber analysis and warning capabilities and strengthening the effectiveness of the public-private sector partnerships in securing cyber critical infrastructure. Enhancing cyber analysis and warning capabilities. In July 2008, we reported that DHS’s US-CERT had not fully addressed 15 key attributes of cyber analysis and warning capabilities. As a result, we recommended that the department address shortfalls associated with the 15 attributes in order to fully establish a national cyber analysis and warning capability as envisioned in the national strategy. DHS agreed in large part with our recommendations and has reported that it is taking steps to implement them. We are currently working with DHS officials to determine the status of their efforts to address these recommendations. Strengthening the public-private partnerships for securing cyber critical infrastructure. In July 2010, we reported that the expectations of private sector stakeholders were not being met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. Federal partners, such as DHS, were taking steps that may address the key expectations of the private sector, including developing new information-sharing arrangements. We also reported that public sector stakeholders believed that improvements could be made to the partnership, including improving private sector sharing of sensitive information. We recommended that the national Cybersecurity Coordinator and DHS work with their federal and private sector partners to enhance information-sharing efforts, including leveraging a central focal point for sharing information among the private sector, civilian government, law enforcement, the military, and the intelligence community. DHS officials stated that they have made progress in addressing these recommendations, and we will be determining the extent of that progress as part of our audit follow-up efforts. Federal systems continue to be afflicted by persistent information security control weaknesses. Specifically, agencies did not consistently implement effective controls to prevent, limit, and detect unauthorized access or manage the configuration of network devices to prevent unauthorized access and ensure system integrity. Most of the 24 major federal agencies had information security weaknesses in five key internal control categories, as illustrated in figure 1. In addition, GAO determined that serious and widespread information security control deficiencies were a governmentwide material weakness in internal control over financial reporting as part of its audit of the fiscal year 2010 financial statements for the United States government. Over the past several years, we and inspectors general have made hundreds of recommendations to agencies for actions necessary to resolve prior significant control deficiencies and information security program shortfalls. For example, we recommended that agencies correct specific information security deficiencies related to user identification and authentication, authorization, boundary protections, cryptography, audit and monitoring, physical security, configuration management, segregation of duties, and contingency planning. We have also recommended that agencies fully implement comprehensive, agencywide information security programs by correcting weaknesses in risk assessments, information security policies and procedures, security planning, security training, system tests and evaluations, and remedial actions. The effective implementation of these recommendations will strengthen the security posture at these agencies. Agencies have implemented or are in the process of implementing many of our recommendations. In addition, the White House, OMB, and selected federal agencies have undertaken governmentwide initiatives to enhance information security at federal agencies. For example, the Comprehensive National Cybersecurity Initiative, a series of 12 projects, is aimed primarily at improving DHS’s and other federal agencies’ efforts to reduce vulnerabilities, protect against intrusion attempts, and anticipate future threats against federal executive branch information systems. However, the projects face challenges in achieving their objectives related to securing federal information, including better defining agency roles and responsibilities, establishing measures of effectiveness, and establishing an appropriate level of transparency. These challenges require sustained attention, which agencies have begun to provide. In summary, the threats to information systems are evolving and growing, and systems supporting our nation’s critical infrastructure and federal systems are not sufficiently protected to consistently thwart the threats. Administration and executive branch agencies need to take actions to improve our nation’s cybersecurity posture, including implementing the actions recommended by the president’s cybersecurity policy review and enhancing cyber analysis and warning capabilities. In addition, actions are needed to enhance security over federal systems and information, including fully developing and effectively implementing agencywide information security programs and implementing open recommendations. Until these actions are taken, our nation’s federal and nonfederal cyber critical infrastructure will remain vulnerable. Mr. Chairman, this completes my statement. I would be happy to answer any questions you or other members of the Subcommittee have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Michael Gilmore (Assistant Director), Anjalique Lawrence (Assistant Director), Larry Crosland, Kush Malhotra, Bradley Becker, Lee McCracken, and Jayne Wilson. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Electricity Grid Modernization: Progress Being Made on Cybersecurity Guidelines, but Key Challenges Remain to be Addressed. GAO-11-117. Washington, D.C.: January 12, 2011. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Cyberspace Policy: Executive Branch Is Making Progress Implementing 2009 Policy Review Recommendations, but Sustained Leadership Is Needed. GAO-11-24. Washington, D.C.: October 6, 2010. Information Security: Progress Made on Harmonizing Policies and Guidance for National Security and Non-National Security Systems. GAO-10-916. Washington, D.C.: September 15, 2010. Information Management: Challenges in Federal Agencies’ Use of Web 2.0 Technologies. GAO-10-872T. Washington, D.C.: July 22, 2010. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010. Cyberspace: United States Faces Challenges in Addressing Global Cybersecurity and Governance. GAO-10-606. Washington, D.C.: July 2, 2010. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010. Cybersecurity: Key Challenges Need to Be Addressed to Improve Research and Development. GAO-10-466. Washington, D.C.: June 3, 2010. Information Security: Federal Guidance Needed to Address Control Issues with Implementing Cloud Computing. GAO-10-513. Washington, D.C.: May 27, 2010. Information Security: Agencies Need to Implement Federal Desktop Core Configuration Requirements. GAO-10-202. Washington, D.C.: March 12, 2010. Information Security: Concerted Effort Needed to Consolidate and Secure Internet Connections at Federal Agencies. GAO-10-237. Washington, D.C.: March 12, 2010. Cybersecurity: Progress Made but Challenges Remain in Defining and Coordinating the Comprehensive National Initiative. GAO-10-338. Washington, D.C.: March 5, 2010. National Cybersecurity Strategy: Key Improvements Are Needed to Strengthen the Nation’s Posture. GAO-09-432T. Washington, D.C.: March 10, 2009. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. 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. | Pervasive and sustained cyber attacks continue to pose a potentially devastating threat to the systems and operations of our nation's critical infrastructure and the federal government. In recent testimony, the Director of National Intelligence stated that there had been a dramatic increase in malicious cyber activity targeting U.S. computers and networks. In addition, recent reports of cyber attacks and incidents affecting federal systems and critical infrastructures illustrate the potential impact of such events on national and economic security. The nation's ever-increasing dependence on information systems to carry out essential everyday operations makes it vulnerable to an array of cyber-based risks. Thus it is increasingly important that federal and nonfederal entities carry out concerted efforts to safeguard their systems and the information they contain. GAO is providing a statement describing (1) cyber threats to cyber-reliant critical infrastructures and federal information systems and (2) the continuing challenges facing federal agencies in protecting the nation's cyber-reliant critical infrastructure and federal systems. In preparing this statement, GAO relied on its previously published work in the area, which included many recommendations for improvements. Cyber-based threats to critical infrastructure and federal systems are evolving and growing. These threats can come from a variety of sources, including criminals and foreign nations, as well as hackers and disgruntled employees. These potential attackers have a variety of techniques at their disposal that can vastly expand the reach and impact of their actions. In addition, the interconnectivity between information systems, the Internet, and other infrastructure presents increasing opportunities for such attacks. Consistent with this, reports of security incidents from federal agencies are on the rise, increasing over 650 percent over the past 5 years. In addition, reports of cyber attacks and information security incidents affecting federal systems and systems supporting critical infrastructure illustrate the serious impact such incidents can have on national and economic security, including the loss of classified information and intellectual property worth millions of dollars. The administration and executive branch agencies continue to act to better protect cyber-reliant critical infrastructures, improve the security of federal systems, and strengthen the nation's cybersecurity posture. However, they have not yet fully implemented key actions that are intended to address threats and improve the current U.S. approach to cybersecurity, such as (1) implementing near- and mid-term actions recommended by the cybersecurity policy review directed by the president; (2) updating the national strategy for securing the information and communications infrastructure; (3) developing a comprehensive national strategy for addressing global cybersecurity and governance; and (4) creating a prioritized national and federal research and development agenda for improving cybersecurity. Federal systems continue to be afflicted by persistent information security control weaknesses. For example, as part of its audit of the fiscal year 2010 financial statements for the U.S. government, GAO determined that serious and widespread information security control deficiencies were a governmentwide material weakness. Over the past several years, GAO and agency inspectors general have made hundreds of recommendations to agencies for actions necessary to resolve prior significant control deficiencies and information security program shortfalls. The White House, the Office of Management and Budget, and selected federal agencies have undertaken additional governmentwide initiatives intended to enhance information security at federal agencies. However, these initiatives face challenges, such as better defining agency roles and responsibilities and establishing measures of effectiveness, and require sustained attention, which agencies have begun to provide. As such, GAO continues to identify protecting the federal government's information systems and the nation's cyber critical infrastructure as a governmentwide high-risk area. |
According to FAA, safety is the FAA’s most important mission and its goal is to achieve the lowest possible accident rate and constantly improve safety. Supporting this safety goal are a number of activities and requirements including federal regulations that require pilots to have both a pilot certificate and medical certificate prior to operating an aircraft and meet several requirements, depending on the level of certificate FAA issues the applicant. In order for FAA to issue a pilot certificate, applicants must demonstrate various piloting skills; pass written tests of aeronautical knowledge; log specified hours of flying time; read, speak, write, and understand the English language; and meet certain age restrictions, in addition to meeting the physical qualifications for a medical certificate and undergoing certain background checks. FAA authorizes pilots to fly specific types of airplanes or use specific types of aeronautical instruments after they meet certain training and testing requirements. Federal regulations establish three classes of medical certification that correspond to the duties that pilots perform. Airline transport pilots that serve as pilots in command of scheduled air carrier operations must hold first-class medical certificates. Pilots that fly for compensation or hire or serve as flight engineers or flight navigators, as well as air traffic control tower operators, generally hold second-class medical certificates. Private pilots hold third-class medical certificates. Pilots must undergo medical examinations periodically to renew medical certificates (see table 1). A pilot begins the medical certification process by completing an application, including reporting his or her medical history on the application, certifying that it is complete and true, and authorizing the National Driver Register, through a designated state department of motor vehicles, to furnish to the FAA information pertaining to his or her driving record. A pilot applicant is examined by an aviation medical examiner (AME), who is a qualified physician in private practice in whom FAA has delegated the authority to examine pilot applicants and make certification decisions on behalf of FAA. To become an AME, FAA requires physicians to receive basic training at its Civil Aerospace Medical Institute and recurrent training through seminars to stay abreast of any changing medical science. FAA collects information through a database to monitor and evaluate the performance of AMEs. For example, if an AME makes an error, FAA describes the type of error that was made in its database. Finally, FAA has the authority to supersede and modify an AME’s decision to issue or deny a medical certificate. FAA has established medical certification procedures to identify whether pilots meet medical standards. As part of these procedures, AMEs decide whether or not to issue pilot medical certificates based on information gathered from pilots and their physical examinations. In the majority of cases, pilots meet the medical standards for certification and AMEs issue the medical certificate. In addition to the AME examination, FAA has a computer system that initially processes all the applications and prioritizes some for review, such as those where the AMEs deferred the decision or denied the certificate. The computer system also identifies for further review applications where the AME has issued the medical certificate and the application indicates potentially disqualifying medical conditions. Finally, FAA checks the National Driver Register to help ensure pilots meet standards by checking for indications of substance abuse. AMEs determine whether a pilot meets FAA medical standards based on their review of the pilot’s medical certification application and the results of their physical examination. Pilots are responsible for providing information on the application describing their medical history to alert the AME of any health-related condition, such as cardiac problems or mental disorders. Pilots also report whether their FAA medical certificate has ever been denied, suspended, or revoked. In addition to answering medical questions, the application requires the pilot to report any convictions and administrative actions (e.g., suspensions or revocations) involving driving while intoxicated, impaired, or under the influence of alcohol or drugs. The AME is responsible for reviewing the applicant’s responses on the application form to identify inconsistencies, missing information, and disqualifying conditions. The AMEs next conduct a physical examination. In 2007, FAA had about 4,400 AMEs conducting physical exams. To verify pilot information and identify potential medical issues, the AME examines the pilot for vision, hearing, mental, neurological, cardiovascular, and general medical conditions. Additionally, if the pilot is applying for a first-class medical certificate, the AME must conduct an electrocardiogram annually for pilots over the age of 40. During the course of the medical examination, the AME should use the information obtained from the review to ask the applicant pertinent questions, especially questions that deal with type of medications and pilot’s medical history. For example, if the applicant reported use of anticoagulants or indicated that he or she had a coronary artery angioplasty procedure, then the AME would be prompted to ask the applicant to provide a copy of any FAA correspondence that authorized medical certification on the medication or following the procedure; or request the applicant to provide medical documentation regarding these treatments and conditions. Certain aspects of the applicant’s medical history may require more information. For example, if the pilot answered yes to having experienced heart or vascular trouble on his or her application, the AME is required to ask the pilot to clarify the significance of that item of history by asking for supplementary reports from the applicant’s personal physician. After reviewing the medical history and completing the medical examination, AMEs make one of the following determinations: issue a medical certificate, issue a special certificate, defer making a decision, or deny the certificate. The AME may issue a medical certificate when the applicant meets all medical standards. In such cases, the pilot leaves the AME’s office with his or her medical certificate in hand. AMEs may also issue a special, time-limited medical certificate (or special issuance) to pilots whose medical conditions do not meet the federal medical standards but have received FAA authorization to obtain a medical certificate because they can perform their duties without endangering public safety. FAA may require pilots to take a special medical flight test, practical test, or medical evaluation for this purpose. The AME may defer the application for FAA review when the applicant exhibits one or more disqualifying medical conditions. (See app. III for a list of disqualifying medical conditions.) The AME may deny certification when the applicant does not meet the medical standards. When the AME defers or denies the application for a medical certificate or issues a certificate under an authorization for special issuance, the application is routed to FAA application examiners who decide whether to issue or deny the certificate. FAA established a computer system that prioritizes application review procedures in order to target its resources toward applications that it determined needed the most review. FAA’s computer system, called Document Imaging Workflow System (DIWS), initially processes all medical certification applications and designates each one as either a priority or a non-priority application. See table 2 for definition of priority and non-priority applications. In 2007, of the 438,152 medical certification applications received, DIWS designated 34,590 applications as priority applications, 399,962 applications as non-priority, and 3,600 as in process. FAA’s computer system identifies and closes most non-priority applications. In 2007, for example, FAA automatically processed and closed the applications where AMEs issued medical certificates—about 88 percent of all medical applications. After AMEs submit the applications, DIWS routes priority applications to application examiners for review. These examiners review the medical certification applications, supporting documentation, and any previous medical issues in a pilot’s medical file. They follow FAA regulations, guidance, and consult with FAA physicians in order to decide whether to issue or deny the certificate. In 2007, FAA application examiners evaluated all 34,590 priority applications (see fig. 2). In 2006, as a result of growing concern by pilots and FAA’s management about the length of time to review priority applications, FAA established a goal of completing each application review in 30 days. According to FAA, as of February 2008, the average time to process a priority application is 24 days. 0.82% In process(3,600) 71.2% (34,590) Priority applications (deferred, denied, and special issuances) 28.8% (13,967) Non-priority applications with potentially disqualifying medical conditions (48,557) FAA’s computer system also evaluates non-priority applications (applications where the AME decided to issue a certificate) and identifies ones where the pilot or AME indicated one or more potentially disqualifying medical conditions on the application. FAA programmed DIWS to route these applications to application examiners for review due to the presence of a potentially disqualifying medical condition. For example, in 2007, of the applications that were designated as non-priority applications, DIWS identified 13,967 with one or more potentially disqualifying medical condition such as a history of heart or vascular trouble, diabetes, or epilepsy. However, according to FAA officials, FAA’s application examiners rarely if ever review these applications due to workload and time constraints and these applications are removed from the examiners’ workload after about two months. Once removed, non- priority applications are closed without being reviewed by an application examiner, thus making the AME’s decision to issue the medical certificate final. A random sample of closed non-priority applications are subsequently selected for quality assurance review. FAA officials indicated that one impact of not reviewing non-priority applications is a greater reliance on AMEs to make a correct determination and identify pilots that may have potentially disqualifying medical conditions. Because FAA application examiners rarely have time to review these non-priority applications, the burden is on the AME to make the correct determination. According to FAA, this makes the AMEs the first and sometimes the only line of defense because few if any non- priority applications are ever reviewed. More often than not, the AME decisions are considered final. Because of their importance, FAA trains AMEs to identify pilots that have potentially disqualifying medical conditions or may not be medically fit to fly. Moreover, FAA teaches AMEs how to detect discrepancies in applicant responses. However, officials we spoke to also acknowledged that no matter how well-trained the AMEs, the current medical certification procedures are based on an honor system and rely on pilots being truthful on the application form. Failure to disclose medical information on the application form can be the basis for suspension or revocation of a medical certificate. This is one reason why high-ranking FAA officials visit air and pilot conventions around the country to teach pilots about the importance of disclosing medical conditions on their applications. FAA checks the National Driver Register each time a pilot applies for medical certification to look for indications of substance dependence. The National Driver Register identifies applicants who have had their drivers’ licenses revoked or suspended or been convicted of serious traffic violations such as driving while impaired by alcohol or drugs. FAA transmits applicants’ names, dates of birth, and Social Security numbers, if available, to the National Driver Register weekly. If the search results indicate the applicant has drug- or alcohol-related motor vehicle actions, the FAA investigator contacts the state motor vehicle agency for information to request the driving record for review. When applicants do not provide their Social Security numbers, FAA investigators use applicants’ demographic information and physical descriptive information to validate identities. According to FAA officials, the lack of a Social Security number does not present a significant barrier, at this time, for completing their investigation. However, according to FAA officials, access to the Social Security number is the most efficient means of verifying a pilot’s identity. Once FAA verifies the alcohol-related action, it determines whether the person was a pilot at the time of the offense and whether he or she reported the conviction to FAA. If the FAA investigator finds that the pilot failed to properly report a drug- or alcohol-related action, he or she conducts the investigation and sends the case to FAA legal counsel for possible enforcement action. If an applicant did not report the convictions or license actions on the application for medical certification, FAA may deny, suspend, or revoke the applicant’s pilot and/or medical certificates, if the applicant was aware of the conviction or license action. Applicants can appeal certificate denials, suspensions, and revocations. (See fig. 3). According to FAA officials, in 2007 FAA found 2,708 potential matches in the National Driver Register and recommended 875 enforcement actions for failure to properly report an alcohol-related motor vehicle action. These enforcement actions included issuing warning letters, assessing civil penalties, and suspending or revoking the pilot’s license and/or medical certificate. FAA officials reported that the National Driver Register investigation is taking longer to complete than before July 2007, because FAA investigators no longer have electronic access to each states’ records. FAA investigators had used the National Crime Information Center (NCIC) to access state records electronically and obtain driving-related conviction information back from the states’ motor vehicle agencies in minutes. However, in May 2007, FAA lost access to NCIC after the Justice Department concluded FAA’s investigations unit did not have a criminal justice function and therefore had no need to access databases containing criminal information. According to FAA officials, the lack of electronic access to states’ data has increased the time it takes to complete the preliminary investigation to confirm a reportable alcohol-related incident is on the driving record. FAA officials told us staff turnover at the state agencies also creates delays because new employees do not understand why FAA is requesting the information and investigators have to take time to educate the new staff about FAA’s authority. During the first half of fiscal year 2008, FAA investigations took about 59 days on average, although the time it takes to complete an investigation varies depending on the facts of the case. However, FAA has tried to limit the impact by shifting staff and workload and authorizing compensatory time. Further, beginning January 2008, FAA has been able to get limited electronic information from 14 states’ motor vehicle records. FAA has developed programs to help it determine whether AMEs and FAA examiners properly issued medical certificates. Specifically, FAA has established two quality assurance review programs in which FAA has identified instances in which AMEs issued medical certificates to pilots that have disqualifying medical conditions and in which FAA application examiners overlooked relevant medical documents and made clerical errors. According to FAA officials, they plan to continue reviewing AME- issued certificates and collecting data from the reviews. Also, as previously mentioned, FAA checks the National Driver Register for indications of substance abuse to help ensure pilots who are issued medical certificates meet medical standards. FAA currently does not check federal disability benefits for indications of disqualifying medical conditions. Our comparison found that federal disability benefits databases can provide useful information on pilots’ medical conditions. FAA has established two quality assurance programs to review selected medical certificate applications. The first program evaluates whether AMEs issued applications appropriately (see table 3). According to FAA officials, the impetus for this quality assurance program was that FAA recognized it needed to see if AMEs issued medical certificates appropriately because the majority of these determinations are closed without FAA review, thus making the AME decision final. In addition, this quality assurance program in part takes the place of application examiners’ reviews. Application examiners rarely review these applications under current staffing levels, according to FAA officials, if they are to meet the 30-day performance goal. FAA conducted the first quality assurance review of AME issuance decisions in 2006, and found that about 95.7 percent of the applications were appropriately issued, 1.8 percent had insufficient information, and 2.5 percent were inappropriately issued. In most cases, the applications that were inappropriately issued contained information that should have led the AMEs to defer the decision to FAA rather than issuing the medical certificate. This quality assurance review evaluated 2,000 of the applications for AME-issued certificates from December 2004 to July 2005—0.6 percent of total applications. Quality reviewers based their review on the pilots’ applications and AMEs examinations as well as other information stored in FAA’s medical computer system. FAA conducted the second quality assurance review in 2007 on 1,000 applications wherein AMEs issued medical certificates from January through June 2007. FAA randomly selected a sample of 500 non-priority applications from 189,239 applications that had no potentially disqualifying medical conditions. Of those selected, FAA found that AMEs appropriately issued 96.6 percent or 483 of the certificates and issued 3.4 percent (17 certificates) when the application lacked complete information. However, once FAA collected the appropriate documentation, it determined that none of these certificates were inappropriately issued by AMEs. FAA randomly selected another 500 non-priority applications from 5,305 issued applications that DIWS identified as having one or more potentially disqualifying conditions. FAA found that AMEs appropriately issued 93.8 percent or 469 of the certificates, issued 2.4 percent (12 certificates) when the application lacked complete information, and inappropriately issued 3.8 percent (19 certificates) of the sampled certificates. According to FAA, if this rate were also applied to the 5,305 pilot applications that were processed without further review, 202 medical certificates would have been issued inappropriately in the January through June 2007 period. In general, these were applications in which the AME issued the certificate when he or she should have deferred the decision to FAA due to indications of disqualifying medical problems. For example, a pilot who had reported having a seizure was hospitalized overnight, and prescribed anti-seizure medication for a month. The AME issued the medical certificate when the application should have been deferred to FAA for final determination. According to FAA, it took a range of actions depending on the nature of the error, such as gathering additional information about the medical condition, contacting the pilot or AME, and revoking the medical certificate, although it did not track the number of medical certificates that were revoked. FAA officials noted that they share the results with managers, supervisors, and AMEs and at meetings to make AMEs aware of the problems they are finding. FAA officials indicated that they plan to continue the quality assurance reviews of non-priority applications on a semi-annual basis and collect data from the reviews. These additional data from subsequent years could help identify increases or decreases in incomplete or inappropriately issued certificates and demonstrate how well its certification procedures are ensuring that medical certificates are being properly issued. The second quality assurance program consists of quality assurance specialists reviewing at least ten percent of (1) priority applications that each FAA application examiners had evaluated and (2) some non-priority applications with potentially disqualifying medical conditions. These applications are selected randomly by DIWS. FAA established this program in 2002 to ensure application examiners’ determinations comply with FAA documentation standards and certification guidelines. FAA officials told us that quality assurance specialists review up to 50 percent of applications for application examiners who are new or in training. Following their review of the applicant’s medical information, the quality assurance specialists determine whether they agree with the decision the FAA application examiner made and look for errors that may lead to incorrect determinations. FAA uses monthly reports on the results of these reviews to identify trends in error types. For example, FAA reported in 2007 it reviewed 1,646 applications and found that application examiners made clerical errors in 44 applications and overlooked relevant medical documentation in 16. In its 2007 reviews, FAA did not find any medical certificates that application examiners had inappropriately issued. When the quality assurance specialists identify errors, they discuss their findings in person or hold group training sessions help application examiners avoid making the error in the future. Another approach FAA could use to ensure pilots are medically qualified is using disability information from other federal agencies for indications of disqualifying medical conditions. In 2005, as a result of its Operation Safe Pilot investigation, DOT IG recommended that FAA come up with a strategy, such as database matching, to identify pilots who receive disability benefits. DOT IG’s investigation indicated that federal agencies that provide disability benefits (e.g., the Social Security Administration (SSA) or the Departments of Labor or Veteran Affairs) would have information that FAA could use to compare with its information about pilot medical qualifications. Because disability benefits programs have different disability standards, FAA would have to investigate the pilot’s medical condition to assess whether the disability would disqualify him or her from being medically certified under FAA’s standards. The DOT IG conducted the investigation jointly with the SSA’s Office of Inspector General and California’s U.S. Attorney Office. The investigation compared medical certificates for pilots in northern California with the SSA’s databases to determine, in part, if pilots were receiving Social Security disability benefits. They found that 70 of 40,000 pilots were receiving disability benefits and 48 pilots had disqualifying medical conditions that were not reported to FAA. As a result of their investigation, 45 of 48 pilots were indicted for falsification. All 45 pilots either pled guilty or were convicted at trial. As a result its investigation, DOT IG recommended that FAA work with SSA and other disability benefits providers to implement a strategy to check pilots against disability benefits recipients. According to FAA officials, FAA has not implemented this recommendation because of litigation resulting from the investigation. FAA will need to make decisions about using information from disability benefits providers now that the litigation is resolved. However, FAA is implementing two related DOT IG recommendations by amending its medical certification application to include a question about whether pilots are receiving disability benefits currently and a notification that information pilots provide on their medical certification application may be shared with other federal agencies. According to FAA, these revisions should be in place in October 2008 and establish the groundwork for checking information on pilots applying for medical certification with other federal information. We found that for February 2008, less than 1 percent (1,246 of 394,985 pilots) of U.S. pilots with a current medical certificate were receiving Social Security disability benefits. Of the pilots receiving a disability benefit, private pilots with third-class medical certificates were most likely to be receiving a Social Security disability benefit (79 percent or 989 of 1,246 pilots). Commercial pilots who generally fly small commercial aircraft and have second-class medical certificates were the second largest group of pilots to be receiving disability benefits (16 percent or 201 of 1,246 pilots). Finally, transport pilots who operate large passenger aircraft and have first class medical certificates were least likely to be receiving a Social Security disability benefit (4 percent or 56 of 1,246 pilots). We found that back, spinal, and muscle medical problems, such as degenerative back disorders, were the most common medical conditions. They represented 40 percent or 495 of the pilots receiving disability benefits. Psychotic and non-psychotic conditions, such as anxiety disorders, were the second most common medical conditions, representing 19 percent or 237 of the pilots receiving disability benefits. Injury related conditions, such as skull fractures, were the third most common conditions, representing 11 percent or 138 of the pilots receiving disability benefits. We did not evaluate the individual cases in which a pilot had a current medical certificate and was receiving disability benefits to identify whether the disability was a disqualifying condition. According to FAA officials, they would have to review the facts of each case in order to determine whether the pilot should hold a medical certificate and be considered safe to fly. In situations where a pilot is being treated for anxiety, for example, FAA officials indicated the pilot could operate an aircraft if he or she met several conditions. The pilot would have to have been off all medication for 90 days and passed several FAA-administered evaluations. (See table 4.) According to an FAA official, FAA will need additional staff to implement a data matching program to examine such cases. In addition to determining how many pilots were receiving disability benefits, we also looked at whether or not pilots provided FAA with their Social Security numbers. Our analysis indicated that about 78 percent of the pilots provided FAA with a Social Security or other nine-digit number while the rest did not supply a number. Of the 1,246 pilots who received disability benefits, about 86 percent provided FAA a Social Security number while the remaining 14 percent did not. (See table 5.) See appendix II for a complete description of our methodology and results. FAA’s overall goal is to provide the safest aviation system in the world, and toward that end, FAA has established procedures for ensuring that pilots obtain certifications showing that they are medically fit to fly. Although the recent record of safety in this area has been good, an accident stemming from a pilot’s poor medical condition would be traumatic. FAA has also developed programs to determine if medical certificates have been properly issued. As we report above, one of FAA’s quality assurance programs found that the majority, but not all, of the sampled medical certificates were properly issued. Because FAA only has two years of quality assurance data, it has not yet identified potential trends regarding the number of improperly issued medical certificates. However, if FAA continues collecting the quality assurance data, as it plans to do, it will have an opportunity to analyze the data for such trends and further help FAA identify weaknesses in its guidance and practices. Finally, due to recent litigation, FAA has decided not to use independent databases that contain disability information. In the future, however, the disability benefit information pilots report on the medical certification application could help to identify pilots who might pose risks. We provided a draft of this report to the Department of Transportation and SSA for review. They provided comments by e-mail. The Department of Transportation indicated that it generally agreed with our findings. We also received technical clarifications from FAA’s Office of Aerospace Medicine within the Office of Aviation Safety, and SSA’s Office of General Counsel, which we incorporated into 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 30 days from its date. At that time, we will send copies of this report to congressional committees and subcommittees with responsibilities for aviation issues and to the Secretary of Transportation and the Commissioner of Social Security. 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. Should you or your staff have any questions on matters discussed in 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 contributions to this report are listed in appendix IV. In order to assess the Federal Aviation Administration’s (FAA) efforts to screen medical certification applicants and identify medically unqualified pilots, we answer the following questions (1) what procedures does FAA use to certify that pilot applicants meet medical standards and (2) how does FAA determine that medical certificates have been properly issued? In addition, we identify the number of pilots with current medical certificates who are receiving disability benefits and determine if they provided FAA a Social Security number. To identify FAA’s procedures for certifying that pilots meet medical standards, we reviewed agency guidance and federal regulations. We spoke with FAA officials about pilots’ application procedures, including requirements to disclose their medical history, convictions and administrative actions involving driving while under the influence of drugs or alcohol, and whether their FAA medical certificate has ever been denied, suspended, or revoked. We spoke with FAA officials and reviewed agency guidance to identify aviation medical examiners’ (AME) procedures for examining and documenting the physical condition of pilot applicants and to determine under what circumstances AMEs would issue, defer, or deny a medical certificate. We identified FAA application examiners’ procedures for reviewing deferred, denied, and special issuance applications. We spoke with FAA officials about FAA’s computer system, called the Document Imaging Workflow System (DIWS), to identify how it processes and prioritizes applications, in particular how it selects some for additional review and closes others. From this computer database, FAA provided 2007 data about the number of medical certification applications that it received and that DIWS identified as priority, non-priority, and non- priority with potentially disqualifying medical conditions. Based on these data, FAA officials noted that application examiners reviewed all of the priority applications in 2007. Finally, we spoke with FAA investigators to identify FAA’s procedures for accessing the National Driver Register, an independent database FAA uses to determine if pilots have recent drug- or alcohol-related motor vehicle actions that might indicate a substance abuse problem. Based on this information and data provided by FAA, we identified the steps and the duration of FAA’s activities to check the National Driver Register, investigate potential matches, and take enforcement action. To identify how FAA determines that medical certificates are properly issued, we spoke with FAA officials about the quality assurance reviews of priority and non-priority applications, and obtained information about the frequency of the reviews, how FAA collects and reports results, and the actions taken following the reviews (i.e., certificates revoked, training, one-on-one meetings). We obtained the 2006 and 2007 quality assurance review reports. We spoke with FAA officials about its methodology for sampling non-priority applications with potentially disqualifying medical conditions and determined the sample size provided valid measures of the underlying population of non-priority applications. We identified how quality assurance specialists review samples of the priority applications completed by FAA application examiners, the types of errors they look for, and what they do with the results of their reviews. We obtained and reviewed the quality review supervisory reports for 2007. We spoke with FAA officials to determine if FAA has implemented the recommendations related to the Operation Safe Pilot investigation, including using disability benefit information to identify pilot applicants who may have disqualifying medical conditions. We obtained documents and spoke with officials from the Department of Transportation and Social Security Administration (SSA) Offices of the Inspector General about the match they completed of pilots in northern California with Social Security databases reported in their 2005 investigation and the status of the lawsuit filed by a pilot convicted as a result of that investigation. Finally, to determine if U.S. pilots with current medical certificates (as of February 2008) were receiving SSA disability benefits, we obtained FAA’s airman registry database for February 2008. We matched FAA pilot medical certification records with two Social Security disability databases to determine (1) the number of pilots with current medical certificates who were receiving disability benefits; (2) from the group of pilots receiving disability benefits, how many had supplied their Social Security number to FAA and how many did not provide their Social Security number; and (3) what the most common disabling medical conditions were for pilots receiving disability benefits. We did not investigate each case to determine if the pilot receiving SSA disability benefits had a disqualifying medical condition according to FAA medical standards. (See app. II for a detailed description of the data match.) We conducted our performance audit from July 2007 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 also took steps to assess data reliability by interviewing agency officials, reviewing documents, performing electronic testing for obvious errors in accuracy and completeness as well as inconsistencies and concluded that the data were sufficiently reliable for our purposes. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. Information in the airman registry is supplied by pilots when they apply for initial certification to operate an aircraft and for medical certification. When pilots apply for medical certification, they supply demographic information which is submitted to FAA after an aviation medical examiner (AME) performs a physical exam on the pilot. For identification purposes, the application contains a field for a nine-digit number defined as the Social Security number. Because of provisions in the 1974 Privacy Act, FAA does not require pilots to provide their Social Security number. When a pilot does not provide any data in this field, FAA provides a nine-digit number from a range of numbers that do not conflict with numbers assigned by SSA. To determine how many active pilots are operating in the United States, in February 2008, we obtained the previous 39 months’ worth of FAA’s Civil Airman Registry certification records. In addition to demographic information, this database contains information about the date a pilot’s last medical certificate was submitted. We received records no older than 39 months to ensure that we had a population of pilots with recent first-, second-, and third-class medical certificates. First-class medical certificates must be renewed every 6 months for pilots 40 years of age or older and every 12 months for pilots under 40 years of age, second-class every 12 months, third-class medical certificates for pilots 40 years of age or older every 24 months, and every 60 months for pilots under age 40. There were 693,105 pilot records in the database when it was received February 14, 2008. The records included U.S. as well as foreign pilots. In the analysis, we eliminated records for pilots who were deceased, who do not need medical certification (e.g., hang glider and balloon pilots), foreign pilots, duplicate records, and records for pilots whose medical certificates were not current. To verify Social Security numbers, the pilot certificate records—those with data supplied by the pilot in the field defined as Social Security numbers and those with nine-digit numbers provided by FAA—were processed through SSA’s Employee Verification System (EVS). The EVS is routinely used by employers to verify workers’ Social Security numbers. The EVS process first tests each number contained in the FAA field labeled as a Social Security number in its attempt to verify that the number is a valid Social Security number. This first step tests the number to see if it is within the range of validly issued numbers and if so, then it checks the name, date of birth, and gender to determine if it matches the information in SSA’s database assigned that number. If the number does not meet the validly issued range test, the EVS process will test the name, date of birth, and gender to determine if a valid Social Security number matches the values contained in these fields, and a final attempt to find a verified Social Security number is made by matching just the name and date of birth. The result of the EVS process for GAO was 305,063 pilot records verified by Social Security number, name, date of birth, and gender. An additional 1,602 records were verified by name, date of birth, and gender. And finally, another 88,320 pilot records were included because the name and date of birth matched. In all, 394,985 records had verified Social Security numbers through the EVS process. The majority of the records that were not verified were for foreign pilots, while the rest were duplicate records based on the FAA database conscript. About 78 percent (308,036) of the 394,985 records with verified Social Security numbers were records where pilot applicants provided FAA with a nine-digit number in the Social Security number field, and about 22 percent were pilot applicants for which FAA had provided a nine-digit number. (See table 6.) We included in the 308,036 records 2,067 cases where SSA was not able to verify the numbers provided by the pilots but was able to identify Social Security numbers associated with these individuals based on other data elements. There were 7,889 pilot records for which SSA was unable to verify Social Security numbers. Eliminating the unverified records left 394,985 verified records, with 305,969 representing Social Security numbers contained in the FAA file and verified by SSA’s EVS process, and 89,016 that were assigned a Social Security number through the EVS process. Once the EVS process was complete, records were matched to SSA’s Title II and Title XVI disability databases, both of which contain past and present benefit information. Those eligible to receive disability benefits from either disability fund must be considered 100 percent disabled. SSA defines disability as the “inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or has lasted or can be expected to last for a continuous period of not less than 12 months.” Recipients’ cases may be periodically reviewed and if SSA determines the person’s impairment has medically improved and he or she is able to return to work, the person is removed from the program. Under the Title II program, three categories of individuals can receive disability benefits: A disabled insured worker under 65. A person disabled since childhood (before age 22) who is a dependent of a deceased insured parent or a parent entitled to Title II disability or retirement benefits. A disabled widow or widower, age 50 to 60, if the deceased spouse was insured under Social Security. The Title XVI program provides supplemental security insurance payments to individuals, including children under age 18, who are disabled and have limited income and resources. Under Title XVI, there are two basic categories under which a financially needy person can receive disability payments: An adult age 18 or over who is disabled. A child (under age 18) who is disabled. The 394,985 pilot records match against SSA’s disability databases identified less than 1 percent of the pilots (1,246) were receiving disability benefits. Of the pilots receiving disability benefits, 79 percent (989) were private pilots or third-class medical certificate holders while the remaining 21 percent (257) were commercial and transport pilots. (See tables 7 and 8.) The data match showed that 1,075 of the pilots receiving Social Security disability benefits supplied a Social Security or other nine-digit number to FAA and 171 pilots receiving disability benefits did not supply a Social Security number (see table 9). Back, spinal, and muscle medical problems, such as degenerative back disorders, were the most common disabling medical conditions representing 40 percent or 495 of the pilots receiving disability benefits. Psychotic and non-psychotic conditions, such as anxiety disorders, were the second most likely condition, representing 19 percent or 237 pilots receiving Social Security benefits. Injury-related conditions, such as skull fractures, were the third most likely condition, representing 11 percent or 138 of the pilots receiving disability benefits (see table 10). Our review did not make a determination as to whether pilots receiving disability benefits had a qualifying disability. To assess the reliability of the pilot data that FAA provided us, we (1) performed electronic testing for obvious errors in accuracy and completeness as well as inconsistencies; and (2) interviewed officials in FAA’s Aviation Data Systems Branch and the Civil Aerospace Medical Institute, Oklahoma City, who are knowledgeable about the content of the data and how they were entered. The 7,889 pilot records excluded from our analysis was a limitation to our matching process. However, we compared the age, sex, and state of residence of the excluded records with the verified records and found that the verified records and those that were excluded were similar in the proportion of pilots in each of the three medical classes. The comparison did show that women pilots comprised 10 percent of the records that could not be verified while making up 5 percent of the group whose Social Security numbers were verified by SSA. We do not know whether the 7,889 pilot records are different from the records we were able to put through the matching process with regard to receipt of disability benefits. We selected February 2008 as the time frame for the match between FAA pilot certificates and SSA disability databases. If FAA were to replicate our study, it might have different results, based on the length of time of the comparison and the turnover of recipients receiving disability benefits. In addition, if FAA were to find validated Social Security numbers for the 7,889 records excluded from our analysis, that might impact the results. In 2005, the joint Department of Transportation and SSA Offices of the Inspector General Operation Safe Pilot investigation reported that 3,220 of 40,000 pilots in northern California were collecting some sort of SSA benefit. These were pilots who received any SSA benefit at any point in their lifetime, including retirement and survivor benefits. Our discussions with SSA IG officials determined that the Operation Safe Pilot investigation identified 70 pilots who were receiving disability benefits. The difference between the Operation Safe Pilot investigation and our data match was the scope of benefits examined. Our examination focused on pilots receiving only disability benefits for February 2008. After reviewing the medical history and completing the examination, aviation medical examiners (AME) must issue a medical certificate, deny the application, or defer the action to the Aerospace Medical Certification Division or the appropriate regional flight surgeon. AMEs may issue a medical certificate only if the applicant meets all medical standards, including those pertaining to medical history unless otherwise authorized by FAA. AMEs may not issue a medical certification if the application fails to meet specified minimum standards or demonstrates any conditions that are considered “disqualifying.” FAA considers the following medical conditions as disqualifying under 14 CFR Part 67. coronary heart disease that has required treatment or, if untreated, that has been symptomatic or clinically significant; diabetes mellitus requiring insulin or other hypoglycemic medication; disturbance of consciousness without satisfactory medical explanation of personality disorder that is severe enough to have repeatedly manifested itself by overt acts; substance abuse and dependence; and transient loss of control of nervous system function(s) without satisfactory medical explanation of cause. In addition to the contact person named above, Catherine Colwell, Assistant Director; Colin Fallon; Elizabeth A. Marchak; Gail Marnik; Tina Paek; Vanessa Taylor; Walter Vance; and Crystal Wesco made key contributions to this report. | The Federal Aviation Administration (FAA) seeks to make the U.S. aviation system one of the safest in the world. However, a 2005 Department of Transportation Inspector General investigation found that FAA had issued medical certificates to a small percentage of pilots with disqualifying medical conditions, such as heart conditions, schizophrenia, and drug or alcohol addiction. In response to your request, our report addresses the following questions: (1) what procedures does FAA use to certify that pilot applicants meet medical standards and (2) how does FAA determine that medical certificates have been properly issued? In addressing these objectives, GAO researched FAA guidance and federal regulations; interviewed federal officials; analyzed FAA's application review procedures, quality assurance program, and its use of the National Driver Register; and conducted a data match between FAA's pilot registry and Social Security Administration's disability programs. The data match does not determine if pilots receiving disability benefits have medical conditions that would disqualify them from holding an FAA medical certificate. GAO is not making recommendations in this report. The Department of Transportation generally agreed with our findings. FAA and the Social Security Administration provided technical clarifications, which we incorporated as appropriate. FAA's pilot medical certification procedures consist of a multi-step process intended to determine whether pilots meet medical standards. As part of its certification procedures, aviation medical examiners (AME) review information provided by pilot applicants and the results of their physical examination before issuing medical certificates. In the majority of cases (about88 percent in 2007), applicants meet medical standards and AMEs issue certificates. FAA uses a computer system to process all the applications. It designates some applications for additional review by FAA application examiners, such as when AMEs do not issue the medical certificate or defer the decision. The computer system also identifies for FAA review the applications in which AMEs issued the medical certificate and the application indicates potentially disqualifying medical conditions. Finally, FAA checks each pilot applicant against the National Driver Register to look for drug- and alcohol-related motor vehicle actions and indications of substance abuse. FAA has developed programs to help it determine whether it has properly issued medical certificates. Specifically, FAA has established two quality assurance review programs--one evaluating certificates that the AMEs issued and the other evaluating certificate decisions made by FAA application examiners. In its 2007 reviews, FAA identified 19 instances in which AMEs issued certificates to pilots who have disqualifying medical conditions as well as 16 cases in which FAA application examiners overlooked relevant medical documents and 44 with clerical errors. According to FAA officials, they plan to continue reviewing AME-issued certificates and collecting the results. These additional data from subsequent years could help FAA identify how well its procedures are ensuring that medical certificates are being properly issued. In addition, FAA relies on the National Driver Register check to help ensure pilots meet medical standards. Finally, due to recently resolved litigation, FAA currently does not check federal disability benefits databases for indications that pilots may have disqualifying medical conditions. Although our analysis of the Social Security Administration's disability databases found that 1,246 of 394,985 medically certified pilots were receiving disability benefits, this does not necessarily mean these pilots do not meet FAA medical standards. It may, however, indicate that federal disability databases can provide useful information on potentially disqualifying medical conditions. |
Natural gas is a colorless, odorless fossil fuel found underground that is generated through the slow decomposition of ancient organic matter. In some cases, the gas, composed mainly of methane, is trapped in pockets of porous rock held in place by impermeable rock. In other cases, natural gas may occur within oil reservoirs or in coal deposits. Natural gas is extracted via wells drilled into the porous rock. The natural gas is then moved through pipelines and processing plants to consumers. Historically, domestic natural gas production has occurred largely in Texas, Oklahoma, and Louisiana. In more recent years, as older fields have been depleted, the Rocky Mountain region, Alaska, and areas beneath the deeper waters of the Gulf of Mexico are becoming increasingly important in supplying natural gas; however, in many cases these supplies are not near pipelines and other infrastructure needed for getting the gas to markets, which increases the costs of gas obtained from the newer fields. residential users living in houses, apartments, and mobile homes; commercial users such as stores, offices, schools, places of worship, and industrial users covering a wide range of facilities for producing, processing, or assembling goods, including manufacturing, agricultural, and mining operations; entities that use natural gas to generate electricity and provide that electricity to others, such as regulated electric utilities and competitive suppliers of electricity; and the transportation sector, including pipeline companies, which use natural gas to operate the pipeline networks, as well as those using natural gas to power cars and buses. Most residential and commercial consumers rely on natural gas utilities to supply their gas. Industrial consumers and electricity generators obtain their gas through a variety of means, including buying it directly from spot markets and natural gas utilities. The demand for natural gas in the United States has generally been seasonal, with peak demand during the winter heating months. From April through October, companies typically purchase natural gas and place it into underground storage facilities located around the country. Later, as the seasonal demand increases, these stored supplies of natural gas are used to augment the supplies provided via pipelines. According to EIA, natural gas demand during winter months is usually 1.5 times greater than monthly natural gas production in other months. Over the past 25 years, the wholesale natural gas supply market has evolved from a highly regulated market to a largely deregulated market, where prices are mainly driven by supply and demand. While the regulated market ensured stable prices, it also caused severe gas supply shortages because, with artificially low prices, producers had no incentive to increase production and consumers had no reason to curtail their demand. Before implementation of the Natural Gas Policy Act of 1978, which began deregulation of wholesale natural gas prices, the federal government controlled the prices that natural gas producers could charge for the gas they sold through interstate commerce. Under this regulatory approach, producers located natural gas reserves, drilled wells, gathered the gas, and sold it at federally controlled prices to interstate pipeline companies. After purchasing the natural gas, pipeline companies generally transported and sold the gas to local distribution or gas utility companies. These companies, under the oversight of state or local regulatory agencies, then sold and delivered the gas to their consumers, such as homeowners. In today’s restructured market, the retail prices that consumers pay are still regulated in many states and reflect the prices paid by their suppliers to acquire the natural gas. However, the federal government does not control the wholesale price of natural gas. Since the removal of federal price controls, the wholesale price of natural gas decreased initially and has become more volatile. Producers still locate and gather natural gas, but they now sell the gas at market-driven prices to a variety of companies, including marketers, broker/trader intermediaries, and a variety of consumers. New market centers have emerged, including a market center referred to as the Henry Hub, located in Henry, Louisiana. Henry Hub prices are reported on a daily basis, and trades made at that market are often used as benchmarks for other natural gas trades. The various players in the market may sell gas back and forth several times before it is actually delivered to the ultimate consumers. In some cases—in spot markets, for example—natural gas is sold for immediate delivery. In other cases, it may be sold for delivery in the future, through a variety of what are called futures markets. In addition, several types of financial derivatives related to natural gas—contracts whose market value is derived from the price of the gas itself—can be bought and sold through numerous sources by entities that are interested in protecting themselves against increases in the price of natural gas. Derivatives include natural gas futures and options, and derivative prices typically move in parallel with the spot market. Derivatives markets include exchanges such as the New York Mercantile Exchange, which is regulated by the CFTC; and the Intercontinental Exchange, which operates as an exempt commercial market without CFTC oversight but over which CFTC has anti- manipulation and anti-fraud authority; and off-exchange and over-the- counter (OTC) markets, which are not subject to general federal regulatory oversight. Since 1999, wholesale prices for natural gas have trended steadily upward due to expanding demand—largely for electricity production—and supply that could not expand as quickly because the industry is already operating at near capacity. This tightness in the demand and supply balance has also made the market susceptible to extreme price changes in times when either demand or supply change unexpectedly. One such period of extreme price changes occurred in late 2005, when two hurricanes hit the Gulf Coast region, disrupting a substantial portion of the domestic supply of natural gas. Prices spiked to high levels and, although they have since dropped, they remain unusually high today. Since 1999, wholesale natural gas prices have risen steadily, as demonstrated by the moving average in figure 1. Previously, in the early and mid-1990s, prices were generally low, usually ranging from $2 to $3 per million BTUs, adjusted for inflation. From January 1999 through July 2005, however, average wholesale prices increased by over 200 percent, rising from about $2 to $6.75 per million BTUs. Most recently, in the last half of 2005, prices rose to over $15 per million BTUs, sevenfold higher than prices seen in the early 1990s. A combination of market forces has caused the upward trend in wholesale natural gas prices since 1999. Demand for natural gas has been growing rapidly since the mid-1980s, with total consumption increasing by about 38 percent from 1986 through 2004. Figure 2 illustrates the extent to which consumption of natural gas has risen in the United States over the past 2 decades and the relative amounts used by each of the five types of consumers: residential, commercial, industrial, electricity generators, and transportation. A significant share of the increased demand in recent years has resulted from increased use of natural gas to generate electricity. Out of concern regarding the supply of natural gas and other factors, construction of power plants using oil or natural gas as a primary fuel was restricted from 1978, when the Powerplant and Industrial Fuel Use Act (Fuel Use Act) took effect, through 1987, when it was repealed. After the Fuel Use Act’s repeal, use of natural gas by the electric generation sector increased by 79 percent from 1987 through 2004. Newer gas-powered plants produce low levels of pollutants, compared with many existing plants. This characteristic, as well as the long period of low prices in the 1990s and other factors, has made natural gas the primary fuel in new power plants. The supply of natural gas, however, has not kept pace with the increased demand. Historically, most of the natural gas used in the United States—85 percent in 2003—has been produced here. However, as older natural gas fields have been depleted, additional drilling for natural gas has been required in order to maintain domestic production. This additional drilling has not necessarily resulted in immediate additional supplies in part because development of new wells and supporting pipeline infrastructure can take time. Overall, from 1994 through 2003, domestic annual production held steady at about 19 trillion cubic feet. In 2003, EIA reported that the domestic natural gas industry had produced nearly all of the natural gas that could be produced on a monthly basis from 1996 through 2001—the most recent data then available. Furthermore, EIA reported that at times there was virtually no spare capacity in some parts of the country and forecasted that these tight supply conditions would continue, despite EIA’s projection for a significant increase in drilling activity. In recent years, imports of natural gas have become increasingly important. Net imports of natural gas have increased steadily, rising by over 250 percent from 1987 through 2004. In 2004, the United States imported about 15 percent of the total natural gas consumed here. Nearly all of the imported gas comes from Canada via pipeline, and those imports constitute virtually all of Canada’s production not used in that country. In addition, a small share—about 3 percent of total U.S. supply—has been shipped on special ocean tankers as liquefied natural gas (LNG) from countries such as Trinidad and Tobago, Nigeria, and others. These imports have increased significantly in recent years; however, it is not clear if we have the capacity to handle further increased shipments, in part because only five facilities in the United States are able to receive and process LNG imports. Moreover, because of limited international supplies and high prices in other markets, it also is not clear how much additional supply is available to the United States. The tight demand and supply balance has made the market for natural gas more susceptible to extreme price changes when demand or supply changed unexpectedly. As we previously reported, prices spikes occur periodically in natural gas markets because neither the demand side nor the supply side can quickly adjust to changes in the marketplace. On the demand side, some customers are able to react to changes in prices. For example, some industrial entities may be able to switch fuels or reduce their production. However, many other customers, such as residential customers, may have few fuel-switching options and little firsthand knowledge of spot natural gas prices—and understand the costs of their natural gas consumption only when they receive their bill. On the supply side, suppliers are slow to respond to price changes. For example, they may be delayed in responding to high prices because, as noted earlier, existing domestic sources of natural gas are already operating at near full capacity—often above 90 percent in the United States in recent years, according to EIA. In these circumstances, because little excess supply is readily available, it must be added, generally by drilling new wells and connecting those wells to existing pipelines, which can take time. For example, receiving regulatory approval can take a year or more, and the time to drill the well and connect it to the pipeline network can take another 6 to 18 months. Because neither the suppliers nor many consumers can react quickly to price changes, even small unexpected increases in demand or disruptions in supplies can cause sudden and significant price increases. Most recently, prices rose sharply following the landfall of two hurricanes in the Gulf region. It appears that the price spike was caused by the unexpected decrease in the supply of natural gas in late 2005 following Hurricanes Katrina and Rita, exacerbated by factors that raised demand. Because of the damage caused to production, processing, importing, and transporting infrastructure in the Gulf region, wholesale prices climbed to a high of $15 per million BTUs by December 2005. Other factors—such as market manipulation—may also have affected wholesale prices. Our ongoing work examining futures trading in natural gas markets will address this issue later this year. The Gulf region produces about 20 percent of the U.S. natural gas supply. The region’s extensive natural gas-related infrastructure includes about 4,000 platforms that extract natural gas from beneath the ocean floor; two of the five terminals that import LNG into the United States; plants that remove impurities from natural gas to prepare it for sale and use; and an extensive network of pipelines, linked by hubs such as the Henry Hub, that transport natural gas to other parts of the United States. The paths of Hurricanes Katrina and Rita, in relation to Gulf region natural gas infrastructure, are shown in figure 3. The hurricanes forced operators to evacuate about 90 percent of the oil and gas platforms in the Gulf for safety reasons, rendering them unable to produce natural gas; shut down one of the two LNG importing terminals for about two weeks; damaged processing plants; and damaged several pipelines and their connecting hubs, delaying transmission of natural gas from supply facilities that were still operational. For example, the Henry Hub, a major gas market center, was closed by flooding for a total of 11 days following Katrina and Rita. As a result of all of these factors, the hurricanes had a significant impact on the supply of natural gas. Figure 4 shows the impact of Hurricanes Katrina and Rita on the production of natural gas from the Gulf region. Hurricane Katrina disrupted about 8 billion cubic feet of natural gas production per day immediately following its landfall—amounting to about 80 percent of daily production from the Gulf and about 16 percent of total daily U.S. production of natural gas. Lost production from Katrina was in the process of being restored when Hurricane Rita struck—again reducing production of natural gas from the Gulf region to levels similar to those immediately following Katrina. As a result of the severity and timing of these two hurricanes, the Gulf region produced less than half its usual amount of natural gas for about 9 weeks after Hurricane Katrina struck. By comparison, nearly all of the lost production that resulted from Hurricane Ivan in 2004 was restored within 9 weeks and amounted to about 20 percent of that caused by Katrina and Rita. By the end of January, only about 80 percent of the natural gas supplies that had been disrupted by Katrina and Rita had been restored, leaving the overall market tighter than it was prior to the hurricanes and leaving the U.S. vulnerable to future unexpected interruptions in supply or increases in demand—either of which could result in higher prices. The high natural gas prices that followed the Katrina and Rita supply disruptions came at a time when demand for natural gas was already high. Higher-than-average late-summer temperatures in August had led to increased demand for natural gas to generate electricity, particularly in the South. As a result of this high level of demand, existing supplies were stretched thin and overall price levels were high. In addition, the hurricanes struck as companies were filling their storage of natural gas in preparation for the winter heating season. Prices for natural gas in both the spot and the futures market spiked dramatically immediately following the supply disruptions caused by the 2005 hurricanes. In September 2005, after the second hurricane, natural gas spot prices increased to over $15 per million BTUs—roughly twice as high as the average price in July 2005 of about $7.60 per million BTUs. Futures prices to deliver gas in October also doubled to $14.20 per million BTUs, reflecting traders’ expectations that high spot prices could continue into the future. Futures prices closely followed spot prices until early November 2005, when spot prices fell to about $9 per million BTUs, but prices for December gas futures remained at about $12 per million BTUs, reflecting the belief by futures market traders that natural gas prices would be high in December. A brief cold spell during the beginning of December increased demand for natural gas for heating purposes, driving prices up. The arrival of warmer than normal temperatures just before the end of the year reduced demand and has contributed to the recent reduction in prices. Figure 5 shows the spikes in natural gas prices during the months of, and following, the 2005 hurricanes. Two other instances of price spikes—caused by unexpected increases in demand—have occurred since 1999. First, coincident with the western electricity crisis, from mid-2000 through early 2001, wholesale prices for natural gas rose substantially and remained relatively high for nearly a year. This period witnessed significant increased demand for natural gas by the electric generation sector in order to meet electricity demand across the West during a year of diminished availability of hydroelectricity, a situation compounded by high demand through the winter and lower- than-normal storage levels. In a second instance, wholesale prices rose sharply in February 2003 during a period of high demand because of unusually cold winter temperatures; however, prices returned to normal relatively quickly. How higher wholesale natural gas prices are affecting consumers depends largely on the degree to which the consumers or their suppliers may have purchased gas on the spot market—which reflects current wholesale prices—or may have taken steps to reduce their exposure to these prices. The effect of higher prices also depends on the consumer’s sensitivity to price changes. Some consumers, such as low-income residents and certain industries, are more sensitive to price changes than others. The impact of recent increases in natural gas wholesale prices on consumers depends on how much of the natural gas they use is purchased in spot markets. Those with the greatest reliance on spot markets are hit the hardest when prices rise or spike. For example, some natural gas utilities that relied on spot markets are spending significantly more on energy this winter, which may translate into higher gas bills for residential and commercial consumers. According to our preliminary work with the state commissions that regulate natural gas utilities, 10 states reported that at least some of the natural gas utilities they regulate were highly exposed to spot market prices. Furthermore, in a few states, some of the largest natural gas utilities projected they would purchase 70 percent or more of their natural gas supplies for this winter from the spot market. Participants in the market, such as industrial consumers who purchase gas directly from the market or natural gas utilities that purchase gas on behalf of their customers, can hedge against high spot market prices for natural gas in three main ways: (1) by purchasing and storing gas for use during times when prices are high; (2) by signing fixed-price contracts for delivery of the gas in the future; and (3) by purchasing financial instruments, such as options or derivatives, that increase in value as natural gas prices rise. Since the winter of 2000-2001, some state public utility commissions (PUCs) have encouraged the natural gas utilities they regulate to hedge some part of their gas purchases in order to help stabilize prices, according to the American Gas Association. According to the state commissions, 27 states reported that the utilities they regulate will acquire at least half of their expected winter natural gas needs at a known price, generally ranging from $7 to $10 per million BTUs. In that regard, last November, Commissioner Donald Mason of Ohio told Congress that customers around Dayton, Ohio, have saved about $3 per million BTUs as a result of hedging, including use of long-term, fixed- price contracts. Gas utilities are also taking other approaches to keep down or stabilize their customers’ costs. For example, in some states, utilities offer “level” payment programs and show customers how to use energy wisely through energy-efficient appliances. In Minnesota, in 2005, all state- jurisdictional gas utilities are required to spend at least 0.5 percent of their gross operating revenues on conservation improvement efforts such as weather audits, weatherization, and rebates for purchases of energy- efficient appliances. While some gas utilities have made efforts to reduce their exposure to spot prices by increasing their use of hedging, as some did after the price spike in 2000-2001, some states and municipalities still discourage the use of hedging, according to the association that represents the public utility commissioners. While hedging allows consumers to obtain greater price stability, it has costs and risks, and utilities may lack incentives to undertake it. Storing gas for later use, for example, entails up-front costs such as the cost of placing it into and keeping it in storage. Market participants face risks if, for example, they purchase gas in advance under a fixed-price long-term contract and prices drop. For that reason, some natural gas utilities may be reluctant to enter into long-term contracts when prices are relatively high, according to a trade association that represents municipal gas utilities. Furthermore, absent specific PUC guidance to hedge purchases, gas utilities may have few incentives to hedge since they are generally able to pass along increased costs associated with purchases of natural gas. Moreover, some state regulators may not allow gas utilities to financially benefit from using hedging but hold them financially responsible if the hedge proves unnecessary. Furthermore, while under some circumstances hedging can reduce or eliminate the impact of a price spike, it may offer little benefit during prolonged periods of price changes. For example, a utility that signed a 5-year commitment to purchase natural gas at a predetermined price may witness no change in the cost of acquiring the natural gas during the period of the contract but would again face market prices (either higher or lower) when it came time to replace this gas supply at the end of the contract. In this sense, hedging may serve to delay until the contract term ends, but not prevent, the effect of higher or lower prices on consumers. Because energy costs account for a relatively large share of overall costs for some consumers or because they are heavily dependent on natural gas, any price increases can present significant difficulties. In particular, low- income residential consumers and some highly energy intensive industries appear likely to encounter the greatest impact. The effect of high natural gas prices has already been especially severe on low-income individuals. According to representatives from a trade association representing publicly owned natural gas utilities, a utility in Philadelphia, Philadelphia Gas Works, has billed $42 million more than they have collected so far this winter, representing an increase of 2 percent in uncollectible heating bills this winter compared with last winter. In Kentucky, utilities this winter have witnessed the highest number of complaints and the greatest number of problems faced by customers. Furthermore, federal assistance to low-income households in meeting heating expenditures provides only limited assistance. According to the National Association of State Energy Officials, the Low Income Home Energy Assistance Program (LIHEAP) currently serves only 20 percent of the eligible population, with average payments of $311 per family designed to help families pay projected natural gas heating expenditures of $1,568 this winter. Additionally, despite several years of increases, LIHEAP funding in fiscal year 2005 is only 67 percent of what it was in fiscal year 1982, adjusted for inflation. However, some states have increased funding for low-income individuals recently. For example, in December, Minnesota began distribution of an additional $13.4 million in funding designed to assist an additional 26,000 households in paying for heating. Electricity generators are also sensitive to higher prices because of their dependence on natural gas. This is true especially in the eastern United States, where, according to FERC, electricity generators rely heavily on natural gas. Furthermore, the region has many of the newer gas-fired electric power plants that have less flexibility to switch to other fuels, such as oil-based fuels, according to the National Petroleum Council and others. As a result, some consumers may see higher electricity bills. High natural gas prices are also adversely affecting industrial consumers. As we reported in 2003, some industrial consumers shut down production facilities because of higher energy costs in 2000 and 2001. Industry representatives expect recent high prices to have a similar effect. A recent survey by a trade association representing large energy consumers showed that more than half of 31 member companies surveyed are decreasing their demand for natural gas an average of 8 percent to 9 percent this winter compared with last winter, leading the association to conclude that higher prices have forced industries to curtail production in the United States. The association expects that further cutbacks will occur if prices remain high this year. According to an association that represents industrial consumers, high natural gas spot prices have been particularly detrimental to specific industries in the United States that rely on natural gas, such as fertilizer and chemical manufacturers, that compete in international markets. As we reported in 2003, natural gas expenses can account for 90 percent of the total cost of manufacturing nitrogen fertilizer. The high cost of domestic natural gas has made it difficult for U.S. producers of nitrogen fertilizer to compete with foreign nitrogen fertilizer producers, who can buy natural gas at lower prices and export their products to the United States. For example, in 2004, Trinidad and Tobago was the largest supplier of anhydrous ammonia, a type of nitrogen fertilizer, to the United States. Prices of natural gas are sharply lower in Trinidad and Tobago, where, according to the Fertilizer Institute, prices were about $1.60 per million BTUs in 2005. The U.S. fertilizer industry, which typically supplied 85 percent of its domestic needs from U.S.-based production during the 1990s, now relies on imports for nearly 45 percent of nitrogen supplies, according to a trade association representing fertilizer companies. Furthermore, other industries can be affected. In the fertilizer industry, according to a trade association representing fertilizer companies, costs are passed on to U.S. farmers, which have witnessed a dramatic increase in the cost of nitrogen fertilizers. The prices paid by farmers for the major fertilizer materials reached a record during the spring of 2005—on average, 8 percent higher compared with the same period in 2004, according to a trade association representing fertilizer companies. In today’s restructured market, the federal government does not control the price of natural gas or directly regulate most wholesale prices. However, three federal agencies—FERC, CFTC, and EIA—play key roles in overseeing and supporting a competitive and informed natural gas marketplace. Under federal law, FERC is responsible for regulating the terms, conditions, and rates for interstate transportation by natural gas pipelines and public gas utilities to ensure that wholesale prices for natural gas, sold and transported in interstate commerce, are “just and reasonable.” FERC’s jurisdiction over retail natural gas sales is limited to domestic gas sold by pipelines, local distribution companies, and their affiliates. The commission does not prescribe prices for these commodity sales. FERC’s regulatory authority applies to the physical markets for energy commodities, such as natural gas, and not to futures markets. In December 2002, we reported that as energy markets were restructured, FERC had not adequately revised its regulatory and oversight approach to respond to the transition to competitive energy markets. FERC agreed that its approach to ensuring just and reasonable prices needed to change: from one of reviewing individual companies’ rate requests and supporting cost data to one of proactively monitoring energy markets to ensure that they are working well to produce competitive prices. That year, the commission established the Office of Market Oversight and Investigations to actively monitor energy markets and, when necessary, undertake investigations into whether any entity had or was attempting to manipulate energy prices. As we previously reported, in 2002, FERC staff undertook several studies and investigations to determine whether there had been attempts to manipulate upward prices for natural gas delivered to California during 2000-2001. FERC’s ability to monitor the natural gas markets has been enhanced in several regards recently. First, the Energy Policy Act of 2005, passed last September, contains several enforcement provisions that increase the commission’s ability to punish wrongdoers that harm the public. In particular, the act provides FERC with the authority to impose greater civil penalties on firms that commit fraud. In addition, FERC has taken steps to strengthen its efforts to protect energy consumers. These actions include establishing a telephone hotline that individuals can call to report market abuse or other problems. FERC also has begun actively monitoring natural gas markets to determine whether price movements are the result of market manipulation or market fundamentals. The staff reviews market activity for any possible manipulation that might also affect prices and performs a detailed review of natural gas prices and market activity on a daily basis with the intent of identifying areas of possible manipulation. If the staff identifies price anomalies that are not explained by market fundamentals, they investigate. Since 2002, FERC has settled a number of investigations involving natural gas market manipulation. For example, 10 companies agreed to pay settlements totaling approximately $84 million. In addition, a FERC administrative law judge found that another company exercised market power over natural gas prices in California during the 2001-2002 heating season, and the company subsequently agreed to pay a settlement of $1.6 billion. FERC officials told us that, since early fall of last year, it has received complaints, expressions of concern, and requests to investigate with respect to high natural gas prices through its enforcement hotline and from public officials and the general public. Additionally, FERC has identified areas of concern through its daily market oversight process. FERC officials told us that all complaints and concerns are taken seriously and actively investigated, where appropriate. However, since ongoing investigations are considered nonpublic under FERC’s regulations, officials said they could not comment further on any ongoing investigations of the natural gas market. A large part of CFTC’s mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, including natural gas. CFTC does this for federally regulated exchanges such as NYMEX, and it has limited authority over certain other futures markets. It does not have general regulatory authority for other over-the-counter markets, including some used for trading natural gas futures or options. In fulfilling its regulatory role, CFTC conducts market surveillance to identify situations that could amount to attempted or actual futures market manipulation and to initiate appropriate preventive actions. For instance, to protect the futures market from excessive speculation that could cause unwarranted price fluctuations, CFTC or an exchange impose limits on the size of the transactions that may be held in futures or options of a commodity. In the natural gas futures market, these transaction limits are placed on trading that occurs during the spot month. To monitor these transaction limits, the commission has about 45 market surveillance staff and economists to do policy and economic analysis of energy trading issues. As part of its regulatory role, CFTC also enforces various laws prohibiting fraud, manipulation, and abusive trading practices. CFTC’s enforcement group investigates and prosecutes alleged violations of the Commodity Exchange Act. From 2002 through May 2005, CFTC investigated over 40 energy companies and individuals, filed over 20 actions, and collected over $300 million in penalties. Most of these actions were related to natural gas. For example, in July 2004, Coral Energy Resources, L.P. (Coral), a Houston-based firm that marketed gas to consumers across the United States, was ordered to pay a civil monetary penalty of $30 million. The penalty was imposed because the CFTC found that Coral knowingly provided false, misleading, or inaccurate information concerning its natural gas transactions from January 2000 to September 2002. During that time, CFTC found that Coral employees also attempted to manipulate the price of natural gas in interstate commerce or for future delivery. Natural gas traders report their market information to firms like Natural Gas Intelligence, who in turn compile pricing and volume indexes, for instance, that are used by market participants to settle their transactions. Submitting incorrect information could affect the price of natural gas in interstate commerce and could affect the futures or options prices of gas. FERC and CFTC have recently signed a memorandum of understanding to create a more effective and efficient working relationship between the two agencies. The agreement covers the sharing of information and the confidential treatment of proprietary energy-trading data. FERC officials told us that if either agency needs information about trading within the other agency’s jurisdiction, then the other agency must provide it. The understanding is to contribute to better coordination of enforcement cases. The Energy Information Administration (EIA) is charged with collecting information about energy markets, including natural gas. The information reported by this agency is important in promoting efficient natural gas markets and public awareness of these markets. In our 2002 analysis of natural gas markets, we identified that most elements of EIA’s natural gas data collection program inadequately reflected some of the changes in the market. For example, with some exceptions, EIA’s current natural gas data collection program remains primarily an annual effort to obtain comprehensive information on natural gas volumes and prices, while markets have evolved to require more timely and detailed data. However, beginning in the spring of 2002, EIA began to provide more real time market information that traders and other gas industry analysts use as an indicator of both supply and demand. For example, on May 9, 2002, EIA began releasing weekly estimates of natural gas in underground storage for the United States and three regions of the United States. According to EIA, these data are valued by market participants and are a key predictor of future natural gas price movements. EIA has also undertaken efforts to better understand derivatives markets and the effectiveness of energy derivatives to manage price risk. In addition, EIA’s weekly natural gas data releases are published each Thursday, and according to EIA officials, these releases have been well received by natural gas market participants. Natural gas has become an essential element in our national energy picture. Ironically, however, natural gas markets may be suffering from the growing popularity of this versatile fuel. Rising demand and tightening supply appear to have contributed to both the general rise in prices over the past several years as well as the price spikes, such as that following the hurricanes in 2005. Moreover, the stage seems set for future price spikes if either demand is higher than expected or supplies are unexpectedly interrupted. To the extent that the higher prices persist and price spikes are possible, natural gas markets could pose significant challenges for our country. Many people may have to pay a larger percentage of their income for home heating and other uses of natural gas, such as electricity—not just this year, but every year. Some may not be able to afford it. Further, because some key industries have historically relied on low natural gas prices to be competitive, we may lose some of these industries along with the jobs that they provide. These are weighty issues that require concerted actions reaching across not just the natural gas industry but also across the energy sector and related financial markets. The American consumer wants secure, affordable, reliable, and environmentally sound energy. Meeting this demand will be a challenge. This hearing offers another important step in the process of overseeing the regulators—FERC and CFTC—charged with ensuring these markets operate as intended. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have at this time. If you have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Other major contributors to this testimony include Karla Springer (Assistant Director), Lee Carroll, Michael Derr, Patrick Dynes, Elizabeth Erdmann, Philip Farah, John Forrester, Mark Gaffigan, Mike Hix, Chester Joy, Jon Ludwigson, Kristen Sullivan Massey, Cynthia Norris, Frank Rusco, Jena Sinkfield, Rebecca Spithill, John Wanska, and Kim Wheeler-Raheb. Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions. GAO-05-414T. Washington, D.C.: March 16, 2005. Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural Gas Availability and Prices. GAO-03-1148. Washington, D.C.: September 30, 2003. Energy Markets: Additional Actions Would Help Ensure That FERC’s Oversight and Enforcement Capability Is Comprehensive and Systematic. GAO-03-845. Washington, D.C.: August 15, 2003. Natural Gas: Analysis of Changes in Market Price. GAO-03-46. Washington, D.C.: December 18, 2002. Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14, 2002. 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 early December 2005, wholesale natural gas prices topped $15 per million BTUs, more than double the prices seen last summer and seven times the prices common during the 1990s. For the 2005-2006 heating season, the U.S. Energy Information Administration predicts that residences heating with gas will pay 35 percent more, on average, than they paid last winter. This testimony addresses the following: (1) the factors causing natural gas price increases, (2) how consumers are affected by these higher prices, and (3) the roles federal government agencies play in ensuring that natural gas prices are determined in a competitive and informed marketplace. This testimony is based on GAO's 2002 published work in this area, updated through interviews, examination of data, and review of relevant publications. GAO's new work was conducted from December 2005 through February 2006 in accordance with generally accepted government auditing standards. Since 1999, wholesale prices for natural gas have trended upward because of expanding demand and supply that has not kept pace. The domestic natural gas industry has been producing at near capacity, and the nation's ability to increase imports has been limited. Tight supplies have also made the market susceptible to extreme price spikes when either demand or supply change unexpectedly. Prices spiked in August 2005 when hurricanes hit the Gulf Coast, disrupting a substantial portion of supply and again later when demand was pushed higher because of, among other reasons, colder-than-expected temperatures in early December. Although prices have dropped, they remain higher than last year. Other factors--such as market manipulation--may also have affected wholesale prices. We are currently examining futures trading in natural gas markets for signs of manipulation and expect to report on our results later this year. While most consumers' gas bills are rising, the degree of the increase depends, in part, on how much of their supply is purchased from wholesale spot markets. Consumers who directly, or indirectly, buy their natural gas mainly from spot markets will see prices that reflect both recent price spikes and the longer-term trend toward higher prices. Our work shows that some of the largest natural gas utilities in a few states expect to buy at least 70 percent of their gas at spot market prices this winter. These companies generally pass these prices on to their customers. On the other hand, consumers and suppliers that have reduced exposure to spot market prices because some of their gas has been purchased through a process called hedging may be insulated from price spikes and may postpone their exposure to even gradual price hikes. In this regard, utilities in more than half the states have hedged at least 50 percent of their supply for this winter by entering into long-term fixed-price contracts and other techniques. This will help stabilize prices for their customers. Nonetheless, high gas prices will hit some consumers hard, including lower-income households and companies that depend heavily upon natural gas, such as fertilizer manufacturers. The Federal Energy Regulatory Commission (FERC) and the Commodities Futures Trading Commission (CFTC) play key roles in ensuring that natural gas prices are determined in a competitive and informed marketplace. Both agencies monitor natural gas markets and investigate instances of possible market manipulation. Since 2002, FERC has settled a number of investigations involving natural gas market manipulation; for example, one company agreed to pay a settlement of $1.6 billion after FERC found it had exercised market power over natural gas prices in California during the 2001-2002 heating season. From 2002 through May 2005, CFTC investigated over 40 energy companies and individuals, filed over 20 actions, and collected over $300 million in penalties, most of which were natural gas related. |
The LIHTC program replaced older tax incentives, such as accelerated depreciation—that allowed taxpayers to deduct the costs of assets faster than their value actually declined—with a federal-state program in which HFAs receive LIHTC allocations of credits and award the credits to specific projects that meet requirements of Section 42 of the Internal Revenue Code (code). Prior to the establishment of LIHTC, federal housing assistance generally involved subsides or grants administered by HUD to construct new affordable housing and to make rents affordable in existing rental housing. An LIHTC project owner can develop new housing or acquire and rehabilitate existing housing. The projects can be apartments, single- family housing, single-room occupancy, or permanent and transitional housing for the homeless. The project may include units for low-income households and market-rate units. The amount of credit received is based on the number of low-income units. The project owners—the taxpayers receiving LIHTCs—agree to set aside a certain percentage of the units with rents that are affordable to qualifying low-income households for at least 30 years. A project must reserve at least 20 percent of the available units for households earning up to 50 percent of the area’s median gross income (adjusted for family size), or at least 40 percent of the units for households earning up to 60 percent of the area’s median gross income (adjusted for family size). HUD and Treasury officials noted that in practice, LIHTC projects usually exceed these minimum affordability requirements by setting aside nearly all of their units for low-income households. In return, taxpayers can earn a tax credit over a 15-year period (the compliance period) if they meet the affordability requirements, but can claim the credit over an accelerated time frame (the 10-year credit period), beginning in the year in which the property is placed in service (ready for occupancy) or, if the taxpayer chooses, the succeeding taxable year. IRS can recapture (take back) some or all of the credits received by taxpayers if the taxpayers have not met the requirements during the compliance period. In addition, properties awarded credits after 1989 must comply with the affordability requirements for at least another 15 years (the extended use period) but are no longer subject to recapture after the compliance period. HFAs may impose longer affordability restrictions on properties than the minimum 30-year period. The three time periods begin on the same day—the first day of the tax year in which the building is placed in service, or if taxpayers elect, the beginning of the following tax year. The allowable credit may be reduced (in part or in whole) for the tax year if taxpayers were not compliant with the code requirements. Taxpayers also may be subject to the recapture of credits claimed in prior years. LIHTC is administered by IRS and state HFAs. To promote compliance with LIHTC program requirements, IRS is the federal entity responsible for (1) enforcing taxpayer compliance and (2) overseeing HFAs’ implementation of the program. All 50 states, the District of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands have HFAs that receive LIHTC allocations. HUD’s role includes mandatory and voluntary data collection on the LIHTC program. More specifically, the agency has collected information on tenant characteristics, as mandated by the Housing and Economic Recovery Act of 2008. In addition, since 1996, HUD has voluntarily collected LIHTC project-level data because of the importance of these credits as a source of funding for low-income housing. HUD also has a role in designating difficult development areas and qualified census tracts. Figure 1 provides an overview of the LIHTC process and participants. HFAs competitively award credits. HFAs competitively award tax credits to developers or owners of qualified projects that reserve all or a portion of their units for low-income tenants. HFAs award the credits in accordance with qualified allocation plans (QAP) that outline states’ affordable housing priorities and ranking and selection procedures for projects. Developers apply to HFAs for tax credits. To apply for tax credits, a developer must submit a detailed proposal to an HFA. To qualify for consideration, a project must meet certain requirements, such as reserving specified percentages of available units for lower-income households and restricting rents for these households to 30 percent of a calculated income limit. Investors provide equity and receive tax benefits. Developers typically attempt to obtain funding for their projects by attracting third-party investors willing to contribute equity financing (up-front cash) to projects. The developer sells an ownership interest in the project to one or more investors, or in some instances, to a syndicator acting as a broker between the developer and investor(s). Tax credit investors can be individuals, but the vast majority of investments have come from corporations, either investing directly or through private partnerships. Although investors buy an interest in an LIHTC partnership, this process is commonly referred to as buying tax credits because the investors receive tax credits in return for their investment (providing that the building is developed and operated according to code requirements). Syndicators pool projects, recruit investors, and provide services. Syndicators, when involved, are intermediaries that often administer tax credit deals and charge a fee for overseeing the investment transaction. Syndicators pool several projects into one tax-credit equity fund and recruit investors willing to become partners in LIHTC partnerships. The investor, as a limited partner, has a large ownership percentage in the property but otherwise is not directly involved in project development. Syndicators provide legal and accounting services required to pool the tax credits, monitor projects for the investors, and sometimes fund reserves for legal and administrative costs. IRS administers the LIHTC program primarily within one division, with assistance from other offices and units (see fig. 2). The Small Business/Self-Employed Division (SB/SE) primarily administers the LIHTC program. One full-time program analyst develops internal protocols, provides technical assistance to HFAs, and provides community outreach to industry groups and taxpayers (developers/owners and investors). In related activities, one staff member in the Low-Income Housing Credit compliance unit (compliance unit) assists in determining if tax returns may warrant an audit. An additional 5.6 full-time equivalents, also from the compliance unit, assist in reconciling LIHTC forms from HFAs and taxpayers to identify potential inconsistencies and populate IRS’s Low-Income Housing Credit database. The database has been used to record information from certain IRS forms submitted by HFAs and taxpayers. The Office of Chief Counsel, within the Commissioner’s office, provides technical assistance for the LIHTC program and determines the amount of credit available for the national pool—the amount of unused housing credit carryovers allocated to qualified states for a calendar year from a pool of unused credit. According to IRS officials, six attorneys work part-time on the LIHTC program. IRS administers the LIHTC program by developing regulations and guidance and is responsible for overseeing HFAs and taxpayer compliance. HFAs award tax credits to qualified projects, determine the credit amounts needed for financial feasibility of the projects, and monitor project compliance. The design of the LIHTC program can result in other entities—private and public—providing additional types of monitoring of LIHTC projects; examples include investors and syndicators performing due diligence in relation to a project’s viability and eligibility for tax credits. IRS administration of the LIHTC program involves developing and publishing regulations and guidance as well as overseeing compliance on the part of HFAs and taxpayers. The IRS Office of Chief Counsel, with assistance from Treasury’s Office of Tax Policy, develops and publishes regulations and guidance based on requirements in the code. Published guidance may include revenue rulings and procedures, notices, and announcements. Other guidance for the program includes an Audit Technique Guide for Completing Form 8823—the report on noncompliance or building disposition, on which HFAs record findings after inspecting projects—and an Audit Technique Guide for Low-Income Housing Credit. The guide for completing form 8823 includes specific instructions for HFAs on when desk audits, site visits, and file reviews are to be performed; how to complete the form; and guidelines for determining noncompliance in areas such as health and safety standards, rent ceilings, income limits, and tenant qualifications. The purpose of the guide is to provide standardized operational definitions of noncompliance categories. The Low-Income Housing Credit guide is a manual developed to assist IRS examiners who conduct audits of taxpayers receiving LIHTCs. The guide discusses topics ranging from examination techniques to specific issues pertinent to the LIHTC program. IRS oversight covers allocation of LIHTCs by HFAs and taxpayer compliance (see fig. 3). One full-time analyst monitors the program with assistance from the compliance unit. The compliance unit staff review information on three IRS forms that are the basis of LIHTC program reporting for HFAs and taxpayers. IRS is responsible for reviewing the forms and using them to determine whether program requirements have been met. Specifically, IRS compliance unit staff and the program analyst review the following: Compliance unit staff review information on credit allocation and certification (form 8609). The two-part form is completed by the HFA and the taxpayer. HFAs report the allocated amount of tax credits available over a 10-year period for each building in a project. The taxpayer reports the date on which the building was placed in service. IRS staff use a checklist to record information that might warrant additional review by the program analyst, such as discrepancies in the number of tax credits the HFA and the taxpayer reported. They also enter the information from this form in IRS’s Low-Income Housing Credit database. The compliance unit uses a checklist to review noncompliance or building disposition (form 8823). HFAs must complete the form after conducting an on-site physical inspection of an LIHTC project if any noncompliance is found. All projects must be inspected by HFAs at least every 3 years (including at least 20 percent of low-income units). The form records any findings (and corrections of previous findings) based on the inspection of units and review of the low-income certifications. According to IRS’s guide for completing form 8823, when findings are identified by HFAs and reported to IRS, the compliance unit must notify the owner of the noncompliance issues. In addition, the compliance unit determines if the identified noncompliance may warrant consideration of a taxpayer audit by IRS. If so, the compliance unit will forward an audit consideration package for the program analyst’s review. The program analyst then determines the audit potential of the taxpayer. If an audit were needed, the program analyst would forward the audit package to the relevant IRS audit examination division—such as SB/SE—and monitor the status of the audit. The compliance unit staff review the allocations each HFA reports as having been made on the HFA annual report (form 8610) to ensure allocations do not exceed a statutorily prescribed ceiling for that year. IRS officials stated that the Office of Chief Counsel reviews all the 8610s and reports the state housing credit ceiling in published guidance for the upcoming year. HFAs also use the form to report whether they have met certain program requirements, such as confirming that their QAPs contain monitoring procedures and affirming the completion of LIHTC project monitoring. HFAs generally complete the form by the end of February of each year. The program analyst then reviews the information and follows up with HFAs as necessary. IRS relies on HFAs to administer and oversee the LIHTC program in their states. In addition to awarding tax credits to qualified projects, HFAs are responsible for: determining the amount of credit needed for the financial feasibility of each project and its viability as a qualified low-income housing project through the 10-year credit period. HFAs make determinations (1) when the application is received, (2) when the allocation of the credit is completed, and (3) when the building is placed in service and the taxpayer submits a final cost certification. monitoring LIHTC properties for compliance with program requirements (for example, health and safety standards, rent ceilings, income limits, and tenant qualifications). Findings from HFA monitoring are provided to IRS on noncompliance or building disposition (form 8823). Taxpayer noncompliance with LIHTC requirements may result in IRS denying claims for the credit in the current year or recapturing—taking back—credits claimed in prior years. Once IRS monitoring of LIHTC projects ends after year 15, HFAs have sole authority to monitor compliance for at least another 15 years, and the taxpayer must ensure that the project continues to meet program requirements, as defined in the project’s extended use agreement with the HFA. If a project were found to be noncompliant, the HFA could take action, such as litigation under state law. The design of the LIHTC program (for instance, the roles of investors and syndicators) can result in other entities—private and public—providing additional types of monitoring of LIHTC projects. Investors and syndicators not only provide financing for LIHTC projects, but also provide project oversight to help ensure that they receive the expected tax credits over the designated period. For instance, an LIHTC investor needs to make sure the property is suitable for occupancy and rented to qualified low-income families at restricted rents during the initial 15-year period. To mitigate risk before investing, the investor and syndicators will underwrite and screen properties for quality and sustainability. For example, the investor may ensure the development team has adequate resources to build and operate the property and that mechanisms are in place to avoid foreclosure. Additionally, because of the amount of capital that can be involved in projects, investors may require additional testing and auditing beyond what is required by the program. Investors and syndicators also may maintain a list of properties to more closely monitor based on identified performance measures. However, findings from investors and syndicators typically are not shared with the public or federal agencies, according to Treasury officials. LIHTC projects also can receive funds from other federal programs and be subject to monitoring requirements of those programs—for example, HUD’s HOME and project-based Section 8 rental assistance programs. According to a 2012 industry survey of HFAs with LIHTC projects that received other federal funds, an average of about 20 percent of the units received HOME funds and an average of about 18 percent received project-based Section 8 rental assistance. The monitoring conducted for the other programs provides additional information that could be useful for IRS in monitoring LIHTC projects. However, IRS officials stated they do not review findings on HFAs that other programs identified but rather focus on ensuring completion and submission of IRS tax forms. Examples of monitoring requirements from these programs include the following: For HOME, HUD requires that participating jurisdictions conduct on- site physical inspections of projects every 1, 2, or 3 years, depending on the size of the project. These site visits also require reviews of program and project files. HUD approves the use of grant funds by reviewing a state or locality’s consolidated plan, which identifies needs, sets priorities, determines resources, and sets goals. For project-based Section 8 rental assistance, performance-based contract administrators (entities such as HFAs and public housing authorities) assist HUD in overseeing individual Section 8 properties and ensure that properties are in compliance with HUD policies. The contract administrators must perform annual management and occupancy reviews for all their assigned properties and conduct monthly reviews of all payment vouchers submitted by property owners. For example, the contract administrators conduct on-site reviews of property owners’ tenant information files and ensure property owners provide complete and accurate tenant data to HUD. HUD’s oversight of the contract administrators can include reviews of status reports of performance-based administrators and annual compliance reviews, which determine the compensation of the contract administrator. In addition to specific program requirements, HUD program participants must comply with several federal civil rights requirements, including the Fair Housing Act and Americans with Disabilities Act. Such requirements prohibit discrimination in the administration of housing subsidies and require buildings to be designed and constructed in an accessible manner, located in appropriate sites and neighborhoods, and marketed equally to all potential tenants. For certain requirements, officials told us that HUD routinely monitors program participants. For others, HUD uses an administrative complaint procedure to identify candidates for reviews. HUD’s monitoring consists of a combination of file reviews and site visits. HFAs also have used funding from the Tax Credit Assistance Program (TCAP), administered by HUD, and the Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits (Section 1602) program, administered by Treasury. The LIHTC program was severely disrupted in 2008–2009 (in the midst of the financial crisis), when the demand for the credits and the price investors were willing to pay for them declined. TCAP and Section 1602 provided gap financing to fill the equity gap that resulted from lower LIHTC prices, allowing stalled “shovel-ready” projects to proceed. The two programs no longer actively fund new projects, but as of May 2015, compliance monitoring of funded projects remained ongoing. The TCAP and 1602 programs require more compliance monitoring than traditional LIHTC projects; for example, of asset-management functions the HFAs perform. HUD and Treasury also have used a risk-based approach to monitor TCAP and 1602 projects. For example, HUD determined that TCAP projects that had less than $10,000 in LIHTC investment and no other federal funding sources might be at higher risk of noncompliance. HUD officials explained these TCAP projects were considered higher-risk due to the potential of less oversight from other private and public entities. Treasury reviewed HFAs for compliance in the first year of the Section 1602 program. Then Treasury used a risk-based approach to identify HFAs for subsequent reviews (they would merit additional monitoring if noncompliance issues were identified in the first review). Thereafter, on an annual basis during the compliance period, HFAs have to certify to Treasury that they performed all required compliance monitoring activities and report to Treasury the results of these activities for each project. Finally, unlike LIHTC, some of these grant programs—HOME, project- based Section 8 rental assistance, and TCAP—are considered federal financial assistance by the Single Audit Act, and thus are subject to an annual single audit by a third party. Annual external audits must include a review of financial statements and internal controls and adherence to program compliance requirements. IRS performed minimal oversight of HFAs, particularly in relation to reviewing QAPs and assessing HFA compliance. IRS conducted some audits of taxpayers claiming the tax credits, but does not have detailed information on the results of these audits. Moreover, IRS has not set goals or assessed performance for the program. Finally, data in IRS’s Low-Income Housing Credit database were not complete and reliable for assessing compliance. IRS oversight of HFAs has been minimal, particularly in terms of reviewing QAPs and conducting on-site or desk audits of HFAs. Federal internal control standards state that internal control helps program managers achieve desired results. Monitoring, one of the internal control standards, should occur in the course of normal operations, be performed continually, and be ingrained in the agency’s operations. IRS officials stated they did not regularly review QAPs as part of their compliance monitoring of the HFA annual report (form 8610). IRS’s review of HFAs included a review of responses on the annual report related to compliance monitoring procedures in the QAP and frequency of monitoring conducted by the HFA. However, in addition to these requirements, the code includes requirements for selecting projects and ensuring a QAP is approved by the state governing agency. Yet, IRS has not conducted regular reviews of QAPs to determine how HFAs interpreted the code to select projects, if the QAPs included the required compliance monitoring, or if the QAPs had been approved. As a result of minimal monitoring, IRS does not know the extent of compliance monitoring by HFAs, which limits its ability to determine if the HFAs appropriately awarded credits to projects. Moreover, IRS and Treasury were unclear about how to handle instances in which a QAP did not meet requirements in the code. Some Treasury and IRS officials stated that Treasury would have to invalidate all credits allocated to an HFA if the QAP did not meet requirements, which could affect awarded projects across multiple years. In contrast, IRS has reported in audit-related documents that an HFA’s authority to allocate tax credits should be revoked only when IRS determined that the HFA’s noncompliance was widespread and willful. The documents suggest that such revocation most likely would be applied prospectively to limit the tax consequences for taxpayers. IRS has performed few on-site or desk audits of the 56 HFAs—it audited a total of 7 HFAs—from the program’s inception in 1986 through May 2015. According to an IRS summary report of all HFA audits conducted from 2003 to 2014, the agency generally selected which HFAs to audit based on press accounts and HFA self-reporting about lack of adherence with compliance requirements. IRS officials also stated that HFAs increasingly have missed the February 28 deadline to submit the annual report (form 8610) and often submit incomplete or inaccurate forms. The summary report recognized that conducting ongoing audits is a necessary component of LIHTC program administration. The report also notes continued audit presence would reinforce the importance of HFA compliance with requirements in the code and provide an opportunity for IRS to address deliberate noncompliance by HFAs. The scope and methods of the reviews varied based on the types of noncompliance the IRS program analyst identified. For instance, on one audit the program analyst selected a sample of files on which to conduct an in-depth review of HFA compliance activities. In another, the program analyst enlisted the assistance of a field agent to review the HFA’s internal controls for record keeping and credit allocation, among other areas. The other audits were desk audits. Examples of the audit findings include the following: Written HFA policies conflicted with the requirements in the code or Treasury regulations. The QAP did not address all compliance requirements in the regulations or was outdated. Annual report to IRS had errors, such as incorrect credit allocations and overstated numbers of inspections and reviews. The HFA failed to submit form 8823 as required to report LIHTC noncompliance. Physical inspections and tenant file reviews were not completed as required and notifications to owners were not conducted as required. All but one audit was closed at the time of our review. IRS cited multiple reasons for not conducting regular reviews of QAPs and audits of HFAs. First, IRS officials stated that they did not regard a regular review of QAPs as a part of their compliance responsibilities. Second, IRS officials stated that because of other priorities the agency does not have a sufficient number of LIHTC staff or other assigned resources to conduct more audits of HFAs. IRS has statutory authority to collect up to a $100 annual penalty from each HFA failing to file a timely, accurate annual report. However, IRS officials said the agency concluded that penalty collection would not be cost-effective because more resources would be needed to collect the penalty than would be gained through collection and that increasing the penalty amount would require statutory change. Third, IRS officials stated that they had considered involving IRS field office staff to conduct more HFA audits over the years, but due to competing demands at IRS, this did not occur. The lack of QAP reviews and audits of HFAs means that IRS is unable to determine the extent to which HFAs meet requirements for awarding tax credits and monitoring project compliance. IRS has conducted some audits of taxpayers claiming LIHTCs, but does not have detailed information on these audits. In a 1997 report, we found that IRS did not have an estimate of taxpayer compliance for the LIHTC program and recommended that IRS explore alternative ways to evaluate compliance with the requirements of the code by taxpayers. In 2000, IRS had completed a review of a sample of 402 audits of LIHTC taxpayers performed from 1995 through 1999 (an average of about 100 audits annually to determine a compliance level by taxpayers claiming the credit and types of noncompliance). According to IRS, the review did not find evidence of widespread noncompliance with the code. Officials also stated the agency had not updated this review since 2000—15 years ago—because IRS had been proceeding with the understanding that nothing had changed with the compliance level. According to IRS, the agency completed 555 additional audits (an average of about 40 audits annually) of taxpayers claiming LIHTCs from 2001 through 2013. About 29 percent of these audits resulted in no change to the amount of credit claimed by the taxpayer or recapture of the credit. For the remaining audits, the taxpayer agreed to make changes to the credit claimed (about 24 percent); IRS no longer pursued the case (about 23 percent)—for example, because the statute of limitation was within 1 year of expiring; IRS continued to audit the taxpayer (about 10 percent); or IRS closed the case because the taxpayer disagreed with the audit results and requested adjudication (about 10 percent). According to IRS officials, competing audit priorities have limited the number of LIHTC taxpayer audits conducted. Detailed information on the results of the audits of taxpayers claiming LIHTCs have not been shared with LIHTC staff. More specifically, IRS examiners have not provided information on types and trends in noncompliance or the amount of credit changed or recaptured. In June 2002, we concluded that tracking audit findings and identifying commonly occurring issues could be valuable in helping management evaluate agency oversight, monitor activities, and identify problem areas. Moreover, we have consistently stressed the importance of IRS conducting tax compliance research to understand the extent and causes of taxpayer noncompliance and use the results to review audit examination programs. LIHTC staff stated they have not maintained a database on outcomes of audits (such as types of and trends in noncompliance), the recapture of tax credits or adjustments of credit for compliance monitoring purposes, or coordinated within IRS to monitor recapture of the program credit. As a result, information on commonly occurring issues and reasons for taxpayer noncompliance related to the LIHTC program is not available to inform the program analyst responsible for overseeing the program. Although IRS is the only federal agency responsible for overseeing LIHTC program compliance, it does not set goals or assess performance for the program. Federal internal control standards state activities need to be established to monitor performance measures and indicators, which includes comparing data so that analyses can be conducted, as appropriate. We previously reported that data availability was a challenge in assessing tax expenditure performance. IRS collects limited data that it needs to administer and enforce the code. It does not use the information it collects to assess the housing production program, such as the number and location of LIHTC projects. (We discuss IRS’s Low-Income Housing Credit database in more detail later in this report.) HUD’s role in the LIHTC program is generally limited to the collection of information on tenant characteristics (mandated by the Housing and Economic Recovery Act of 2008). However, it has voluntarily collected project-level information on the program since 1996 because of the importance of LIHTC as a source of funding for affordable housing. HUD also has sponsored studies of the LIHTC program that use these data. HUD’s LIHTC databases, the largest federal source of information on the LIHTC program, aggregate project-level data voluntarily submitted by HFAs and the tenant characteristic information HUD must collect. In our December 2012 report on the LIHTC program, we found that HUD’s LIHTC databases were incomplete and missing data on many projects. We recommended HUD evaluate and implement additional steps to improve the database, which could improve the federal government’s ability to evaluate basic LIHTC program outcomes. HUD agreed and has since implemented our recommendation by taking steps to identify potential gaps in its database. For example, in December 2014, HUD published a report analyzing data it must collect on tenants residing in LIHTC properties. As part of this report, HUD compared property information in its tenant database to the information in its property database to help assess the completeness of both databases. Furthermore, HUD has been limited in its ability to report complete information on how the LIHTC program contributed toward meeting agency priority goals and broader, federal housing goals. The Office of Management and Budget’s 2014 guidance on content for strategic plans, annual performance plans, and annual performance reports directs agencies to include tax expenditures in their identification of organizations and programs that contribute to agency priority goals (areas of special focus as determined by the agency administration). HUD has strategic goals to meet the need for quality affordable rental homes and build strong resilient and inclusive communities. HUD also has a priority goal to preserve and expand affordable rental housing. HUD’s fiscal year 2013 annual performance report and 2015 annual performance plan included a performance measure that accounted for LIHTC projects with HUD- insured mortgages in its agency priority goal. Overall, HUD’s goals call for continuing to assist about 5.5 million households living in subsidized housing and serving approximately 62,000 additional households through affordable rental housing programs. However, officials said data used to support these goals do not include all LIHTC units, but only those units that have HUD mortgage insurance. HUD has a separate process for collecting LIHTC information for HUD-insured properties and does not rely on any of the existing databases on LIHTC. In our May 2011 glossary on performance measurement and evaluation, we stated that performance measurement can serve as an early warning system to program management because of its ongoing nature and as a vehicle for improving performance and accountability to the public. Information about the extent to which an intended purpose has been met also can contribute towards broader evaluations of how well a program has been working and actions that could be taken to improve results. Basic information on results, such as the number and location of LIHTC projects, is limited. Without goals and performance measures, decision makers do not have sufficient information to assess the results or the effectiveness of the program as a tool to maintain affordable housing. IRS had not comprehensively captured information reported for the program in its Low-Income Housing Credit database and the existing data were not complete and reliable. IRS guidance requires the collection of data on the LIHTC program in an IRS database. The IRS database records information submitted by HFAs and taxpayers on three forms— credit allocation and certification (form 8609), HFA report of noncompliance or building disposition (form 8823), and HFA annual reports (form 8610)—and IRS mainly uses the data to reconcile program information submitted and identify taxpayers for audit. Based on our analysis of the information in the database, the data on credit allocation and certification information were not sufficiently reliable to determine if basic requirements for the LIHTC program were being achieved. Federal internal control standards state that effective information technology management is critical to achieving useful, reliable, and continuous recording and communication of information. However, our electronic testing of IRS data found instances in which allocation dates and placed-in-service dates were incorrectly entered in the database, which highlighted problems with how the data elements were entered into the database from paper forms. Automatic edit checks to ensure that the date fields entered are reasonable were not fully implemented, although IRS’s database user guide describes the use of such checks. Officials stated they did not become aware that the edit checks were not working until our assessment of the data. The programming of the edit checks contained errors, which prevented them from working correctly. IRS officials agreed that these problems should be corrected and data quality reviews conducted on an ongoing basis. Because IRS has not regularly assessed the credit allocation and certification information (form 8609) for errors and conducted management review of the data, we could not determine how often LIHTC projects were placed in service within required time frames. Without improvements to the data quality of credit allocation and certification information, it is difficult to determine if credit allocation and placed-in- service requirements have been met by HFAs and taxpayers, respectively. Moreover, we found IRS guidance requires information from the HFA report of noncompliance or building disposition (form 8823) and the HFA annual reports (form 8610) to be captured in the Low-Income Housing Credit database. However, based on our review of the database, the information was partially captured for the noncompliance form and not captured for the HFA annual reports. More specifically, we could not determine the types or frequency of project noncompliance from data available on the HFA reports on noncompliance or building disposition (form 8823). According to IRS, the agency has received approximately 168,000 noncompliance or building disposition forms since 2009 but the database included about 3,100 records (about 2 percent of records received). Officials told us the decision was made in 2008–2009 to input information only from forms that indicated a change in building disposition, such as the foreclosure of a project. IRS focused on forms indicating a change because of the serious nature of these occurrences for the program, the impacts on taxpayers’ ability to receive credit, and greater prevalence of these occurrences as a result of the economic downturn. Additionally, when IRS upgraded its database in 2008 a large backlog of un-entered information existed (the database was offline from 2005 to 2008); however, officials realized their operations were not affected by the lack of information. Officials further explained it was not cost-effective to input information received from all forms 8823 into the database because the need for trend analysis on all types of noncompliance was not useful for purposes of ensuring compliance with the tax code. However, officials stated they have not performed any cost estimates to determine the cost of inputting such information. The database does not contain information from HFA annual reports (form 8610). IRS officials stated there were plans to include this information in the database from 2009 to the present, but due to competing priorities for limited resources, it has not yet been added. Statutory restrictions in the Internal Revenue Code prevent the disclosure of taxpayer information to other federal agencies, such as HUD, that may make more use of the data. For LIHTC, taxpayer protections restricting disclosure of taxpayer information generally prohibit IRS from sharing data it collects on the LIHTC program with HUD. HUD officials said they experienced difficulties obtaining data from IRS to help ensure the completeness of their data because of issues related to protections for taxpayer information. The code does not specifically give IRS the authority to provide information to HUD so that HUD can assess the completeness of the data it receives from HFAs on tenant characteristics or other data elements in HUD’s LIHTC database for the program. Nevertheless, Congress has granted some statutory exceptions to the provisions relating to confidentiality while balancing the expectation of taxpayer privacy with the policy goals of efficient use of federal resources, public health and welfare, and law enforcement. IRS staff suggested internally that Congress create such an exception for the LIHTC program, authorizing IRS to provide HUD with protected information on LIHTC buildings and enabling HUD to assess the completeness of the LIHTC tenant information it collects. In that case, HUD could then review its databases, compare the information against the IRS data, determine what information it was missing on tenant characteristics, and follow up with the HFA as necessary. According to officials, neither IRS management nor Treasury (which must present all administration proposed tax legislation) has yet received this internal proposal. LIHTC administration differs from some other tax credit programs that are jointly administered by IRS with another federal agency. The other federal agencies conduct monitoring, report on performance, collect data, and have missions consistent with the purposes of the programs. HUD’s experience in affordable housing and working with HFAs may benefit the LIHTC program. More specifically, HUD’s rental housing programs rely on state and local housing agencies (including HFAs) to implement programs. A greater involvement of HUD in the LIHTC program may help alleviate the oversight challenges cited in this report. But joint federal administration may require additional resources for HUD. In some cases, IRS jointly administers tax credit programs with other federal agencies that provide key oversight and administrative support, such as monitoring, performance measurement, and data collection. Specifically, we identified two programs—the Historic Rehabilitation Tax Credit and the New Markets Tax Credit—in which federal administration of the programs is shared between IRS and another agency (see table 1 for overview). We discuss the Historic Rehabilitation Tax Credit and the New Markets Tax Credit programs in greater detail below, focusing on differences with how IRS oversees LIHTC—such as describing how the other federal entities monitor and assess program performance. Historic Rehabilitation Tax Credit Program The Historic Rehabilitation Tax Credit program promotes the rehabilitation of historic properties. For this credit, developers planning to rehabilitate “certified historic structures”—buildings listed in the National Register of Historic Places or located in a registered historic district and certified by the National Park Service (NPS) as contributing to the historic significance of that district—can apply for certification to NPS through their local State Historic Preservation Officer for tax credits in the amount of 20 percent of the certified rehabilitation costs. Historic Rehabilitation Tax Credit. The National Park Service’s Technical Preservation Services (TPS) administers the Historic Rehabilitation Tax Credit program, which cost an estimated $580 million in forgone revenue in fiscal year 2014. TPS promulgates the Secretary of the Interior’s Standards for Rehabilitation (standards), to which renovation projects must conform to be eligible for rehabilitation tax credits. TPS, in consultation with State Historic Preservation Officers (SHPO), also reviews and approves proposed rehabilitation project designs, and (again in consultation with SHPOs) certifies completed rehabilitation projects as conforming to the standards and therefore eligible to claim the rehabilitation tax credit. TPS officials explained that to administer the Historic Rehabilitation Tax Credit program, the agency currently relies on 17 full-time equivalent positions to staff the program and has a budget of approximately $3.2 million for fiscal year 2015. Additionally, TPS officials stated they planned to add 4–5 full-time equivalent positions to the program, for a total of 21 or 22. TPS officials explained that they work with IRS to coordinate elements of program administration, which include the issuance of regulations, the development of program information (such as on revenue procedures) for TPS’s website, and training for SHPOs. TPS also shares program data with IRS, including biannual reports of all program activity drawn from the project database for the Historic Rehabilitation Tax Credit, and information about issues and concerns surrounding an individual project’s eligibility for the credit. New Markets Tax Credit Program Congress established the New Markets Tax Credit to encourage investments in low- income communities that traditionally lack access to capital. The program provides investors (individuals, financial institutions, and other corporations) with a tax credit for investing in these communities. The investors can claim a credit equal to 39 percent of eligible investment spread over 7 years. New Markets Tax Credit. The CDFI Fund, housed in Treasury, plays the lead role in administering the New Markets Tax Credit program, which had about $1 billion in forgone revenue in fiscal year 2014. The Fund certifies qualified organizations as Community Development Entities (CDE)—which are entitled to offer these tax credits to investors to attract private-equity investments to low-income community development projects. The Fund also reviews CDE applications for allocations of specific amounts of the New Markets Tax Credit and—for those CDEs receiving such allocations—prepares allocation agreements that include the amount of tax credit allocation, approved uses of the allocation, approved service area, and reporting requirements. According to CDFI Fund officials, 15 full-time equivalent positions—14 staff and one manager—work full time on New Markets Tax Credit and another Treasury program, with the majority of staff time devoted to New Markets Tax Credits. These employees are assisted at various times by other CDFI Fund staff—for example, legal staff who help to execute allocation agreements with CDEs and information technology staff who maintain database systems. In both programs, we identified oversight and administrative functions (monitoring, performance measurement, and data collection) that federal entities other than IRS perform. TPS and the CDFI Fund have primary roles in monitoring programmatic aspects of the Historic Rehabilitation Tax Credit and New Markets Tax Credit, while IRS administers and enforces compliance with tax-related requirements. Conversely, in the LIHTC program, the monitoring role is split between IRS and HFAs. While IRS has other monitoring responsibilities for the LIHTC program (beyond ensuring taxpayer compliance) that include overseeing HFAs, as discussed previously, such monitoring was lacking or minimal. Historic Rehabilitation Tax Credit. TPS officials told us that TPS staff members take approximately 25 work trips annually to states for purposes such as site visits and training for SHPOs. Site visits typically involve inspections of multiple projects, including projects identified as good and as problematic, as well as projects that are proposed, under way, and completed. TPS officials stated that when they identify deficiencies in a SHPO’s administration of a Historic Rehabilitation Tax Credit project, they generally work cooperatively with SHPOs to identify and take corrective actions. New Markets Tax Credit. CDFI Fund staff told us they conduct two types of site visits to CDEs that are performed by different program offices. The New Markets Tax Credit program office conducts site visits to gather information about current industry practices, tax credit transaction costs, best practices in accomplishing outcomes the CDFI Fund seeks to encourage (such as investing in nonmetropolitan counties and financing projects that create significant community outcomes), and emerging trends and practices the CDFI Fund may want to discourage. The information obtained during these site visits enables the New Markets Tax Credit staff to administer the program by informing the contents of the tax credit allocation application or allocation agreement, or the review and selection process. The Certification, Compliance Monitoring and Evaluation unit conducts risk-based site visits. The purpose of these visits includes determining if a New Markets Tax Credit project was in compliance with the terms and conditions of its allocation agreement, assessing circumstances leading to an instance of noncompliance, and identifying any weaknesses or concerns that may adversely affect the use of the tax credit allocation. If noncompliance were in question, the focus of the site visit would be to determine what, if any, corrective actions were taken by the CDE and progress made in resolving the noncompliance, implementing the corrective action, or both. TPS and the CDFI Fund collect and report performance measures and collect data for the Historic Rehabilitation Tax Credit and New Markets Tax Credit programs, respectively. In contrast, IRS does not report on performance measures on the LIHTC program; rather, it collects data from tax forms to oversee HFA program compliance and taxpayer compliance. As discussed previously, statutory limitations prevent the sharing of data from tax forms with other federal agencies. Historic Rehabilitation Tax Credit. TPS publishes an annual report and a statistical analysis of the Historic Rehabilitation Tax Credit program. Both reports include performance measures such as the number of jobs created in association with completed projects and the number of housing units created with Historic Rehabilitation Tax Credits, including the number of low- and moderate-income units. The statistical analysis contains additional detail about the performance measures, historical data, and state-by-state breakdowns related to qualified rehabilitation expenditures. In addition, TPS collaborates with Rutgers University to produce the Annual Report on the Economic Impact of the Federal Historic Tax Credit. According to TPS officials, to produce these reports, TPS uses data obtained from the project applications, voluntary user profiles, and customer satisfaction questionnaires submitted upon project completion. TPS— unlike HUD in relation to the LlHTC program—has not encountered data-sharing limitations with IRS stemming from protections on taxpayer information because it collects these data using its own forms and documentation. New Markets Tax Credit. The CDFI Fund uses its Community Investment Impact System to collect data from CDEs on projects, including performance measures such as the number of jobs by type; numbers of rental and for-sale housing units; and the capacity of educational, child care, and health care facilities developed using New Markets Tax Credit financing. These data are not collected on IRS forms. The data are used to produce annual research reports and periodic research briefs. In addition, the CDFI Fund contracted with the Urban Institute to conduct a formal evaluation of the New Markets Tax Credit program, focusing on program design, execution, outputs, and outcomes. While multiple federal agencies administer housing-related programs, HUD is the lead federal agency for providing affordable rental housing. HUD’s fiscal year 2013 annual performance report and 2015 annual performance plan reported that it funded about 5.5 million occupied affordable rental units through its rental assistance programs. Much like LIHTC, HUD’s rental housing programs rely on state and local housing agencies (including HFAs) to implement programs. HUD is responsible for overseeing these agencies, including reviewing state and local consolidated plans for the HOME and Community Development Block Grant (CDBG) programs—large grant programs that HUD oversees and that also are used to fund LIHTC projects. HUD has experience in directly overseeing HFAs in their roles as contract administrators for project-based Section 8 rental assistance. HUD also has entered into risk-sharing agreements with HFAs to provide more insurance on multifamily loans. Although we and HUD’s Office of Inspector General have identified weaknesses in evaluation and oversight of programs, HUD has taken steps to resolve some of these issues. Furthermore, HUD has processes, procedures, and staff in place for program evaluation and oversight of state and local agencies that could be built upon and strengthened. HUD already has a limited data collection role in the LIHTC program. As described earlier, HUD voluntarily maintains data on LIHTC properties and must collect data on tenant characteristics such as race and income. Unlike IRS, HUD also has sponsored studies of the LIHTC program based on the data it collects. Furthermore, HUD has strategic goals to meet the need for quality, affordable rental homes and build strong resilient and inclusive communities, and an agency priority goal to preserve and expand affordable rental housing. However, data used to support these goals do not include all LIHTC projects. With the exception of these activities, HUD has no statutory authority to oversee HFAs’ LIHTC program responsibilities or set LIHTC program policies and procedures, and as a result, such authority would require new enabling legislation. HUD’s experience in administering affordable housing programs may help address some of the oversight challenges for LIHTC cited in this report. Although joint administration of the program will involve dividing responsibilities for one program across two agencies, we have reported that mission fragmentation and program overlap sometimes may be necessary when the resources and expertise of more than one agency are required to address a complex public need—as in the case of the Historic Rehabilitation Tax Credit and New Markets Tax Credit programs. HUD officials indicated that a larger role in the LIHTC program would be one way to aid their data collection efforts, better determine whether national affordable housing and fair housing goals had been incorporated, and better coordinate monitoring of civil rights compliance among federal housing programs. IRS also has been challenged to focus on its core mission of helping taxpayers understand and meet their responsibilities and enforcing tax laws. IRS’s enforcement of tax laws has been on our high-risk list since 1990. In February 2015, we determined that significant capacity challenges—such as reduced staffing and examination coverage in an environment of constrained budgets—and incomplete monitoring of enforcement program performance have prevented the removal of the agency from the high-risk list. Moreover, since 2010, the IRS budget has been reduced about 10 percent and IRS enforcement performance and staffing levels have declined. And as we discussed previously in this report, LlHTC receives a small portion of those resources. IRS and Treasury officials further noted that oversight of individual state HFAs that award tax credits and monitor projects is a challenge given IRS’s mission of helping taxpayers meet their responsibilities and enforcing tax laws. Assigning LIHTC programmatic oversight responsibilities to another agency could involve additional staff and other resources. Specifically, such oversight responsibilities likely will involve new hiring as well as training of new and existing staff. According to HUD officials, HUD currently works with HFAs in various capacities, including administering HOME and other housing programs. However, an expanded oversight role in LIHTC would require additional resources. For example, resources would be needed to expand or build data systems to help HUD monitor HFAs and program performance. As noted earlier, HUD was statutorily required in 2008 to collect data on characteristics, such as race and income, of tenants living in LIHTC projects. HUD officials noted that collecting such data was challenging because HUD did not receive additional resources. In our review of LIHTC and the other two tax credit programs, we found that each used different mechanisms to fund their administrative responsibilities. For instance, the Historic Rehabilitation Tax Credit uses fees to fund its administrative activities, such as issuance of regulations, the development of program information, and monitoring. In contrast, the New Markets Tax Credit does not rely on user fees but receives annual appropriations to fund its activities, such as application reviews, monitoring, and performance measurement. For LIHTC, the HFAs partially fund their administration and oversight responsibilities—which include ongoing compliance inspections and other reviews—by assessing fees on owners of LIHTC projects. While practices can differ among the states, according to an annual survey by NCSHA, HFAs can assess a variety of fees to help offset their administrative costs, including application fees, reservation fees, carryover allocation fees, compliance monitoring fees, and penalties and fees related to late or amended submissions. The amounts of these fees vary from state to state; for example, LIHTC application fees range from $0 in Alaska to $6,500 in Georgia. The level of resources that would be needed to perform an adequate level of oversight of HFAs is not known. According to HUD officials, estimating the level of resources needed to perform joint administration of the LIHTC program is feasible and could be based on HUD’s experience administering other housing programs. Having an estimate on potential costs and funding options for financing federal oversight of the LIHTC program will help HUD and congressional decision makers in assessing potential changes to the administration of the program. Although LIHTC is the largest federal program for increasing the supply of affordable rental housing, LIHTC is a peripheral program in IRS in terms of resources and mission. Oversight responsibilities for the program include monitoring HFAs and taxpayer compliance. However, IRS oversight of HFAs has been minimal, particularly in reviewing QAPs and conducting audits of HFAs. Without regular monitoring of HFAs, IRS is not able to determine the extent to which HFAs comply with program requirements. Despite the importance of the program in the affordable rental housing market, program managers and congressional decision makers do not have sufficient information to assess the program’s effectiveness. Significant resource constraints have affected IRS’s ability to oversee taxpayer compliance and currently preclude wide-ranging improvement to such functions, but IRS still has an opportunity to enhance oversight of taxpayer compliance in the LIHTC program. Reliable data on credit allocations and certifications would enable IRS to assess basic compliance requirements. IRS has acknowledged the need for improvements in its controls and procedures (including data entry and quality reviews). Federal internal control standards state effective information technology management is critical to achieving useful, reliable, and continuous recording and communication of information. IRS officials agreed that these problems should be corrected and data quality reviews be conducted on an ongoing basis. Moreover, leveraging the experience and expertise of another agency with a housing mission, such as HUD, may help offset some of IRS’s limitations in relation to program oversight. Unlike the jointly administered Historic Rehabilitation and New Markets tax credit programs, IRS is the sole federal administrator in LIHTC and HUD has a limited role in the program. Expanding HUD’s role—making it a joint program administrator—could enhance LIHTC oversight. Although we and others have identified weakness in HUD’s evaluation and oversight of programs, HUD already has processes and procedures in place for evaluation and oversight of state and local agencies—they constitute a framework on which further changes and improvements in LIHTC could be effected. Under joint administration, IRS could continue to retain certain key responsibilities consistent with its tax administration mission. But assigning oversight responsibilities to HUD (such as reviewing QAPs, developing goals and performance measures, and collecting LIHTC data) could involve additional staff and other resources. The other tax credit programs we reviewed illustrate some of the different funding mechanisms such as fees that might be used to help fund new oversight for LIHTC. An estimate of potential costs and funding options for financing enhanced federal oversight of the LIHTC program would be integral to determining an appropriate funding mechanism. To better align program goals with agency missions and improve program administration and oversight, Congress should consider designating the Department of Housing and Urban Development as a joint administrator of the program responsible for oversight. As part of the deliberation, Congress also should direct HUD to estimate the costs to monitor and perform the additional oversight responsibilities, including a discussion of funding options. To improve the utility of the credit allocation information contained in IRS’s database, IRS should address weaknesses identified in data entry and programming controls to ensure reliable data are collected. We provided a draft of this report to HUD, Interior, IRS, and Treasury for their review and comment. IRS, Treasury, and HUD provided written comments that we reprinted in appendixes II to IV. IRS and Treasury also provided technical comments that were incorporated, as appropriate. Interior did not provide any comments on the draft report. We also provided a draft to the National Council of State Housing Agencies (NCSHA), a nonprofit organization that represents the HFAs, for its review and comment. NCSHA provided written comments that we reprinted in appendix V. IRS agreed with our recommendation that it should address weaknesses in data entry and programming controls to ensure reliable data are collected. IRS noted that reliable data would enable it to more effectively assess basic compliance requirements. According to IRS’s comments, significant resource constraints have affected IRS’s ability to improve its database and implement other improvements in its procedures and controls. Additionally IRS noted that its review of hundreds of audits found no widespread compliance issues and therefore the agency performed no ongoing tracking of audit results and trends. However, as our report notes, IRS conducted this analysis in 2000 for a sample of 402 audits of LIHTC taxpayers performed from 1995 through 1999 and had not updated this review for nearly 15 years. Federal internal control standards state that monitoring should occur in the course of normal operations, be performed continually, and be ingrained in the agency’s operations. As a result, the agency does not have current knowledge of the level of noncompliance or if more monitoring were needed. IRS noted that it expects to take action in response to our recommendation to improve the utility of the credit allocation information contained in its database and improve monitoring. IRS did not comment on the matter for congressional consideration (to designate HUD as a joint administrator of the program responsible for oversight). Treasury agreed that it would be useful for HUD to receive ongoing responsibility for, and resources to perform, research and analysis on the effectiveness of LIHTCs in increasing the availability of affordable rental housing. Treasury noted that such research and analysis is not part of IRS’s responsibilities or consistent with its expertise in interpreting and enforcing tax laws. However, Treasury stated that responsibility for interpreting and enforcing the code should remain entirely with IRS. Similarly, our report notes that under joint administration, IRS could retain certain key responsibilities consistent with its tax administration mission. In considering the utility of HUD’s expanded role in LIHTC, Treasury noted that research and analysis by HUD might help address whether HFAs’ allocations of LIHTCs affirmatively addressed fair housing concerns and whether the allocations have been effective in meeting other congressional goals. Treasury further observed that if HUD’s research and analysis indicated a need for additional interpretation or guidance, then Treasury and IRS could improve guidance or change the approach to enforcement. Coordinating on findings from any analyses conducted by HUD would be a positive step towards strengthening oversight of the program. As our report notes, IRS has performed minimal oversight of HFAs, particularly in terms of analyzing QAPs and conducting on-site or desk audits of HFAs. Thus, leveraging the experience and expertise of another agency with a housing mission may help offset some of IRS’s limitations in relation to program oversight. HUD could assume certain oversight responsibilities, such as reviewing QAPs of HFAs, monitoring of HFAs’ compliance with key responsibilities, identifying goals and performance measures, and collecting more programwide data. HUD did not expressly comment on the matter for congressional consideration (to designate HUD as a joint administrator of the LIHTC program responsible for oversight). However, it supported consideration of a structure for enhanced interagency coordination on housing policy, including the LIHTC program. HUD noted that such a structure could help ensure the program’s alignment with federal housing goals, such as creating affordable housing in areas of high opportunity and fueling reinvestment in high-poverty communities. HUD has conducted dedicated research on LIHTC; for example, on the effect of incentives in state QAPs on the location of LIHTC properties. However, HUD noted that Congress would need to appropriate additional resources to any agency assigned the responsibility to provide oversight, review QAPs, and conduct further in-depth research on LIHTC. HUD stated that it did not receive any appropriations authorized for its collection of LIHTC tenant data, which delayed HUD’s ability to publicly release data. Our report also notes that assigning programmatic oversight responsibilities for LIHTC to another agency could require additional staff and other resources. We examined other tax credit programs with joint administration and found that each used varying mechanisms to fund its activities, including user fees and appropriations, which could serve as examples of how an agency may fund new oversight of LIHTCs. NCSHA disagreed with our matter for congressional consideration. NCSHA stated that if Congress believed more oversight was needed, NCSHA would prefer to see Congress place those resources within Treasury and IRS to build on the program expertise in those agencies, partly because it asserted that HUD has “virtually no experience” with the LIHTC program. NCSHA noted that state HFAs have worked closely with Treasury and IRS to ensure proper administration of the program. Our report recognizes the various ways that IRS officials work with state HFAs to implement the program, but it also notes significant oversight deficiencies in IRS’s administration of the program. Our report also highlights several reasons why HUD may be an appropriate agency to jointly administer certain aspects of the LIHTC program. First, HUD is the federal government’s lead housing agency, and as such, has responsibilities for reporting on federal efforts to meet the nation’s affordable housing and fair housing goals. Second, HUD has experience working with HFAs on various programs, including its rental assistance programs, and through its risk-sharing agreements with HFAs. LIHTC projects also may be recipients of funds from other federal programs, including HUD-administered programs such as HOME and project-based Section 8 rental assistance. Third, HUD has a framework (processes, procedures, and staff) in place for program evaluation and oversight of state and local agencies that could be expanded and strengthened. Finally, HUD already has a data collection role in the LIHTC program. While this role is limited to mandatory data collection on tenant characteristics, such as race and income, and voluntarily maintaining data on LIHTC properties, a joint oversight role could allow HUD to directly collect nationwide data on LIHTC properties needed to assess program effectiveness. Whereas currently, statutory restrictions prevent the disclosure of taxpayer information collected by IRS to HUD. As a result, we maintain HUD, an agency with a housing mission and whose current programs regularly interact with the LIHTC program, is in a better position to perform some oversight functions for LIHTC. Also, in commenting on this report, Treasury recognized that it would be useful to have HUD receive ongoing responsibility for research and analysis on the effectiveness of LIHTCs. NCSHA also questioned if it was fair of GAO to judge Treasury and IRS oversight by the amount of data collected or number of audits conducted and with seemingly little attention to the program’s successful housing results. In the report, we cite that monitoring should occur in the course of normal operations, be performed continually, and be ingrained in the agency’s operations. IRS does not regularly review QAPs or conduct on- site reviews of HFAs. More specifically, IRS had conducted only seven audits of HFAs since the program’s inception in 1986. IRS officials stated the lack in oversight was caused by a lack of resources and competing demands. Furthermore, we note that activities need to be established to monitor performance measures and indicators, which includes comparing data so that analyses can be conducted. However, we found that IRS has not set goals or assessed performance for the program, collected limited data needed to administer and enforce the tax code, and the data it collected are not reliable. The LIHTC program is the largest source of federal assistance for developing affordable rental housing and cost an estimated $8 billion in forgone revenue in 2014. Therefore, it is critical that program managers and congressional decision makers have reliable data available to judge the effectiveness and level of compliance of the program. NCSHA also stated that joint administration of the LIHTC program would create additional red tape (a new level of bureaucracy) and could result in reduced program effectiveness and housing production. Our review focused on IRS’s oversight functions, including monitoring taxpayers and state HFAs and reviewing program data for program effectiveness and compliance. We did not suggest a comprehensive change to how IRS administers LIHTC. Rather, we recommend an approach to provide Congress and taxpayers with a greater understanding of how the program operates and performs. In our review of other tax credit programs (similar in purpose and structure to LIHTC) that were jointly administered by IRS and other federal agencies, we found the other federal agencies provided key oversight and administrative support, such as monitoring, performance measurement, and data collection. Under joint administration with HUD, IRS, with its tax expertise, could continue to retain certain key responsibilities in implementing the program in partnership with state HFAs. Joint administration of the program will involve dividing responsibilities for one program across two agencies, and our expectation would be that IRS and HUD will carefully define their respective roles and responsibilities and have clear lines of communication to help ensure the program does not create any unnecessary inefficiencies, such as duplicative or overlapping requirements for HFAs. In addition, Congress can define specific requirements and limits of each agency’s oversight responsibilities. Finally, NCSHA noted that HFAs have a track record of outstanding performance in affordable housing finance and that Congress and the Administration entrusted HFAs to administer federal housing programs. In addition, NCSHA stated GAO had positively recognized HFAs for the LIHTC program in past reports. We acknowledged in our report that the LIHTC program was the largest federal program for increasing the supply of affordable rental housing and the design of the program can result in HFAs and other entities, including investors and syndicators, providing project oversight. We also made these points in prior work. But we also noted in prior work dating to 1997 that procedures for reviewing QAPs and monitoring compliance could be improved, and that LIHTC data were not sufficient to measure program success. Joint administration with an agency with a housing mission could help offset these longstanding deficiencies in IRS’s oversight of the program. 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 Secretaries of Housing and Urban Development, Interior, and Treasury; the Commissioner of Internal Revenue; 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) 512-8678 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 VI. This report discusses the Low-Income Housing Tax Credit (LIHTC) program, which is administered by the Internal Revenue Service (IRS) and state housing finance agencies (HFA). More specifically, this report (1) discusses how the LIHTC program is administered; (2) evaluates processes for overseeing the LIHTC program; and (3) compares the administration of other tax credit programs with LIHTC. To determine how the LIHTC program is administered, we reviewed IRS regulations and guidance that describe IRS’s roles and responsibilities in administering the LIHTC program, including overseeing HFAs and taxpayers. We also reviewed documentation on the role of HFAs, investors, and syndicators in the program. Because LIHTC projects are often financed with funds from other programs, we reviewed the monitoring requirements for some federal programs present in LIHTC projects, such as the HOME Investment Partnerships (HOME) program and project-based Section 8. To illustrate the number of LIHTC projects containing other federal funding, we also reviewed a publication issued by the National Council of State Housing Agencies (NCSHA) on survey results. We assessed the reliability of these data by interviewing NCSHA officials and reviewing documentation on survey techniques used to collect the data. We determined the data were reliable for our purposes of reporting on other funding sources for LIHTC projects. We interviewed officials from IRS, the Department of the Treasury (Treasury), Department of Housing and Urban Development (HUD), selected HFAs, and NCSHA on the administration of the program. We also conducted interviews at the Georgia HFA and Illinois HFA to help provide examples of how the programs were administered at the state level. We selected these two HFAs based on prior work conducted at these locations for other GAO reports on the Tax Credit Assistance Program (TCAP), administered by HUD, and the Grants to States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits (Section 1602) program, administered by Treasury. Our prior work is relevant because it assessed HFA administration and oversight of these programs and because we discuss TCAP and 1602 in this report. We also selected these sites because of their proximity to GAO locations. Moreover, we interviewed a certified public accounting and consulting firm, Novogradac & Company LLP. We selected this firm because of its role in the LIHTC working group—a forum for participants in the LIHTC program to work together to resolve technical and administrative issues relating to the LIHTC program—and because of the information on the firm’s website on HFAs and guidance for the LIHTC program. To evaluate processes for overseeing the LIHTC program, we reviewed applicable forms and guidance used to monitor the program, and reviewed IRS audits of HFAs conducted from 2003 to 2014 to determine the frequency with which audits were conducted and the types of findings identified. We reviewed IRS’s process for identifying and conducting audits on taxpayers claiming LIHTCs from 2001 to 2013 and how the results of these audits were used to inform management about the types of noncompliance and to track the effectiveness of program monitoring. We reviewed federal internal control standards to identify key activities that help ensure that a program addresses requirements and appropriate actions are taken to address program risks. We also reviewed the strategic and annual reports of IRS, Treasury, and HUD to determine the program goals and outcome information available for the LIHTC program. We analyzed information contained in IRS’s Low-Income Housing Credit database from December 2005 to August 2014. Specifically, we reviewed available information from forms on the credit allocation and certification (form 8609) and the noncompliance or building disposition (form 8823). We assessed the reliability of the database by reviewing documentation, performing electronic testing, and interviewing the relevant officials responsible for administering and overseeing the database. We also conducted reasonableness checks on the data to identify any missing, erroneous, or outlying figures. We determined we would not be able to rely on the data to perform our analysis. Therefore, we limited our discussion of the database to the type of information collected, the extent to which the information was collected, and potential analysis that could be conducted if the data were more complete and accurate. We also reviewed an IRS staff proposal for statutory changes to allow IRS to disclose certain protected information so that HUD could help assess the completeness of the data it received on LIHTC tenant characteristics and reviewed a prior GAO report that discussed statutory exceptions related to data sharing of confidential taxpayer information. Lastly, we interviewed IRS and selected HFA officials about monitoring procedures for the LIHTC program and Treasury and HUD officials on program goals and outcomes and statutory barriers that may prevent information sharing for the LIHTC program. To compare the administration of other tax credit programs with LIHTC, we reviewed tax credit programs administered by IRS to identify those that are most similar in purpose and structure to LIHTC. We focused on the Historic Rehabilitation Tax Credit and New Markets Tax Credit programs because, similar to the LIHTC program, both are aimed at encouraging community development and each is jointly administered by IRS and another federal entity—the Department of Interior’s National Park Service (NPS) and Treasury’s Community Development Financial Institutions (CDFI) Fund, respectively. In addition to administrative structures, our review focused on how these two programs conducted monitoring, used performance measures, and collected data. We reviewed prior GAO reports related to each of these programs. Moreover, we reviewed HUD’s role in working with state and local agencies and its role in the LIHTC program. We also reviewed information available in the State HFA Factbook: NCSHA 2012 Annual Survey Results to gain an understanding of how HFAs use fees to administer the LIHTC program. We assessed the reliability of these data by interviewing NCSHA officials and reviewing documentation on survey techniques used to collect the data. We determined the data were reliable for our purposes of reviewing how HFAs use fees to administer the LIHTC program. Additionally, we interviewed officials from the Departments of Interior and Treasury and the CDFI Fund concerning the administration of the Historic Rehabilitation Tax Credit and New Markets Tax Credit programs and how the programs funded administrative costs. We met with IRS officials to discuss their role in the administration of the Historic Rehabilitation Tax Credit. We conducted this performance audit from February 2014 through July 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Andy Finkel (Assistant Director), Nadine Garrick Raidbard (Analyst-in-Charge), Jessica Artis, Vaughn Baltzly, William R. Chatlos, Anar N. Jessani, Elizabeth Jimenez, John McGrail, Marc Molino, Ruben Montes de Oca, Christine Ramos, Barbara Roesmann, and MaryLynn Sergent made major contributions to this report. | The LIHTC program, established under the Tax Reform Act of 1986, is the largest source of federal assistance for developing affordable rental housing and cost an estimated $8 billion in forgone revenue in 2014. LIHTC encourages private equity investment in low-income housing through tax credits. HFAs receive an annual allocation of tax credits and competitively award the credits to owners of qualified projects. GAO was asked to review the administration and oversight of the program. This report addresses, among other things, (1) IRS oversight of LIHTC and (2) how LIHTC administration and oversight compare with that of other tax credit programs. GAO reviewed regulations and guidance for monitoring HFAs and taxpayers; analyzed information on IRS audits of HFAs; reviewed selected programs that award tax credits similarly to LIHTC; and interviewed IRS, HUD, and HFA officials. Internal Revenue Service (IRS) oversight of the Low-Income Housing Tax Credit (LIHTC) program has been minimal. Specifically, since 1986 IRS conducted seven audits of 56 state housing finance agencies (HFA) on which IRS relies to administer and oversee the program. (HFAs are state-chartered authorities established to meet affordable housing needs.) Federal internal control standards call for monitoring to be performed continually in the course of normal operations and be ingrained in agency operations. Oversight of HFAs has been minimal, partly because LIHTC is viewed as a peripheral program in IRS in terms of its mission and priorities for resources and staffing. Without such reviews, IRS cannot determine the extent of noncompliance and other issues at HFAs. IRS jointly administers other programs: the Historic Rehabilitation Tax Credit with the National Park Service and the New Markets Tax Credit with the Community Development Financial Institutions Fund in the Department of the Treasury. The federal agencies that work with IRS to oversee these programs have missions consistent with the purposes of these programs; they also conduct monitoring, report on performance, and collect data. For example, officials of both agencies told GAO that staff routinely conduct site visits and other project reviews. In these cases, IRS also is able to benefit from the other federal agencies' policy and subject-matter expertise. Likewise, the Department of Housing and Urban Development's (HUD) experience in administering affordable housing programs and working with HFAs may benefit IRS in its administration and oversight of the LIHTC program. More specifically, HUD relies on state and local housing agencies (including HFAs) to implement its programs and already has processes and procedures in place to oversee them. Although GAO and others have identified weakness in HUD's program evaluation and oversight activities, HUD has taken steps to address some of these issues and its existing processes and procedures constitute a framework on which further changes and improvement can be made. Moreover, IRS is not well positioned to oversee LIHTC. Since 1990, IRS has been on GAO's high-risk list due to significant capacity challenges and incomplete monitoring of tax law enforcement. IRS's budget has been reduced by 10 percent and enforcement program performance and staffing levels have declined since 2010. Joint administration with HUD could better align program responsibilities with each agency's mission and more efficiently address existing oversight challenges. Under joint administration, IRS could retain responsibilities consistent with its mission (as it does in the other two tax credit programs). For example, IRS could continue to enforce taxpayer compliance. Assigning oversight responsibilities to HUD could involve additional resources for HUD. For LIHTC and the other two programs, GAO found that each used different mechanisms to fund administrative responsibilities. For instance, Historic Rehabilitation uses fees to fund its program, including oversight, while New Markets requests funding through annual appropriations. The level of resources that would be needed to perform an adequate level of oversight of HFAs is not known. An estimate of potential costs and funding options for financing enhanced federal oversight of the LIHTC program could benefit the agency involved and provide useful information to Congress. Congress should consider designating HUD as a joint administrator of the program. HUD's role should include oversight responsibilities (such as regular monitoring of HFAs) to help address deficiencies GAO identified. Treasury agreed HUD could be responsible for analyzing the effectiveness of LIHTC, with IRS continuing to enforce tax law. HUD and IRS did not comment on the matter for congressional consideration. HUD supported consideration of a structure for enhanced interagency coordination. The association representing HFAs disagreed with the matter. GAO maintains that joint administration would strengthen program oversight. |
Although MAOs are responsible for collecting and transmitting encounter data to CMS, they rely on the cooperation of providers to submit complete and accurate data that conform to agency requirements. MAOs gather encounter data—which originate from the information in an enrollee’s medical record—for their own management and payment purposes. While Medicare pays MAOs a fixed monthly amount per enrollee, MAOs may compensate providers for services rendered to enrollees under different contractual arrangements. Providers paid by their plans on a FFS basis submit claims for payment that include the amounts to be reimbursed by the MAO.basis—that is, that receive a designated amount to cover all services for an assigned enrollee—record a zero if no payment amount information is available. MAOs may include provisions in their contracts with providers that require submission of complete and accurate encounter data. In contrast, providers paid by their plans on a capitated After collecting and reviewing these data, MAOs transmit the data to CMS. CMS adopted the health insurance industry’s standard claims format for reporting MA encounter data. MAOs must use the Health Insurance Portability and Accountability Act of 1996-compliant Accredited Standards Committee X12 Version 5010 format, which all providers and private and public health plans are required to use for electronic claim By using this standard format, CMS generally avoided submissions.placing a new requirement on MAOs. In January 2012, CMS began phasing-in MA encounter data collection by type of provider. It began by receiving data on professional encounters (such as services performed by physicians), then institutional encounters (such as services performed during an inpatient hospital stay), and finally durable medical equipment (such as hospital beds and wheelchairs). By August 2012, MAOs were submitting data from all types of providers. Although CMS requires that MAOs submit encounter data for all items and services provided to enrollees, the file formats that CMS currently uses preclude MAOs from transmitting data on the utilization of certain supplemental MA benefits, such as dental and vision services. Agency officials told us they are considering how to address this discrepancy. To risk adjust payments to MAOs, CMS calculates a risk score—the expected health care expenditures for an enrollee compared with the average health care expenditures of all beneficiaries—for each MA enrollee and Medicare FFS beneficiary. CMS calculates risk scores for MA enrollees using diagnosis information provided by MAOs along with cost and utilization information from Medicare’s FFS claims systems. This approach assumes that diagnostic coding practices are the same in MA and FFS. Risk scores for beneficiaries with the same diagnoses and characteristics should be identical, regardless of whether the beneficiaries are in MA or Medicare FFS. However, MAOs have a greater incentive than FFS providers to make sure that all diagnoses are coded, as this can increase enrollees’ risk scores and ultimately the payments plans receive. In part because of this incentive, risk scores for MA enrollees may tend to be higher relative to the risk scores of FFS beneficiaries who are in similar health and have identical characteristics. To help ensure that MAOs are not overpaid as a result of these differences in diagnostic coding, CMS makes a separate adjustment to payments to MAOs. In 2012 and 2013, we reported inaccuracies in CMS’s methodology for adjusting MA payments. Specifically, we estimated in 2013 that MAOs received excess payments of between $3.2 billion and $5.1 billion from 2010 through 2012 because CMS’s adjustment to account for differences in risk scores was too low. We recommended that the CMS Administrator take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between MA and Medicare FFS. The agency did not formally comment on this recommendation and, as of March 2014, it has not improved the accuracy of this adjustment. Consistent with our finding that this adjustment was too low, Congress has taken steps to increase the statutory minimum annual adjustment. State Medicaid agencies that contract with MCOs typically require them to report encounter data to the state for various purposes.encounter data collection, the agencies may also establish requirements regarding the timeliness, completeness, and accuracy of Medicaid encounter data in contracts with MCOs. For example, to encourage timely submission and promote data quality, they may require MCOs to submit data within a certain time frame and attest that the data submitted are complete and accurate. State Medicaid agencies may then use these data for a variety of purposes, such as setting payment rates, evaluating the performance of MCOs, and providing reports to their legislatures and the public. State Medicaid agencies may assess encounter data to determine whether MCOs meet requirements for complete and accurate reporting. For example, they may calculate the proportion of encounter data files denied or examine the rates of services used per enrollee against specific benchmarks—target rates. As another example, they may require MCOs to list encounter data that were corrected or voided and provide reasons for these actions. They may also have the medical records examined to verify that the information submitted in encounter data is complete and accurate. For example, this review may determine whether services submitted in encounter data were performed or confirm that enrollees have specific diagnoses. Compared with information available in RAPS data, MA encounter data, with more elements reported, provide CMS with more comprehensive information on all enrollee diagnoses as well as the cost and types of services and items provided to enrollees. Each RAPS data file—an electronic record that contains an enrollee’s diagnosis information from one or more providers—contains between 1 and 10 diagnosis groupings. Although all diagnoses are included in these groupings, not all groupings are used in CMS’s risk adjustment model. For each diagnosis grouping, there are 9 RAPS data elements, including the “from” and “through” dates of service, the diagnosis code, and the provider type. Each RAPS data file also includes 31 other elements that are used for data processing and other purposes. Thus, depending on the number of diagnosis groupings, each RAPS data file contains between 40 and 121 data elements. In contrast, each encounter data file—an electronic record that contains detailed information for each medical service and item provided to an enrollee—includes approximately 200 data elements. These elements include information on the patients, providers, and payers of services and items, as well as the dates of service and procedure codes. They also include information on the primary and supplemental diagnoses associated with the service or item. Whereas RAPS data are limited to 10 diagnosis groupings, encounter data can include up to 12 diagnoses for professional services and 25 diagnoses for institutional services. Table 1 summarizes the types and number of encounter data elements. In addition, MA encounter data are more comprehensive than RAPS data because they include information that originates from a wider range of provider types. Specifically, only physicians and hospital inpatient and outpatient facilities report enrollee diagnoses for RAPS data collection. Of these provider types, physicians provide approximately 80 percent of the diagnostic information used for risk adjustment, according to one estimate. As a result, CMS’s current risk adjustment model relies primarily on diagnoses that physicians report. In contrast, more provider types report encounter data, significantly expanding the scope of sources for diagnosis and other information. In addition to physicians and hospital inpatient and outpatient facilities, many other provider types—including ambulance providers, clinical laboratories, durable medical equipment suppliers, home health providers, mental health providers, rehabilitation facilities, and skilled nursing facilities—report encounter data. The fact that CMS has taken a comprehensive approach in collecting encounter data has raised concerns for some MAOs. Because MAOs generally gather such data from certain providers for payment and plan management purposes, the CMS encounter data reporting requirements may not have significantly added to their ongoing data gathering activities. However, industry representatives noted that submitting encounter data from a broad array of provider types may not add to information on diagnoses CMS uses for risk adjustment. Agency officials acknowledged that many encounter data elements MAOs report will not be used for risk adjustment but will allow CMS to more completely identify the services furnished to enrollees. Finally, CMS requires MAOs to submit encounter data more frequently than RAPS data. MAOs submit RAPS data at least quarterly to CMS, with each submission representing approximately one-fourth of the RAPS data an MAO submits during the year. In contrast, CMS requires MAOs to submit encounter data weekly, biweekly, or monthly depending on their number of enrollees. MAOs with more than 100,000 enrollees must submit encounter data on a weekly basis, those with between 50,000 and 100,000 enrollees on a biweekly basis, and those with fewer than 50,000 enrollees on a monthly basis. CMS also requires MAOs to submit encounter data within 13 months from the date of service. Representatives of MAOs noted that they are able to meet CMS’s encounter data frequency requirements, and one MAO told us that it sometimes chooses to submit encounter data more frequently—three times a week rather than once a week—to reduce the size of each submission. CMS is receiving MA encounter data from nearly all MAOs on all types of services at the monthly volume that CMS officials told us they expected. After increasing significantly from August 2012—the first month that MAOs submitted encounter data on services from all provider types— through May 2013, the volume of MA encounter data has had some fluctuations from month to month. (See fig. 1.) Specifically, the volume of encounter data files—electronic records containing detailed information for each medical service and item provided to an enrollee—rose sharply from 2.0 million data files in August 2012 to 49.6 million data files in May 2013. From June 2013 through April 2014, the volume has fluctuated between 34.2 and 54.2 million data files each month. CMS officials told us that they expect to continue receiving encounter data files at a rate of approximately 40 to 50 million files per month throughout 2014. In total, MAOs submitted about 497.9 million encounter data files in 2013 comprising approximately 416.5 million professional encounter data files, 64.9 million institutional files, and 16.5 million durable medical equipment files. In April 2014, CMS announced that it will use MA encounter data as part of risk adjustment and no longer rely solely on RAPS data. The agency will start using the diagnosis information from MA encounter data as well as the diagnoses in RAPS data from 2014 dates of service when calculating 2015 enrollee risk scores.both data sources to obtain diagnoses reported from hospital inpatient and outpatient facilities and physicians. Further, the agency announced Specifically, CMS intends to use that it will use all diagnoses equally, whether they came from RAPS data or MA encounter data, when calculating risk scores. CMS officials said that RAPS data generally have all MA enrollees’ diagnoses, so they do not anticipate receiving a significant amount of additional diagnoses from MA encounter data. CMS officials described these efforts to begin using diagnoses from MA encounter data as a key step in making full use of the data in risk adjusting payments. Furthermore, officials stated that 2015— and perhaps subsequent years—will serve as a time to transition from using RAPS data to using MA encounter data to calculate risk scores. Once MA encounter data are deemed sufficiently complete and accurate for use in risk adjusting payments, CMS plans to discontinue RAPS data collection and transition entirely to using MA encounter data. Although CMS identified a number of other potential uses for MA encounter data in the 2008 final rule, how it would use the data for any of these additional purposes. Adequately developing plans for encounter data, and communicating them to MAOs, may improve CMS’s efforts to manage aspects of the Medicare program. Agency officials told us that they have deferred planning efforts to use MA encounter data for any purposes besides using it as a different way to collect diagnosis information for the current risk adjustment model. Accordingly, CMS’s plans remain undeveloped and it has not established specific time frames for any of the following potential uses outlined in 2008: the agency has yet to determine Revise CMS’s risk adjustment model for MA payments. CMS intends to improve its model for risk adjustment using MA enrollee cost, diagnoses, and utilization information. However, agency officials noted that developing such a model is an involved process and would take a number of years to complete. In the 2008 final rule, CMS listed the following potential data uses without further explanation: (i) updating risk adjustment models, (ii) calculating Medicare disproportionate share percentages, (iii) conducting quality review and improvement activities, and (iv) Medicare coverage purposes. 73 Fed. Reg. 48434 (Aug. 19, 2008). Conduct quality review and improvement activities. Such activities refer to assessing the performance of providers and MAOs in delivering care. For example, CMS could use encounter data to develop new MA quality measures. Calculate Medicare disproportionate share hospital percentages. CMS increases payments to hospitals serving a disproportionate number of low-income patients through the disproportionate share hospital adjustment. The agency currently incorporates the number of hospital days for MA enrollees in its calculation of disproportionate share hospital percentages. CMS officials have not specified how the agency could use MA encounter data to modify how it calculates the disproportionate share hospital percentages. Monitor Medicare coverage. Such monitoring may refer to using encounter data to determine whether an MA enrollee has reached the maximum out-of-pocket limit for an enrollee’s cost sharing each year. Without developing plans for these additional uses of encounter data, CMS cannot determine whether it is gathering the proper amount and types of information required for these purposes. Additionally, the agency would not be able to establish management priorities, and therefore cannot ensure that it is using the data to their full potential. In a May 2014 proposed rule, CMS identified a number of additional uses of encounter data designed to strengthen program management and increase transparency in the MA program. These were the following: Conduct program evaluations. CMS noted that it may use encounter data to assess the MA program and demonstration designs. The data could also be used for government-sponsored public health initiatives and academic health care research. Support program integrity efforts. CMS indicated that encounter data could be used to conduct audits, investigations, and other efforts to combat waste, fraud, and abuse undertaken by the Office of Inspector General or CMS. Aid program administration. CMS stated that it may use encounter data in reviewing the validity of MAO bid submissions—projected revenue for providing standard Medicare services to an average enrollee in an MAOs’ service area. It may also use the data to verify MAO information on medical loss-ratios—the percentage of revenue used for patient care, quality improving activities, and reduced premiums—to determine whether MAOs have met minimum requirements. As of May 2014, CMS had taken some, but not yet all, appropriate actions—as outlined in its Medicaid encounter data validation protocol— to ensure that MA encounter data are complete and accurate before they are used. (See fig. 2.) CMS’s actions to date have focused on communicating with MAOs about data submission requirements, certifying MAOs’ capability to transmit the data, and conducting automated checks for completeness and accuracy of the data. However, the agency has not yet conducted statistical analyses, reviewed medical records, and provided MAOs with summary reports on data quality referenced in its Medicaid encounter data validation protocol. Although CMS intends to perform these additional quality assurance activities, CMS officials have not specified a time frame for doing so. CMS has established certain requirements for the MAOs’ collection and submission of encounter data. The initial step in CMS’s Medicaid encounter data validation protocol is to establish such features as the data submission format, the data elements to be reported, the time frames for data submission, and the benchmarks—target rates—for completeness and accuracy of the data. CMS required that MAOs use the reporting format that is standard in the health insurance industry, and MAOs began submitting files in that format in January 2012. CMS also required that MAOs submit encounter data—including any corrections to the data—within specified time frames and at intervals determined by their size. To enhance compliance with its encounter data requirements and thus promote complete and accurate data submissions, CMS has engaged in regular and open communication with MAOs since 2010. Agency officials have regularly held meetings with MAOs to discuss encounter data system enhancements, changes in data submission requirements, and concerns on specific encounter data topics. Although MAOs noted that they would like to continue receiving detailed information frequently— particularly on the more complex aspects of the encounter data submission process—CMS reduced the frequency of the encounter data user group meetings during the summer of 2013. According to CMS officials, MAOs’ increased familiarity with data submission requirements reduced the need for ongoing guidance. Other outreach methods the agency has used include newsletters and bulletins with information such as the most common data errors, a technical assistance support desk to address specific reporting circumstances, and a website for posting summaries and questions from meetings with MAOs. To maintain detailed guidance on data submission requirements, CMS produced and updates an encounter data manual. (See app. I for more information about CMS’s outreach efforts with MAOs.) While it has focused its efforts on educating plans about reporting requirements, CMS has not yet established benchmarks for encounter data completeness and accuracy and does not have a timeline for developing such benchmarks. As stated in the Medicaid encounter data validation protocol, each data field submitted for each encounter type should have an acceptable rate of completeness and accuracy. The protocol states that each plan’s target error rate should be below 5 percent, composed of the percentage of missing, duplicate, or incorrect records. In 2012, CMS stated it would develop error frequency benchmarks but has yet to do so. In May 2014, agency officials told us that as they gain more experience with the data submissions they will use that information to develop such performance benchmarks. In contrast, state Medicaid agencies have established various benchmarks for Medicaid encounter data, which could help inform the development of similar benchmarks for MA encounter data. For example, New Jersey permits MCOs to have no more than 2 percent of encounter data submissions denied each month. Alternatively, Arizona does not allow the payment information in MCOs’ encounter data submissions to vary from the financial reports submitted by MCOs by more than 3 to 5 percent.Without benchmarks, as suggested by the protocol, the agency has no objective standards against which it could hold MAOs accountable for complete and accurate data reporting. CMS has certified nearly all MAOs to verify their capability for collecting Under CMS’s protocol for validating and submitting encounter data.Medicaid encounter data, each MCO’s information system should be assessed to see whether it is likely to successfully capture and transmit the encounter data. Such a review would determine where the plan’s information system may be vulnerable to incomplete or inaccurate data capture, storage, or reporting. To become certified for submitting encounter data, CMS requires an MAOs’ information system undergo complete end-to-end testing. MAOs needed to separately demonstrate that they can successfully transmit encounter data collected from institutional, professional, and durable medical equipment providers. During official testing, MAOs had to achieve at least a 95 percent acceptance rate for each type of encounter. Also, MAOs were required to sign an agreement with CMS attesting that they will ensure that data in every submission can be supported by a medical record and that the data are complete and accurate. CMS performs automated checks to determine encounter data quality and identify submission issues, such as whether certain data elements are missing, and sends automated notifications to MAOs. According to CMS’s protocol for validating Medicaid encounter data, performing electronic checks on encounter data is a key step in verifying data quality. Such a data review should include basic checks of the data files by provider type and for each of the data elements in the files. Under the protocol, the standard data review process should be automated to verify that, among other things, critical data elements are not missing and are in the correct format, data values are consistent across data elements and are within the volume of data aligns with enrollment figures. CMS performs over 1,000 automated checks to verify that data elements are present, the values of data elements are reasonable, and the data are not duplicated. According to CMS, the number of errors returned to MAOs and the number of duplicate data files submitted per MAO can illustrate, at least in part, the completeness and accuracy of the encounter data submitted. For example, CMS performs automated checks to flag missing data elements—such as a contract ID number or a date of service—in encounter data files and returns files with missing elements to MAOs. CMS also determines whether encounter data elements have the correct alphanumeric values (e.g., that zip codes contain only numeric characters) and verifies whether the values are consistent across data elements (e.g., the date of service is before the date of data submission). In addition, CMS ensures that the same data file is not accepted into the Encounter Data System more than once, which would result in duplicate data files. After performing these automated checks, CMS sends MAOs up to five types of automated reports with details about the encounter data submission, including information on the data received. These reports provide information on whether errors occurred and whether encounter data processing can continue so that MAOs can identify problems with their data. CMS may provide additional reports if MAOs need to resubmit the data to meet CMS’s requirements. (See app. II for a summary of CMS’s automated reports for MAOs.) Although representatives from MAOs noted that CMS has not always produced the automated reports on a timely basis, CMS officials told us that they now produce the reports within 1 week of encounter data submission. According to the MAO representatives, the reports are generally useful, straightforward, and easy to understand. CMS plans to develop four other automated reports related to data submission and processing but has not established a time frame for doing so. These reports are expected to determine the number of encounter data files accepted and rejected identify encounter data submission errors and summarize the type of errors found, provide additional details on rejected encounter data submissions, ascertain diagnoses that CMS accepted and will use to calculate risk scores. Although CMS has had plans since at least October 2010 to develop a report that identifies those diagnoses that it will use to calculate risk scores, it still has not produced the report. MAOs we interviewed expressed concern that CMS has not developed this report, which could help them understand how encounter data will be incorporated into CMS’s risk score calculation. Although CMS is aware of the need to perform statistical analyses of MA encounter data, the agency has not yet conducted these analyses. According to CMS’s protocol for validating Medicaid encounter data, analyzing values in specific data elements, generating basic statistics on the volume and consistency of data elements, and periodically compiling and reviewing statistics on utilization rates can help detect data validity issues. In March 2014, CMS officials told us that they were able to only summarize the volume of encounter data files by MA plan. The officials stated that they would like to be able to determine the frequency of diagnoses per encounter data file, examine the dates of service on encounter data files, and compare MA encounter data with FFS claims data by the summer of 2014. However, the officials noted that they have not developed a specific time frame for performing statistical analyses and that determining which analyses to perform will be an iterative process over the next year or two. It appears that CMS will use encounter data to calculate 2015 risk scores and pay MAOs before it performs statistical analyses of the data. As CMS begins to analyze the quality of MA encounter data, several types of statistical analyses outlined in its Medicaid validation protocol may help detect potentially inaccurate or unreliable data. Such analyses include the following: Determining whether the frequency of values within an encounter data element is reasonable. For example, a frequency distribution for the place of service variable would be expected to include a reasonable distribution between inpatient hospital, outpatient hospital, and physician office visits. This type of analysis can help detect whether a value is missing, underreported, or overreported. Generating basic statistics from the encounter data. For example, analyzing the rates of outpatient services by provider zip code could help discover that encounter data files are missing certain zip codes, indicating a certain amount of underreporting. To examine the completeness of Medicaid encounter data, a CMS contractor assessed the average number of encounter data files per enrollee and the percentage of enrollees with data files. As another example, MAOs reporting an unexpectedly large number of a particular service may suggest overreporting. Analyzing encounter data elements by demographic group, provider type, and service type. For example, analyzing encounter data by enrollees’ gender would enable CMS to verify that data files for gender-specific diagnoses and procedures are logical. Analyzing encounter data by provider type helps identify missing or erroneous data for specific provider types or discover fluctuations in enrollee visits. For example, dramatic changes in utilization from one time period to another may indicate erroneous data. Finally, analyzing encounter data by service type also helps to examine the relationship between (1) ancillary services (e.g., laboratory tests and x-rays) and enrollee visits, (2) primary care and specialty care visits, or (3) outpatient services and inpatient admissions. Comparing encounter data with other Medicare data sources, MAOs’ financial reports, or other benchmarks. Comparing MA encounter data with Medicare FFS data may help determine whether differences exist in hospital admission rates between the MA and FFS programs. In addition, comparing the volume of encounter data to financial reports helps reveal gaps in the data.monitoring MAOs’ encounter data volumes for various service types against established benchmarks helps identify data submission problems, according to an actuarial firm that assessed Medicaid Furthermore, Moreover, New Jersey examines the encounter data for California.rate of services used per 1,000 MCO enrollees against benchmarks for 28 service categories, such as laboratory services, to assess data completeness. CMS has not yet performed MA enrollees’ medical record reviews, which typically involve comparing a sample of encounter data with the clinical information contained in enrollees’ medical records. According to CMS’s protocol for validating Medicaid encounter data, medical record reviews can help confirm the findings generated in the encounter data analyses. Use of Medical Record Reviews in a Medicaid Encounter Data Validation Study In a 2010 Medicaid encounter data validation study for Georgia, the Health Services Advisory Group examined the extent to which services documented in enrollees’ medical records were absent in their encounter data and the extent to which services documented in enrollees’ encounter data were absent from their medical records. It also evaluated the accuracy of the diagnosis and procedure codes in encounter data by comparing them with documentation in enrollees’ medical records. The findings showed that enrollees’ medical records generally supported encounter data files in Georgia. Specifically, 93.9 percent of the dates of service, 86.7 percent of the diagnosis codes, and 78.5 percent of the procedure codes from the encounter data had supporting evidence in the medical records. However, not all services documented in the medical records were found in encounter data files. Specifically, 20.5 percent of the dates of service, 49.3 percent of the diagnosis codes, and 40.1 percent of the procedure codes documented in enrollees’ medical records were omitted from encounter data files. Acknowledging the necessity of medical record reviews, CMS officials noted that the agency plans to review medical records as part of its MA risk adjustment data validation auditing process when it begins using encounter data for risk adjustment purposes. However, as of May 2014, the agency has not developed specific plans or time frames to include these data in this auditing process. CMS currently uses this auditing process to validate the accuracy of RAPS data. Specifically, CMS requires MAOs to provide medical records to substantiate the information in a selected sample of MA enrollees’ RAPS data. On the basis of the clinical information contained in enrollees’ medical records that substantiates the information in their RAPS data, CMS calculates corrected risk scores and calculates payment errors—which can represent a net overpayment or underpayment. Some MAOs may have been overpaid and may need to refund Medicare payments when enrollees’ medical records do not provide evidence for the risk-adjusted payment they had received from CMS. Because CMS has not yet conducted statistical analyses and reviewed medical records, it cannot report information from these activities to each MA plan. CMS’s protocol for validating Medicaid encounter data highlights the importance of summarizing information, reporting findings, and providing recommendations to plans for improving the completeness and accuracy of encounter data. Once the data are validated, MAOs could use summary reports from CMS in several ways, such as monitoring quality improvement and service utilization and managing their enrollees and providers. For example, the Health Services Advisory Group’s 2010 encounter data validation study for Georgia evaluated the completeness and accuracy of encounter data submitted by three MCOs. The study included plan-specific tables on the number and percentage of encounter files by place of service with statewide comparisons, the number and percentage of valid encounter files for age- and gender-appropriate diagnoses and services, and the number of encounter files by month of service. Without this type of information, CMS and MAOs cannot ensure the completeness and accuracy of MA encounter data. The collection of MA encounter data provides CMS with the opportunity to improve the accuracy of Medicare payments to MAOs and to monitor specific health care services used by enrollees. For MA encounter data to reach its full potential, it is critical that CMS develop a clearly defined strategy—which includes specific actions, priorities, and milestones—for using the information and validating the completeness and accuracy of the data. Deciding how the data are to be used influences which data elements need to be collected and, in turn, the extent of data reporting. However, CMS has yet to develop specifics on how or when it will use encounter data for a variety of program management purposes. Although CMS has decided to use MA encounter data to supplement RAPS data in calculating risk scores in 2015, this use may inappropriately increase payments to MAOs. Using diagnoses from both sources can only increase the number of diagnoses reported for MA enrollees. This has the potential to widen the existing discrepancy between FFS and MA in the coding of diagnoses. As we previously recommended, CMS should take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between FFS and MA to help ensure appropriate payments to MAOs. As of March 2014, CMS has not acted on our recommendation. To the extent that CMS continues to pay MAOs under its current risk adjustment system and not adequately account for diagnostic coding differences, excess payments to MAOs could grow. Furthermore, CMS’s decision to use MA encounter data in 2015 may be premature because the agency has not yet fully validated the data. CMS has taken steps to validate the data, such as establishing certain reporting requirements and performing automated data checks. However, the agency has not yet completed other steps in assessing whether the data are suitable for use, such as performing statistical analyses, reviewing medical records, and providing MAOs with summary reports of its findings. Without fully validating the completeness and accuracy of MA encounter data, CMS and MAOs would be unable to confidently use these data for risk adjustment or any other program management or policy purposes. Until CMS determines that encounter data are sufficiently complete and accurate to be used for risk adjustment and other intended purposes, the potential benefits of using these data will be delayed. To ensure that MA encounter data are of sufficient quality for their intended purposes, the Administrator of CMS should establish specific plans and time frames for using the data for all intended purposes in addition to risk adjusting payments to MAOs and complete all the steps necessary to validate the data, including performing statistical analyses, reviewing medical records, and providing MAOs with summary reports on CMS’s findings, before using the data to risk adjust payments or for other intended purposes. We provided a draft of this report to HHS for comment. In its written response, HHS agreed that establishing plans for using encounter data and performing steps to validate the data are important activities. However, it did not address the specific recommendations we made. (See app. III.) Regarding our first recommendation—to establish specific plans and time frames for all uses of MA encounter data—HHS stated that it agreed that the agency should establish plans for using the data. HHS noted that it has developed lists of the purposes for which it intends to use the data. Current regulations authorize four purposes—risk adjustment, quality improvement, Medicare disproportionate share percentages, and Medicare coverage monitoring. HHS recently published a proposed rule that outlines several additional purposes—program evaluation, program integrity, program administration, and others. HHS stated that once the proposed rule is finalized, CMS will be in a position to establish specific plans and time frames for the list of additional permissible uses of MA encounter data. However, CMS has had the authority since 2008 to use MA encounter data for the initial four purposes, thus it remains unclear if and when CMS will develop detailed plans for these earlier authorized uses. Regarding our second recommendation—to fully validate MA encounter data before use for any purpose—HHS stated that it will continue its data validation activities while it uses the data for risk adjusting payments to MAOs. HHS agreed that performing statistical analyses and providing summary reports are important elements of data validation. HHS stated that it will undertake medical record reviews—which are used to verify encounter data—through its ongoing risk adjustment validation audits of RAPS data. We remain concerned, however, that CMS intends to use 2014 MA encounter data to support its risk score calculations for 2015 before it completes all data validation activities suggested by the Medicaid protocol. Furthermore, CMS’s reliance on risk adjustment validation audits of RAPS data may not be adequate to confirm the completeness and accuracy of encounter data given significant differences—in the volume and breadth of data elements—between the two data collection efforts. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of CMS, interested congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your 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 IV. Description CMS organized this meeting with Medicare Advantage organizations (MAO) to disseminate information on the requirements for encounter data submission, the transition to submitting encounter data, and the schedule for encounter data implementation. CMS prepared this reference guide to provide MAOs with information about collecting encounter data from health care providers and submitting encounter data to CMS. The reference guide also includes information about encounter data processing that CMS performs. CMS prepared these guides, which it regularly updates, to provide technical assistance on conducting Health Insurance Portability and Accountability Act of 1996- compliant electronic transactions. December 2010 through March 2011 CMS organized these meetings between CMS and MAOs to discuss specific MA encounter data topics and concerns. CMS also published questions and answers from these meetings. CMS organized these meetings to provide MAOs with continued guidance on submitting encounter data. CMS also published questions and answers from these meetings. CMS organized these meetings to provide updates regarding decisions the agency made regarding encounter data implementation. CMS prepares bulletins with updated information on encounter data processing, such as the most common errors in submitting encounter data. CMS also prepares newsletters with information on policy updates. The CSSC help line provides encounter data assistance to MAOs by a toll-free telephone number. MAOs receive updated information about encounter data submission through the CSSC website. Palmetto GBA is CMS’s contractor that manages the collection of MA encounter data and the CSSC help line. Appendix II: Summary of Automated Reports for Medicare Advantage (MA) Encounter Data Submissions Report developer The Accredited Standards Committee X12 Notify MA plans about problems with the submission of encounter data files. Example The Centers for Medicare & Medicaid Services (CMS) rejects an encounter data file that contains an error in a processing- related data element. Determine the syntactical accuracy of encounter data elements. CMS alerts an MA plan that letters appear in a numeric-only data element. Acknowledge the acceptance or rejection of encounter data files. CMS notifies an MA plan about a problem with an encounter data submission. Provide information on whether encounter data files and service-related data elements have been accepted or rejected for further processing. CMS informs an MA plan that an encounter data file was rejected for further processing while another one was accepted. Notify MA plans about duplicate encounter data files and service-related data elements. CMS tells an MA plan that an encounter data file includes duplicate services or is the duplicate of another data file. In addition to the contact named above, Rosamond Katz, Assistant Director; Manuel Buentello; David Grossman; Elizabeth T. Morrison; and Hemi Tewarson made key contributions to this report. Medicare: Contractors and Private Plans Play a Major Role in Administering Benefits. GAO-14-417T. Washington, D.C.: March 4, 2014. Medicare Advantage: 2011 Profits Similar to Projections for Most Plans, but Higher for Plans with Specific Eligibility Requirements. GAO-14-148. Washington, D.C.: December 19, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. Medicare Advantage: Substantial Excess Payments Underscore Need for CMS to Improve Accuracy of Risk Score Adjustments. GAO-13-206. Washington, D.C.: January 31, 2013. Medicare Advantage: CMS Should Improve the Accuracy of Risk Score Adjustments for Diagnostic Coding Practices. GAO-12-51. Washington, D.C.: January 12, 2012. Medicare Advantage: Changes Improved Accuracy of Risk Adjustment for Certain Beneficiaries. GAO-12-52. Washington, D.C.: December 9, 2011. | Medicare Advantage—the private plan alternative to the traditional Medicare program—provides health care for nearly 15.5 million enrollees, about 30 percent of all Medicare beneficiaries. After a multiyear rollout, CMS began collecting encounter data in January 2012. GAO was asked to review CMS's plans for using MA encounter data and its efforts to validate the data's quality. This report examines (1) how the scope of MA encounter data compare with CMS's current risk adjustment data, (2) the extent to which CMS has specified plans and time frames to use encounter data for risk adjustment and other purposes, and (3) the extent to which CMS has taken appropriate steps to ensure MA encounter data's completeness and accuracy. In addition to reviewing laws, regulations, and guidance on MA encounter data collection and reporting, GAO interviewed CMS officials and representatives of MAOs. GAO also compared CMS's activities to the protocol CMS developed to validate Medicaid encounter data—comparable data collected and submitted by entities similar to MAOs. The Centers for Medicare & Medicaid Services (CMS) is collecting Medicare Advantage (MA) encounter data—information on the services and items furnished to enrollees—that are more comprehensive than the beneficiary diagnosis data the agency currently uses to risk adjust capitated payments to MA organizations (MAO). CMS, an agency within the Department of Health and Human Services (HHS), makes these adjustments to reflect the expected health care costs of MA enrollees. Encounter data have many more elements—including procedure codes and provider payments—from a wider range of provider types—such as home health agencies and skilled nursing facilities—thus expanding the scope of sources for diagnosis and other information. CMS has not fully developed plans for using MA encounter data. The agency announced that it will begin using diagnoses from both encounter data and the data it currently collects for risk adjustment to determine payments to MAOs in 2015. However, CMS has not established time frames or specific plans to use encounter data for other potential purposes. CMS has taken some, but not yet all, appropriate actions to ensure that MA encounter data are complete and accurate. (See figure.) The agency has established timeliness and frequency requirements for data submission, but has not yet developed requirements for completeness and accuracy. Also, the agency has certified nearly all MAOs to transmit encounter data. Although CMS performs automated checks to determine whether key data elements are completed and values are reasonable, it has not yet performed statistical analyses that could detect more complex data validity issues. For example, CMS has not yet generated basic statistics from the data by demographic group or provider type to identify inconsistencies or gaps in the data. Also, it has not yet reviewed medical records to verify diagnoses and services listed in encounter data or reported what it has learned about data quality to MAOs. Agency officials told GAO they intend to perform these additional quality assurance activities but have not established time frames to do so. CMS should establish specific plans for using MA encounter data and thoroughly assess data completeness and accuracy before using the data to risk adjust payments or for other purposes. While in general agreement, HHS did not specify a date by which CMS will develop plans for all authorized uses of encounter data and did not commit to completing data validation before using the data for risk adjustment in 2015. |
User financing—in the form of user fees, user charges, or targeted excise taxes—is one approach to financing federal programs or activities. User fees assign part or all of the costs of the benefits and services derived from these programs and activities—above and beyond what is normally available to the general public—to readily identifiable recipients of those benefits and services. We have defined “user fees” or “user charges” as fees assessed on users for goods or services provided by the federal government. Some excise taxes, however, can also be described as a form of user financing. For example, the excise taxes on motor fuels, tires, and heavy vehicles accrue to the Highway Trust Fund, from which Congress appropriates funds for the interstate highway system, mass transit, and transportation projects. Similarly, Federal Aviation Administration (FAA) operations are funded in part by excise taxes assessed on airline tickets, aviation fuel, and certain cargo. Both the Chief Financial Officers (CFO) Act and the Office of Management and Budget (OMB) Circular No. A-25 provide that agencies review their user fees biennially and make recommendations about any needed cost adjustments. Circular No. A-25 also states that each agency should review its programs to determine whether it could charge fees for any of its services, noting that if imposing such fees is prohibited or restricted by law, agencies will recommend legislative changes as appropriate. OMB encourages agencies to examine potential effects of design alternatives when reviewing and proposing changes to regulations, even when the regulations are mandated by statute. The user fees considered in this report, and summarized in table 1, are assessed under specific statutory authority and levied on air and sea passengers, vessel operators, or shippers (see app. II for a summary of the fees by payer). The fees vary in the way they are set, collected, used, and reviewed, which may affect their efficiency, equity, revenue adequacy, and administrative costs. Although all of the fees we examined vary in how they are set and adjusted, these differences are a particular issue with the inspection fees. Specifically, the passenger and vessel inspection processes in both the air and sea environments have been largely consolidated within CBP, but the legacy fees supporting these inspections are still governed by separate, dissimilar authorizing legislation and vary significantly in how they are set and adjusted and how they link fee rates to the cost of services. APHIS uses the federal regulatory process to propose rate increases and invites comments on its proposals and implementing regulations via a public notice and comment in the Federal Register. Although various Congressional committees oversee this process, Congress has delegated to APHIS the authority and responsibility to set and adjust AQI fee rates to match program costs over time. In contrast, both the immigration and customs fee rates are set in statute. These fees can only recoup authorized program costs to the extent that total reimbursable program costs do not exceed the rate caps prescribed in statute. The AQI fee statute grants the Secretary of Agriculture broad discretion to prescribe and collect fees sufficient to cover the cost of providing agricultural quarantine and inspection services. In spite of this, in 2006 we reported that financial management issues at CBP and APHIS adversely affect the AQI program’s ability to perform border inspections and that, in fiscal years 2003 through 2005, user fees were not sufficient to cover program costs. Moreover, prior to fiscal year 2006, CBP was unable to provide APHIS with information on the actual costs of CBP’s portion of the AQI program broken out by user-fee type—for example, fees paid by international air passengers or vessels. In 2007, APHIS and CBP further improved the AQI cost estimates by agreeing on a common set of assumptions used to forecast the cost of AQI activities. According to APHIS finance officials, the fee rates are now set to recover all program costs except for certain indirect and imputed costs, such as the cost of employee retirement benefits. We have previously found that OMB Circular No. A-25 guidance and USDA policy require the inclusion of indirect and imputed costs in setting full-cost recovery fees, and that unless otherwise specified in statute such collections should be deposited in the Department of the Treasury’s general fund. However, APHIS finance officials said that because the AQI authorizing statute does not authorize APHIS to spend fee collections on such expenses, APHIS does not include these costs when calculating the fee rate. APHIS also does not list these costs in the Federal Register when proposing rate increases, but noted that more transparency in this area could better inform users of the full cost of the program. APHIS estimates that these indirect and imputed costs for the AQI user fee program totaled approximately $18.9 million in fiscal year 2006. In contrast, the customs and immigration inspection fees are structured to recover partial costs. While both the immigration and customs statutes contain language that fees equal or be reasonably related to the cost of services, the two statutes actually prescribe an exact amount in law to be charged for their respective inspection services. That is, the immigration and customs user fees actually limit cost recovery to a sum certain. The customs statute further restricts cost recovery by limiting the set of activities for which collections may reimburse appropriations. The immigration statute makes immigration user fee collections available to refund any appropriation for expenses incurred in providing immigration inspection and pre-inspection services as well as certain other expenses, at least one of which—administration of debt recovery—is not directly related to immigration inspections according to CBP officials. According to CBP data, in fiscal year 2006, commercial vessel customs inspections fee collections covered about 66 percent of related program costs. DHS does not know the portion of total immigration inspection costs covered by immigration fee collections. CBP and ICE share responsibility for reimbursable, immigration-related inspection activities and, to date, DHS has not reported final costs for ICE’s inspection-related activities. According to CBP data, in fiscal year 2006, CBP’s portion of vessel inspection fee collections covered about 67 percent of CBP’s share of immigration vessel inspection costs, but until ICE’s cost data are finalized, DHS will not know the total portion of immigration costs covered by total fee collections, or whether the fees are properly divided between CBP and ICE. Since the fees can pay for only some inspection activities and only under certain circumstances, ensuring proper use of fee collections can require detailed cost data. Collecting these data, however, can be particularly costly given the disparate fee structures. For example, to be reimbursed for time spent on authorized activities for various fees, CBP must track the time spent on these activities. Because the inspection processes have been largely combined but the separate distinct fees supporting these activities are not uniform, correctly tracking which activities can be reimbursed by which fees can be difficult. To help address the concern that timekeeping was taking time away from officers’ inspection duties, CBP implemented a standard process for tracking time in early 2007. The process includes estimating the amount of time officers conducting different functions (e.g., vessel or passenger inspections) spend on different activities, including customs, immigration, and agriculture inspections. This process, however, has not completely addressed the problem. At one port we visited, on each shift, a full-time CBP officer was assigned solely to tracking staff time. Even with an efficient process for tracking time spent on different activities, the need to separately track three inspections that have largely been consolidated adds complexity and increases the potential for error. In general, the three fees are not levied uniformly, and sometimes involve cross-subsidization (see table 2). For example, although air passengers are charged an AQI fee, sea passengers (generally cruise ship passengers) are not. According to APHIS finance officials, the costs of these passenger inspections are imbedded in the cost of the AQI fee levied on vessel owners and operators. According to APHIS finance officials who calculate the fee rates, the costs of inspecting sea passengers, fee-exempt vessels, and vessels that have met the annual fee cap are spread among all payers of the AQI vessel fees. They said that although it is rare for most commercial vessels to exceed the annual fee cap of $7,380—a total of 15 payments—cruise ships routinely exceed the cap because they arrive in the U.S. far more than 15 times each year. According to CBP data, fiscal year 2006 CBP costs for the AQI commercial vessel inspections were approximately $35 million, and included about $2.2 million for passenger inspections and about $4 million for inspections of exempt private vessels. The cost data that CBP provides to APHIS does not indicate what portion of the $35 million is associated with inspecting cruise ships that have exceeded the fee cap. Sea and air passengers pay an immigration inspection fee, but no such fee is levied on vessel crew although they must undergo inspection. As a general rule, the costs of crew inspection are not charged to vessel owner/operators, although they may be charged for overtime immigration inspections of vessel crew at some ports. This makes fees unpredictable. Predictability of inspection fees enables users to plan, charge clients for, and account for related costs, but inconsistent rules for overtime inspections lead to uncertainty. The separate statutory and regulatory structures of the three overtime inspection charges are not aligned and overtime is not handled uniformly within some of the fees (see fig. 1). For immigration inspections conducted on a Sunday, holiday, or between the hours of 5:00 p.m. and 8:00 a.m. and when a given inspector is working overtime, CBP must charge a vessel operator, owner, or agent for the overtime cost of the immigration inspections. Because regular business hours vary by port, the hours during which an inspector might be working overtime vary. In addition, the amount charged depends on the number and pay grade(s) of the officer(s) performing the inspection and the amount of time spent on the inspection, adding to unpredictability and increasing DHS’s costs to administer the fee. Overtime charges for agriculture vessel inspections must, by regulation, be applied at an hourly rate for overtime inspections on a Sunday or holiday, or whenever the individual inspector is working overtime. According to CBP officials, collections for reimbursable overtime agriculture inspections total about $1.2 million annually. Moreover, although vessels must be charged for overtime inspections, AQI regulations explicitly prohibit charging for similar overtime inspections of aircraft when passengers have already paid an AQI fee for that flight. Lastly, according to CBP officials, CBP has limited authority to charge for overtime for customs inspection services. CBP officials told us that as a result, in practice, overtime charges are not assessed for most customs overtime inspections. Some payers told us that they often do not know whether or when they will incur overtime fees and what the charges will be. They said that consistent fees would offer predictability and reduce confusion. CBP officials also told us that billing vessel owners for overtime inspections is administratively burdensome. According to CBP estimates, CBP’s costs to process and bill immigration and agriculture inspection overtime charges totaled 26 percent of those collections in fiscal year 2007. The statutory authorities governing immigration overtime inspection charges mandate that the amount of the charge be dependent upon the amount paid to the inspector, subject to specified limitations. However, CBP officers are paid under a different statutory scheme, which does not contain the same limitations. Therefore, according to CBP, the agency cannot automatically bill the vessel operator or shipping agent for immigration overtime services. Instead, CBP must make calculations manually based upon the limitations contained in the immigration overtime authorities and the amount actually paid to the CBP officer performing the inspection services. CBP officials said that although charges for overtime inspections make sense because the inspections are more costly, a consistent set of overtime charges for customs, immigration, and agriculture inspections that did not vary by port or the rank of the inspecting CBP officer would increase revenue, decrease administrative costs, and improve CBP’s relations with the trade community. Ineffective and outdated collection methods for vessel inspection fees increase administrative costs for both agencies and payers. Furthermore, a lack of coordination between the Corps and CBP inhibits oversight of HMF payments for passenger vessels, domestic shipments, and shipments into foreign trade zones. Also, when these HMF payments are late, CBP does not charge interest or penalties and is therefore not using an important tool to encourage timely payment. Collections methods function best when they minimize administrative costs and maximize compliance, as seen in the automated system CBP uses to process the MPF as well as HMF assessed on imports. This system allows entry summaries to be electronically transmitted, validated, confirmed, corrected, and paid. The method of collecting the customs and AQI commercial vessel fees imposes unnecessary administrative costs on CBP and payers and may increase the likelihood of over- or underpayments. User fees function best when they minimize, to the extent practicable, administrative costs. Recognizing this, Treasury’s Financial Management Service has made it a priority to increase the use of electronic collection methods for government collections. CBP is automating collections for several user fees but to date, the commercial vessel fees may still only be paid in person by check or cash (see fig. 2). Moreover, payers must retain each paper payment receipt and present them at each entry so that CBP can determine whether that particular vessel has reached the annual fee cap. If a payer misplaces the receipt proving that the vessel has reached the fee cap, the fee must be paid. The payer may request a refund if the receipt is later found, although several stakeholders told us this process is lengthy and burdensome. Some stakeholders and CBP field office staff expressed frustration with the paper-based system and told us that an automated payment and record-keeping system would speed the collection process, reduce the likelihood of payment errors, and reduce administrative costs for both parties. These administrative challenges are exacerbated by the recent increase in the customs vessel inspection fee rate without a corresponding increase in the annual fee cap. Before the fee was raised in April 2007, the annual cap was equal to 15 payments. Some CBP officers told us that for both the customs and AQI fees, they simply counted the number of times the fee was paid within a given year to determine if a vessel had reached the cap. The AQI vessel fee is paid at the same time as the customs vessel inspection fee and is capped at an amount equaling 15 payments per year. Because the customs fee was increased but the cap was not, the cap is now equal to approximately 13.6 payments, meaning that the 14th payment is less than the standard, per arrival fee amount. CBP officers must be aware when processing payments that the 14th payment will be for a different amount than the typical fee rate, and that the fee cap is now structured differently than the AQI vessel fee. According to CBP officials, the quarterly remittance schedule for the passenger inspection fees contributes to a several month delay between the use of appropriated funds and receipt of reimbursement from the immigration and AQI user fee accounts, which has delayed CBP’s ability to spend funds on critical mission areas such as hiring personnel, purchasing equipment, or travel. To address this challenge, CBP told us it has developed a legislative proposal that would, in part, require monthly instead of quarterly remittance. A representative of a cruise line industry association we spoke with noted that monthly payments would increase the administrative costs to the cruise lines, but that if a steadier supply of funding helped CBP to provide better service, it would be worthwhile. Insufficient coordination between CBP and the Corps inhibits CBP’s ability to ensure that certain HMF payments are properly made; without this information CBP cannot verify compliance with the fee. HMF payments for passenger vessels, domestic shippers, and shipments into foreign trade zones are paid quarterly by check to CBP (see fig. 3). According to Corps officials, the Corps gathers information on domestic vessel movements and could provide this information to CBP. However, CBP does not request and the Corps does not share information with CBP on these types of domestic freight movements, which would help ensure that proper payments are made. An official from CBP’s Revenue Division said if CBP had information on freight movements it could reconcile them to HMF payments in order to monitor compliance rather than relying on self-reported payer information. The Revenue Division receives this type of “front-end reporting” for other, similar fees and, the official noted, front- end reporting is one of the best ways to establish a receivable and ensure proper payment. Furthermore, CBP does not systematically review late or improper HMF payments for passenger vessels, domestic shippers, and shipments into foreign trade zones or charge interest for these late payments and therefore is not using an important tool to encourage timely payment. CBP’s Revenue Division does not track whether these HMF payments are paid on time or late. During the course of our work, CBP officials said that CBP should be tracking and assessing interest and penalties on these late payments. CBP reviewed recent payment history and found that 42 percent of payments—representing approximately 18 percent of the total dollar value—were late. According to these officials, they are taking steps to begin collecting interest on past and future late payments. They estimate interest collections for last year to be about $182,000; they do not yet have an estimate for annual penalties. Further, they said that they have begun reviewing the authority related to penalties in order to determine an appropriate dollar threshold that would trigger assessment and collection actions. Finally, CBP’s Regulatory Audits division has not conducted any audits specific to the HMF since 1996; rather, the fee is audited incidentally during the course of audits related to other fees or duties. Although CBP’s audit selection strategy includes referrals from within and outside CBP, CBP has not requested and the Corps has not offered any HMF-related referrals. In contrast to the HMF collections process for passenger vessels, domestic shippers, and shipments into foreign trade zones, CBP’s collection process for both the MPF and HMF assessed on formal customs entries has several advantages. CBP accepts electronic payment for these fees along with customs duties, which are typically paid by a customs broker on behalf of an importer. CBP’s automated system allows entry summaries to be electronically transmitted, validated, confirmed, corrected, and paid, which expedites the release of merchandise. Customs brokers we spoke with said that the system works well, is efficient, and imposes minimal administrative costs. It is less costly for the government and payers of the fee for CBP to collect the fee as part of the formal entry process than it would be for the Corps or another entity to establish a new collections process because CBP already values cargo for the assessment of duties, so there is no duplication of effort. Further, when CBP conducts audits on the value of cargo to determine if the declared value of the goods is correct, CBP also determines if the correct amount was paid for HMF and MPF. Because these are ad valorem fees, if the value of the goods is understated, additional HMF and MPF fees may be due. All of the fees we reviewed suffer from some misalignment—although the nature of that misalignment varies—which affects how the fees are used. Similar to the airline passenger inspection fees, not all authorized, reimbursable activities for the sea passenger and vessel inspection customs fees and MPF are associated with conducting inspections, and not all inspection-related activities may be charged to these fees. HMF collections far exceed funds appropriated for harbor maintenance, resulting in a large and growing surplus in the Harbor Maintenance Trust Fund (HMTF), while Corps officials and port stakeholders assert that many federally managed channels are undermaintained. The customs inspection activities and the authorized uses for the customs passenger and vessel fee collections are misaligned. For example, under the customs authorizing statute, passenger inspection fee collections are only available to reimburse appropriations for a limited, prioritized set of activities—including foreign language proficiency awards and transfers to the Treasury’s General Fund of not more than $18 million for the purposes of deficit reduction. Further, as we discussed earlier, by statute customs inspection-related activities that occur while a CBP officer is earning overtime or premium pay, or during preclearance, can be funded by the user fees, but the same activities conducted during regular time cannot be funded by the fee. Therefore, not all of the activities that may be funded from the customs fee are associated with conducting customs inspections, and not all customs inspection activities are reimbursable (i.e., can be covered by funds from the user fee account). Moreover, use of the customs vessel and sea passenger fee collections is not restricted to vessel and sea passenger inspections. Rather, they may be used to reimburse authorized inspection activities conducted at air, sea, or land ports of entry. Similar alignment issues exist with the MPF. CBP officials said that since the events of September 11, 2001, the focus of merchandise processing has shifted toward security and away from the original focus on trade compliance. They said that certain activities associated with merchandise processing and performed by CBP officers, including screening and inspecting conveyances (including nonintrusive searches), processing seized narcotics, and inspecting vessels and containers, are not reimbursable MPF activities, but should be. According to CBP officials, the legislation governing the MPF should be explicitly consistent with CBP’s mission—that revenue and commercial functions should include commercial as well as security and antiterrorism elements. Since 2003, HMF collections have significantly exceeded funds appropriated for harbor maintenance, resulting in a large and growing surplus in the trust fund. This may be inconsistent with users’ expectations of the fee’s purpose as laid out in statute and the principles of effective user fee design. Specifically, the authorizing legislation generally designates the use of HMF collections for harbor maintenance activities. Furthermore, according to stakeholders, this misalignment between fee collections and expenditures undermines the credibility of the HMF. According to CBP data and Treasury reports, in 2001 HMF collections exceeded expenditures by about $44 million, and by 2007 that gap had grown to over $506 million (see fig. 4). There are several reasons why growth in collections has outpaced growth in expenditures. Total collections grew 101 percent from $704 million to $1.416 billion from 2001 to 2007. Corps officials told us this was driven by the ad valorem nature of the fee—receipts grow with both volume and value of shipments. Annual harbor maintenance project expenditures, which are subject to annual appropriation, grew more slowly—from $660 million in 2001 to $910 million in 2007 (38 percent). The difference between the amount collected and the amount expended has led to a growing balance in the HMTF. In addition, the HMTF is credited with interest on its surplus. Between fiscal years 2001 and 2007, the balance in the HMTF grew from $1.8 billion to $3.8 billion and Corps officials told us they expect it to reach $8 billion in fiscal year 2011 (see fig. 5). Since 1996, the President has included in his annual budget requests and Congress has appropriated $3 million from the HMTF to compensate CBP for costs associated with collecting the fee. However, CBP finance officials told us that they estimate the annual cost of collecting the HMF to be approximately $2 million. Officials at the Corps and CBP were unable to explain why the President’s budget request for this activity was higher than the estimated cost of collecting the fee. The Corps prepares an annual report to Congress on the Harbor Maintenance Trust Fund, which includes a substantive review of the fee, but does not include information on these costs. The HMTF is not the only fund for which revenues flow in automatically from earmarked taxes or fees and spending must be appropriated. In the 1990s the Highway Trust Fund also built up a surplus. At the time, Congress and the President modified the discretionary spending caps to provide for a separate cap on highway funding. In 1998, Congress specified a more automatic link between spending from the Highway Trust Fund and receipts into the Trust Fund. The experience with these annual adjustments, known as Revenue Aligned Budget Authority (RABA), highlights some problems with such links. Spending was tied to estimated receipts with a retroactive adjustment; this worked only as long as the adjustments were positive—when receipts came in below estimated levels and would have resulted in an automatic cut in highway program funding levels, the cut was overridden. A different mechanism is used for the Food and Drug Administration (FDA) prescription drug user fee: if actual FDA fee collections are higher than the amount appropriated, FDA must adjust fee rates in a subsequent year to reduce its anticipated fee collections by that amount. Even if there were a tighter link between collections and expenditures, the HMTF should not necessarily aim for a zero balance. Corps officials and some stakeholders agreed that there are good reasons to consider maintaining a positive balance in the trust fund. Where fees are expected to cover program costs and program costs do not necessarily decline with a drop in fee revenue, a reserve can be important. For example, the AQI fees are maintained with a reserve of approximately 3 months worth of program costs in case of emergency. According to APHIS, the reserve is necessary because the AQI program is funded solely through user fee collections. As with similar situations, deciding whether and how to link HMF collections with expenditures is complicated. On the one hand, aligning collections and expenditures can promote economic efficiency and enhance stakeholder support for the fee. On the other hand, increased spending on harbors or reduced fee collections would increase the federal deficit, unless spending in other areas was decreased or other collections or revenues were increased. Moreover, our prior work shows that providing guaranteed funding levels to any one activity in the budget protects that activity from competition with other areas for scarce resources and limits Congressional discretion to make trade-offs in spending priorities. Regardless of the approach taken, a reduction in fee receipts or an increase in appropriations—absent offsetting changes elsewhere—will increase the federal deficit. Given the fiscal pressures imposed by the nation’s large and growing structural deficits, decisions about changing the HMF should consider its continued relevance and relative priority within the context of reexamining the base of all major federal spending and tax programs. Despite large and growing balances in the harbor maintenance trust fund, both Corps officials and other stakeholders told us that there is a backlog of harbor maintenance, which can result in costly delays and more dangerous shipping conditions. A recent Corps analysis of the 59 busiest commercial federal channels in the U.S. found that the authorized depth was available in the middle of the channel only approximately 35 percent of the time in fiscal year 2005 and 33 percent of the time in fiscal year 2006. Although ships continue to use these channels and harbors, not maintaining them to their justified design dimensions can cause problems. For example, according to Corps officials in one port we visited, some vessels are delayed because they have to wait for high tide in order to pass through the channels. They also reported instances where ships skipped a port of call altogether if such a delay would have caused the ship to miss its scheduled appointment at the Panama Canal. These types of disruptions affect both regional commerce and port profits. A 2007 report by the U.S. Committee on the Marine Transportation System (CMTS) found that vessels often deal with the challenges of poorly dredged and maintained channels and harbors by “light loading,” i.e., loading less cargo than their full capacity, in order to reduce their sailing draft; this in turn increases shipping costs. Furthermore, if a port is not well maintained, it may lack the capacity to handle increasingly larger vessels and therefore lose business or drive up costs. For example, according to South Carolina State Ports Authority officials, the authorized depth of the Port of Georgetown is 27 feet, but the channel has silted in to 25 feet on numerous occasions over the past several years. With the channel at only 25 feet, a company bringing in rock for the regional construction industry can only bring in about 24,000 tons per vessel, down from 28,000 tons with a 27-foot channel. They said that this “light-loading” of vessels significantly drives up its operating cost and impacts construction costs. The 2007 CMTS report found that channel limitations may lead to unsafe conditions and interaction with other vessels. Consistent with this finding, according to a Corps after-action report, a full oil tanker ran aground in East Rockaway, New York, in 2006 due in part to a lack of maintenance. Corps officials said the Corps now uses a performance-based budgeting model to set harbor maintenance priorities, in which projects are prioritized primarily by the amount and value of commercial tonnage moving through the harbor or channel. As part of this effort, the Corps is developing a national estimate of the cost to make the 59 busiest channels available 95 percent of the time at their full-use dimensions, but there is no timeline for completing that study. Without regular, substantive fee reviews, agencies, stakeholders, and Congress lack complete information about changing program costs and whether authorized, reimbursable activities align with program activities. For example, CBP and APHIS report separately on the customs, immigration, and AQI vessel fees, and the reviews generally do not reflect input from the other. Furthermore, CBP’s review of the MPF does not detail program costs and project fee collections, or provide enough information to determine if the amount, structure, or authorized uses of the fee should be updated. Because user fees represent a charge for a service or benefit received from a specific government program, payers may expect a tight link between payments and services, including expectations about the quality of the related service. Although there are opportunities at the local level for payers to provide input on fees and the services they support, opportunities for payers to communicate with the Corps and CBP at the national level are limited. Ineffective communication may reduce stakeholder cooperation and support for the fees, contribute to misunderstandings and confusion about how the fees work and what activities they may fund, and inhibit the agencies’ ability to obtain input from stakeholders about fees and the programs that they fund. Congress does not have a comprehensive view of the vessel and passenger AQI, customs, and immigration inspection fees and how they work together, and may therefore lack important context for reviewing them. As we found in our recent review of the related air passenger fees, despite integration of the inspection processes for the three sea passenger and vessel fees, the administering agencies report separately on their respective fees. DHS has acknowledged that the challenges described in our previous work extend beyond air passenger inspections to other fees managed by the agency. In the case of the AQI, customs, and immigration vessel and sea passenger fees, the agencies and Congress lack information on the total costs of the combined inspections, and therefore do not know whether fee collections cover the costs of the consolidated inspection program. We have previously reported that agencies with shared responsibilities for common outcomes or related functions should reinforce agency accountability for collaborative efforts through common planning and reporting. CBP prepares a biennial report with summaries and key points for each of the user fees that it administers. CBP’s user fee review includes the customs fee, the portion of the AQI fee CBP receives, and the immigration fee. However, the information provided about the immigration fee did not include any input from ICE, which did not have cost information about its portion of the immigration fee at the time. APHIS’s review includes the entire AQI fee, but does not include any information from CBP on its portion of the agriculture inspections and is based only on APHIS’s analysis of the fee collections and inspection costs. Although CBP includes the MPF in its biennial user fee review, the information provided is not sufficient to project fee collections or to provide assurance that the amount of the fee is aligned with program costs. Without this information, CBP is not able to determine if the amount, structure, or authorized uses of the fee should be updated or to recommend changes to the fee statute. According to CBP Office of Finance officials, CBP has reliable information on the extent to which MPF collections cover the costs of related activities only for the past few years. These officials noted that as recently as 2003, cost calculations have included activities that are not directly associated with processing cargo or that are covered by other fee programs. Furthermore, CBP cannot reliably project future MPF collections because the agency has not estimated the effects of exemptions, entries made through foreign trade zones, the decline in the constant dollar value of the minimum and maximum fees, or changes in import demographics on total MPF collections. CBP data on MPF collections and program costs indicate that since fiscal year 2004 collections have increased relative to program costs and in fiscal years 2006 and 2007 collections exceeded costs by a total of approximately $221 million (see fig. 6). CBP’s most recent biennial report notes that a detailed analysis of the current and projected effects of MPF exemptions and an accurate cost estimate for processing merchandise is needed. CBP officials told us that they plan to conduct a detailed review of the MPF in the second phase of a three-phase review of the agency’s user fees. They said that they estimate beginning the MPF review in early 2008, but the timeline depends on when the first phase is completed. Agencies can accommodate stakeholder input in various ways. We have previously reported on both the need to accommodate stakeholder input as well as various models for doing so. Some Corps and CBP officials have established successful, two-way communication practices at the local level. For example, some Corps division offices publicly post survey results and maps showing the controlling depth reports for local harbors and channels. One local Corps official said this practice encourages more dialogue with stakeholders, noting that they will e-mail the office to find out when highlighted areas will be dredged. Also, several of the CBP field offices we visited hold regular meetings with port stakeholders to share information and address stakeholder concerns. However, there is currently no formal vehicle for payers of the HMF and other port stakeholders to provide input to the Corps on the HMF itself or on national harbor maintenance projects and priorities supported by the fees. The HMF authorizing legislation did not establish an HMF advisory committee, though it did establish an advisory committee for a similar program that funds new work construction and rehabilitation on inland waterways. The purpose of this Inland Waterways Users Board is to make recommendations on priorities and spending for inland waterway construction and rehabilitation projects. As we have previously reported, both the customs and immigration passenger inspection fee statutes required the establishment of advisory committees consisting of industry representatives to advise the agency on issues related to inspection services, including fee levels. CBP’s Airport and Seaport Inspections User Fee Advisory Committee meets biannually to advise the commissioner of CBP on issues related to the performance of airport and seaport agriculture, customs, or immigration inspections. The committee members represent entities subject to the fees, including airlines, airports, cruise lines, and industry associations. We recently reported that stakeholders felt that the advisory committee provided only limited opportunities for substantive two-way communication. As a result, they said they lack data necessary to know whether the passenger inspection fees are set fairly or accurately, or are being spent on the appropriate activities. Our prior work found that federal advisory committees play an important role in shaping public policy by providing advice on a wide array of issues. Their advice can enhance the quality and credibility of federal decision making. Despite the strengths associated with the federal advisory committees as a means to facilitate effective stakeholder input, agencies also need to be careful to maintain their mission to promote the public interest and take measures to safeguard against actual or perceived agency capture by the entities paying the fee. According to a Congressional Research Service report on the FDA prescription drug user fees, some critics said that giving the pharmaceutical industry a role in setting program performance goals creates conflicts of interest and gives the industry too much influence over FDA actions. Agencies also need to ensure that all stakeholders are given the opportunity to engage substantively. Some smaller businesses have raised concerns that FAA only consults with selected major airlines and manufacturers, ignoring commuter airlines and smaller businesses also affected by FAA regulations. Many of the stakeholders we spoke with said that although the ad valorem structure of the HMF makes it relatively easy to administer, it raises concerns about equity. Specifically, they noted there is no link between the value of their cargo and the depth or width of the harbor needed by the ship on which it is carried. For example, importers of high-value goods, such as natural gas and pharmaceuticals, told us they essentially pay a much greater share of dredging costs than importers of low-value cargo. Stakeholders said that a ship’s size and draft combined with harbor conditions drive harbor maintenance costs, and therefore may more closely link benefits received with the cost of providing the benefits. Other stakeholders noted that a benefit of the ad valorem structure is that it may better reflect the users’ ability to pay. Some stakeholders also said that because the HMF fee structure does not reflect the individual dredging needs of ports, i.e., lower for naturally deep west coast ports that require very little dredging and higher for shallower eastern seaboard and river ports that require annual dredging, the overall cost of moving goods through the nation’s marine transportation system is artificially high. On the other hand, applying the fee equally to all eligible ports offers a relatively simple collection mechanism and helps to create a level playing field for all ports, which in turn helps minimize competition between individual ports. Even so, officials from ports located near international borders told us the HMF disadvantages them relative to nearby foreign ports. For example, Seattle Port Authority officials consider the HMF to be a “punitive assessment” because they said it decreases Seattle’s competitiveness against Canadian ports (which do not charge the fee). These officials said that the Port of Vancouver actively promotes itself as not charging the HMF, and said this partly explains why the Port of Vancouver is growing at a faster rate than the Seattle port. Whether the fee is based on the value of the cargo (ad valorem) or on the size and draft of the ship is a separate decision from whether fees should vary by the dredging needs and condition of a given port. In other words, Congress could decide to impose a uniform fee structure at all ports even if it chooses to change the design of that fee from ad valorem to one based on a ship’s size or draft. Stakeholders expect that inspections will occur in a timely manner. Cruise lines, importers, and ships’ agents all said that delays for passenger and vessel inspections are costly to industry. Because crew members cannot disembark and, in some ports, the cargo cannot be unloaded until a ship is cleared, these delays can be expensive. One agent said that a 1-hour delay can cost a carrier $15,000 in longshoreman labor costs. Another agent said that crew changes cannot occur until a vessel has cleared its immigration inspection. During this time, the ship must pay expenses for two crews. Stakeholders told us that when multiple ships arrive at the same time, ships have waited up to 4 hours before being cleared. CBP officials told us that these types of inspection delays are generally caused by staff shortages, outdated or crowded facilities, clustered arrivals, or some combination of these factors. We recently reported similar findings related to delays for arriving international air passengers. Although the need to address some of the user fee challenges presented in this report may appear obvious, how to accomplish this is less clear. Where appropriate, changes made to one fee should be designed to complement rather than conflict with the other fees. The separate, disparate fees supporting the largely consolidated inspection process appear to aggravate disconnects between the customs passenger and vessel fees and the corresponding inspection activities, and do not adequately account for the costs imposed by different users. Unless remedied, differences such as the way overtime charges are assessed for commercial vessel inspections, as well as misalignments between actual and reimbursable inspection activities, will persist, causing confusion and raising equity concerns. Moreover, unless CBP automates its collection methods, requires monthly remittance, and aligns fee rate increases with the annual fee caps, CBP will continue to incur unnecessary administrative costs and needlessly expose itself to delayed remittance and potential errors that can result in revenue losses. Similarly, until CBP fully implements a system to assess and collect interest and penalties on late HMF payments, the federal government will continue to incur revenue losses. The extent and nature of the link between HMF collections and expenditures are policy choices only Congress can make. However, vital information about the tradeoffs associated with such a link is lacking. Further, absent a vehicle for substantive HMF stakeholder input and two- way communication at the national level, stakeholder cooperation as well as support and understanding of the fee will continue to suffer. Moreover, funds requested and appropriated in excess of CBP’s collection costs for the HMF reduces the amount of money available in the HMTF to be appropriated for other purposes. Unless agencies present a comprehensive picture of the customs, immigration, and AQI fees, including the full scope of inspection activities and their costs, Congress will continue to lack a complete picture of whether the fees work in concert or conflict with each other, which could hamper oversight. Furthermore, agencies will be less able to develop and maintain the partnerships necessary to collect and distribute the fees as efficiently and effectively as possible. The lack of complete, transparent cost and collections data for the MPF and AQI fees, and regular, formal opportunities to share such information can prevent the agencies from addressing existing issues, including possible misalignments between fee collections and program costs. More broadly, if agencies cannot determine the extent to which these fees are recovering costs, Congress cannot be sure that resources are allocated to the activities it most values. The principles of effective user fee design discussed earlier in this report can both offer a framework for considering the implications of various statutory structures and help clarify and illuminate the tradeoffs associated with various policy choices available to Congress associated with amending the individual statutes related to the fees discussed in this report. Such a framework could also provide the basis for future reviews of federal user fees as Congress works to ensure that user fee financing mechanisms remain relevant and up-to-date. To support the efficiency and equity of the Harbor Maintenance Fee as well as its credibility among stakeholders, Congress should consider reviewing the link between the amount of the HMF and the amount of expenditures for the harbor maintenance program; and establishing an advisory committee on the HMF and the activities that it funds, that includes payers of the fee. We recommend that the Secretary of Homeland Security take the following four actions: Develop a legislative proposal, in consultation with Congress, to harmonize the customs, immigration, and agricultural quarantine inspections fees. Harmonizing the fees could include eliminating the differences in the way charges for overtime inspections are assessed to commercial vessel operators; raising the cap on customs inspection fees for commercial vessels, in line with the 2007 increase in this fee, so that the cap once again corresponds to a whole number, rather than a fraction of payments; revising the customs passenger and vessel inspection fees so that the inspection activities the fees are authorized to fund are more closely aligned with actual inspection activities; and requiring monthly, rather than quarterly, collection of the customs and immigration inspection sea and air passenger fees. Direct CBP to automate its systems for collecting commercial vessel fees to reduce the reliance on paper receipts for tracking payments and to support electronic payments, rather than payment by check or cash. Direct CBP to include in its biennial report on the Merchandise Processing Fee information on total program collections relative to total program costs, over time, as well as any recommendations for updating the amount and authorized uses of the fee. Assess interest and penalties on late HMF payments for domestic shipments, shipments into foreign trade zones, and sea passengers. We recommend that the Secretary of Agriculture take the following two actions: Improve the transparency of the regulatory process of setting the AQI fee rates by providing clearer information about how the rates for each of the fee types (vessel, air passenger, aircraft, etc.) are determined. In accordance with OMB Circular No. A-25 guidance and U.S. Department of Agriculture policy, include in AQI fees the indirect and imputed costs currently not considered when setting AQI fee rates and either transfer the appropriate portions of those collections to the general fund of the Treasury as required, or seek Congressional approval to spend these monies on related AQI program costs. Further, we recommend that the Secretaries of Agriculture and Homeland Security conduct joint reviews of the customs, immigration, and agricultural quarantine inspection fees and consolidate reporting, to include the activities and proportion of fees for which CBP, ICE, and APHIS are each responsible, to provide a comprehensive picture of the user fees supporting the sea passenger and vessel inspections processes. Further, we recommend that the Secretaries of Homeland Security and the Army direct CBP and the Corps to improve oversight of the HMF collections by working together to develop a method for the Corps to provide information on domestic vessel movements to CBP; a method for the Corps to provide referrals of audit candidates to the CBP Office of Regulatory Audit to be considered in the context of CBP’s risk- based system for selecting audit candidates; information on CBP’s costs to collect and administer the HMF, for inclusion in the Corps’ annual report to Congress on the Harbor Maintenance Trust Fund; and an annual budget request for CBP-related salaries and expenses equal to, rather than in excess of, CBP’s actual costs associated with collecting the HMF. We provided a draft of this report to the Secretaries of Homeland Security and Defense, and to the Acting Secretary of Agriculture for review. We received written comments from the Department of Homeland Security (DHS), which are reprinted in appendix III, and oral comments from the Departments of Agriculture (USDA) and Defense (DOD). In addition, each agency provided technical comments, which we incorporated as appropriate. We also provided portions of the report to nonfederal stakeholders for their review and made technical corrections as appropriate. DHS characterized the report as balanced and accurate and agreed with the overall substance and findings of the report. Of the six recommendations directed at DHS, DHS concurred with five of them and partially concurred with the sixth. Specifically, DHS concurred in part with our recommendation to automate collections of the customs and AQI fees assessed on commercial vessels, stating that the agency will analyze the feasibility of this approach and work to identify and obtain funding to implement the recommendation if it is deemed cost beneficial. We appreciate that DHS recognizes the importance of using cost-effective methods to collect fees and look forward to receiving regular updates on DHS’s and CBP’s progress in this area. In its oral comments, USDA noted it was impressed with the level of explanatory detail and analysis contained in the report and said it generally agreed with our recommendations. Regarding our recommendation that USDA include certain indirect and imputed costs when setting the AQI fee rates, the agency said it will review the fee and seek guidance from its Office of the Chief Financial Officer and Office of General Counsel on this issue. USDA noted that it has been APHIS’s position that because USDA receives appropriations to pay for departmental and staff office costs and OPM receives appropriations for imputed costs such as future retirement benefit expenses, APHIS did not have the authority to include those costs in the fee. We interpret the AQI user fee statute, however, as permitting USDA to recover all costs associated with its program, including imputed and indirect costs. We recognize that imputed costs, such as retirement and unfunded pension liabilities, may be more directly linked to the fee- funded activity and more easily calculated than seeking to allocate departmental and staff office costs. Further, “full cost recovery” should be viewed from a governmentwide perspective. Even though USDA would have to deposit those portions of user fee collections as miscellaneous receipts in the general fund of the Treasury, and therefore would not directly reimburse the relevant appropriation account under a specific statute, it would still defray a cost that Congress determined should be paid for by the user fees. If USDA believes that the statutory authority does not permit it to cover such indirect and imputed costs, then we believe USDA should seek additional authority from Congress consistent with our recommendation. USDA also noted that it will need to (1) work with DHS to identify DHS’s imputed costs for the AQI program and (2) consider the impact of the fee increase on payers. We recognize that if incorporating these costs will substantially increase the AQI fees, a measured approach that incorporates the costs gradually may be appropriate. DOD provided oral comments, and concurred with the findings, conclusions, and recommendations of the report related to the Army Corps’ Harbor Maintenance Fee. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies to the Secretaries of Homeland Security, Agriculture, Army, and Defense and interested Congressional committees. We will also make copies available to others on 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) 512-9142 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In order to provide context as Congress considers funding options for port programs, we examined (1) what is known about the way selected fees assessed on air and sea port users are set, collected, used, and reviewed (including the views of stakeholders) and (2) the effects of these attributes on program operations. To meet this objective, we examined selected fees that are assessed on port users; specifically the Harbor Maintenance Fee (HMF), Merchandise Processing Fee (MPF), Customs Inspection Fees, Immigration User Fee, and Agricultural Quarantine Inspection (AQI) User Fees. In selecting the fees, we reviewed relevant policy and economic literature, interviewed user fee experts, and examined Office of Management and Budget data on user charges. We chose these fees because they are levied upon port users, and are related to maritime, safety, and homeland security programs. Additionally, we chose them because they vary in their key design characteristics, specifically in the way in which they are set, collected, used, and reviewed. In examining the fees, we reviewed user fee legislation and guidance, agency documents, and literature on user fee design and implementation characteristics. We interviewed officials responsible for managing the selected user fees at the U.S. Army Corps of Engineers (Corps), the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS), and the U.S. Customs and Border Protection (CBP) offices in Washington, D.C. CBP administers the MPF and Customs inspection fees, and it collects the HMF on behalf of the Corps. CBP administers the Immigration user fees jointly with U.S. Immigration and Customs Enforcement (ICE) and the AQI user fees jointly with APHIS. To select the ports that we visited, we consulted with port security experts from within and outside of GAO, with CBP and Corps officials, and with outside stakeholders, in order to choose ports that varied in their type and volume of trade and commerce (including cruise lines, container ships, petroleum products, and liquefied natural gas); maintenance dredging needs, and specific issues facing them such as a high volume of commercial cargo, security challenges, or proximity to a land border or intricate river system. We also considered travel costs in selecting the site visits. In light of the significant amount of ongoing audit work in the Gulf region, and because other ports in our selection are representative of important characteristics associated with Gulf ports, we did not include a Gulf port in our selection so as not to unnecessarily burden an area in crisis. The ports we selected include medium and large ports, natural deepwater ports, and those that require frequent dredging. We visited the ports of Boston, Massachusetts; Charleston, South Carolina; Newark, New Jersey/New York, New York; Baltimore, Maryland; Miami, Florida; Port Everglades, Florida; Seattle, Washington; and Los Angeles/Long Beach, California. At these ports, we observed passenger, vessel, and cargo inspections, and interviewed officials from CBP and Corps field offices. At each port, we spoke with various stakeholders, including port authority officials, customs brokers, shipping agents, harbor pilots, importers, and cruise line officials. We also met with the following national stakeholder organizations: the American Association of Port Authorities, the Cruise Lines International Association, the Association of Ship Brokers and Agents, the National Association of Maritime Organizations, and the World Shipping Council. We coordinated our work with another GAO team that was examining the customs, AQI, and immigration air passenger inspection fees, and drew upon their audit findings as appropriate. In addition, we reviewed collections and cost data for each of the fees, data on balances in the Harbor Maintenance Trust Fund, and data on channel availability provided by the Corps. We asked questions about APHIS, CBP, and Corps internal controls for the data we used and determined that the data were sufficiently reliable for the purposes of this report. We performed our work from February 2007 through February 2008 in accordance with generally accepted government auditing standards. Appendix II: Summary of Fees by Payer The HMF is not assessed on domestic cargo valued at less than $1,000, and quarterly payment is not required if the total value of all shipments for which a fee was assessed for the quarter does not exceed $10,000. No payment is required for imported cargo that is entitled to be entered under informal entry procedures. Jacqueline M. Nowicki (Assistant Director) and Susan E.M. Etzel managed this assignment. Jessica Nierenberg, Kathleen Padulchick, and Amy Rosewarne made key contributions to all aspects of the report. Jay Cherlow, Chelsa Gurkin, Terrance N. Horner, Alessandra Rivera, and Jack Warner also provided assistance. In addition, Pedro Briones and Carlos Diz provided legal support and Donna Miller developed the report’s graphics. | America's port infrastructure is vital to U.S. foreign trade and a bulwark for national security. One way the federal government funds port-related programs is to levy user fees. GAO was asked to examine (1) what is known about the way selected fees assessed on air and sea port users are set, collected, used, and reviewed and (2) the effects of these attributes on program operations. GAO examined the Harbor Maintenance Fee (HMF), the Merchandise Processing Fee (MPF), and the Customs, Immigration, and Agricultural Quarantine Inspection (AQI) user fees assessed on air and cruise passengers and commercial vessels using criteria that have often been used to assess user fees and taxes--equity, efficiency, revenue adequacy, and administrative burden. The port-related fees GAO examined vary in how they are set, collected, used, and reviewed, creating misalignments between the fees and corresponding services, as well as administrative and oversight challenges. Although the customs, immigration, and AQI inspections have largely been consolidated under U.S. Customs and Border Protection (CBP), the corresponding fees remain separate and distinct and differ in how the rates are set and adjusted, the portion of costs they recover, and on whom the fees are levied. For example, overtime charges are handled differently for each type of inspection, creating confusion about the circumstances under which overtime must be paid, at what rate, and for which services. Certain collection methods increase administrative costs and reduce compliance. For example, quarterly remittance delays availability of funds and failure to charge interest and penalties on certain late payments is costly and discourages compliance. Further, lack of coordination between CBP and the U.S. Army Corps of Engineers inhibits oversight of certain HMF payments. All of the fees GAO reviewed suffer from some misalignment--for example, with their respective costs or activities--which affects how the fees are used. For example, since 2003, HMF collections have far exceeded funds appropriated for harbor maintenance, resulting in a large and growing surplus in the trust fund. Also, not all MPF and customs inspection activities are reimbursable and not all reimbursable activities are inspection related. Finally, agency user fee reviews are not always comprehensive. For example, CBP's review of the MPF does not detail program costs, project collections, or provide enough information to determine if the amount, structure, or authorized uses of the fee should be updated. Further, limited opportunities for substantive communication with HMF stakeholders hamper their understanding of the fee. |
Public health functions in the United States—such as disease detection, vaccinations, and emergency preparedness and response—are conducted by public health officials from 59 state and territorial health departments; approximately 3,000 county, city, and tribal health departments; about 180,000 public and private clinical laboratories; and multiple federal agencies. Since clinicians at the county, city, or tribal level are most likely to be the first ones to detect an incident, they and local public health officials are expected to report an incident or symptoms of diseases to the state health department and other designated parties. States provide supporting personnel, financial resources, laboratory capacity, and other assistance to local responders when needed. When an incident occurs that exceeds or is anticipated to exceed state, local, or tribal resources, state governors may request that the federal government provide resources to assist the state in its response efforts. For incidents involving primarily federal jurisdictions or authorities (e.g., military bases, federal facilities, or federal lands), federal departments and agencies may be the first responders and first line of defense in coordinating activities with state, local, and tribal partners. Along with HHS, several other federal agencies play a role in supporting public health functions, including the Departments of Agriculture, Homeland Security, Defense, and Veterans Affairs. Among these, HHS is the department with primary responsibility for supporting public health emergency preparedness and response: it serves as the federal focal point for coordinating response support for public health and medical services. Figure 1 provides an overview of the public entities having roles and responsibilities in sharing information to support nationwide public health situational awareness. Because of the many participants involved, the identification and management of a public health emergency call for effective communication and collaboration across all levels of government and the public health community. In this regard, efficient information sharing among these entities is essential to create and maintain the situational awareness needed to effectively prepare for, respond to, and manage a public health emergency. Congress recognized the importance of HHS’s role in supporting the nation’s ability to prepare for and respond to public health emergencies and, in 2006, through provisions of PAHPA, established the Office of ASPR. Among other things, the Assistant Secretary of this office serves as the principal advisor to the Secretary of HHS on all matters related to federal public health and medical preparedness and response. This official is also responsible for coordinating with state, local, tribal, and territorial officials to ensure effective integration of federal public health and medical assets during emergencies. The office was established in December 2006 and is made up of six subordinate offices. In addition, PAHPA established the National Biodefense Science Board in 2006, which HHS now refers to as the National Preparedness and Response Science Board. This board is to provide expert advice and guidance to the Secretary on scientific, technical, and other matters regarding current and future chemical, biological, nuclear, and radiological agents. PAHPA also mandated that the Secretary of HHS develop and submit to the appropriate committees of Congress by June 16, 2007, a strategic plan that described the steps the department would take to develop, implement, and evaluate an electronic public health situational awareness network. The network was to be made up of interoperable systems that would enable the simultaneous sharing of information needed to enhance awareness at the federal, state, local, tribal, and territorial levels of public health. The strategy was to identify measurable steps the Secretary would take to develop, implement, and evaluate the network. It was also to identify actions for improving information sharing, coordination, and communication among disparate biosurveillance systems supported by HHS. The law required the department to establish such a network by December 19, 2008. The Secretary designated ASPR to be responsible for developing the public health situational awareness strategy. However, we reported in December 2010 that the Secretary of HHS had not met the requirements enacted by PAHPA in 2006. In particular, we found that the department had not developed a strategic plan for establishing the network and had not integrated relevant but disparate strategies that existed throughout the department as a step toward establishing an electronic public health situational awareness network. Thus, we recommended that the Secretary of HHS develop and implement a strategic plan that defined goals, objectives, and priorities for establishing an electronic public health situational awareness network. We noted that such a plan should include performance measures for evaluating capabilities of existing and planned information systems, identify gaps in information-sharing capabilities and needed areas of improvement, and integrate related strategies within HHS for sharing information among federal, state, local, and tribal entities. The department neither agreed nor disagreed with the recommendation, but stated that a complete strategy would be developed. Subsequently, Congress reauthorized the act in 2013 and reiterated the mandate for HHS to develop a strategy and implementation plan for establishing an electronic public health situational awareness network, and to establish the network. The reauthorization, or PAHPRA, required the Secretary of HHS to submit to the appropriate committees of Congress a coordinated strategy and an accompanying implementation plan no later than 180 days after March 13, 2013—that is, by September 9, 2013. The network was to be established by March 13, 2015. PAHPRA authorized $138,300,000 for each of fiscal years 2014 through 2018 to support HHS’s efforts to implement the network and other activities mandated by the act. In May 2014, ASPR officials completed and the Secretary of HHS submitted the Public Health and Medical Situational Awareness Strategy to Congress. The department submitted the accompanying implementation plan to Congress in September 2015. Figure 2 provides an overview of the submission requirements and delivery time frames of the strategy and plan. Maintaining a situational awareness capability involves an active, continuous, and timely exchange of information that enhances the ability of public health officials to make decisions related to emergency preparedness and response. For about two decades, public health officials at the federal, state, local, tribal, and territorial levels have used IT systems and tools to collect and share information in their day-to-day functions, such as tracking vaccinations and outbreaks of seasonal influenza. Public health officials also use these systems to create the situational awareness needed to enable early detection of, and effective response to, emerging diseases and other public health events. For example, electronic biosurveillance systems are used to collect data such as complaints from emergency department patients and lab test results related to disease syndromes, and to provide these data to public health officials. These data collection and information-sharing techniques are employed not only to detect the initial signs of emerging threats, but also to track the spread of syndromes, diseases, and other biological events throughout the duration of a public health emergency. Additionally, geographic information systems and mapping tools that support emergency response are useful to public health officials, as these tools provide visual and quantitative data such as maps of available hospital facilities and bed capacity, the location of electrical grid generators, and information regarding regional populations. At the federal level, several agencies have implemented and continue to use IT systems and tools as part of their efforts to collect, integrate, and share critical public health and medical information. In our December 2010 report, we described 25 systems in use by HHS’s Centers for Disease Control and Prevention (CDC), Food and Drug Administration (FDA), Indian Health Service, and the Office of ASPR to support public health situational awareness. These systems had been developed and implemented to enable emergency response information-sharing in support of various other public-health-related department initiatives or mandates. In its role as the federal focal point for coordinating response support for public health and medical services, HHS coordinates national emergency response efforts for public health emergencies through ASPR’s Secretary’s Operations Center (SOC). This center was established in 2002 primarily in response to the events of September 11, 2001. The SOC is a 24-hour-a-day, 7-day-a-week emergency operations center that uses information systems and tools to collect and analyze data from other federal emergency operations centers, such as those at CDC and FDA. The systems are also used to share information with other federal agencies that have responsibility for public health and other emergency support functions, such as the Departments of Homeland Security, Agriculture, and Transportation, and with state and local entities. ASPR officials stated that they have used information systems operating from the SOC to support situational awareness during recent emergencies. For example, during the Louisiana flooding in August 2016, HHS deployed regional teams to the field to collect public health data from electronic health records of patients injured or otherwise affected during the flooding. The teams integrated the data into one of the SOC analytical tools, called Fusion Analytics, which layered the patient data with other data, such as information regarding the location of medical facilities that were available and able to treat certain patients. The HHS teams were then able to provide the information to local public health officials to help them make decisions regarding where to transport victims for treatment. In addition, the department used maps and images produced by another system, the HHS emPOWER Map, to identify populations of Medicare beneficiaries who use electricity-dependent medical equipment, such as ventilators and powered wheelchairs. This information was used to support planning and response efforts in the field in case of a power outage. The system also provided graphical information about areas likely to flood in support of emergency responders making preparations. Figure 3 shows an example of the type of information provided by emPOWER Map. ASPR officials noted other ways in which HHS has used IT systems operating from the SOC to help provide situational awareness for the early detection of illnesses in the Zika virus outbreak during the summer of 2016. For example, HHS used its interactive geographical information system tool, called GeoHEALTH, to map the number of cases within the country by state and county. This information was collected from state and local public health officials via CDC’s disease surveillance systems and from the National Biosurveillance Information Center via open source reporting. Using GeoHEALTH, HHS also mapped areas where potential contraceptive access issues could exist based on a number of key factors, including counties with high uninsured rates of women of childbearing age. Another way that GeoHEALTH was used in support of Zika monitoring was to map laboratory capacity for disease testing, as well as areas that were screening for Zika in the blood supply. The maps provided information to public health officials that enabled them to determine, for example, whether a jurisdiction had the medical facilities, lab capacity, resources and medications, and expertise needed to effectively respond to the outbreak. Figure 4 shows an example of a map produced by GeoHealth. ASPR also allows public health entities at the state, local, tribal, and territorial levels to use its systems to collect data. The data are used by these other entities to supplement or enhance information collected from the systems and tools used within their jurisdictions to support biosurveillance, public health reporting, and emergency response operations. Other HHS systems are also available for use by public health entities throughout the country. For example, CDC developed and implemented the BioSense system, which is used not only by its own program and Emergency Operations Center staff, but also by public health staff at state and local health departments and the Department of Veterans Affairs. The system was designed to collect health data from sources such as hospitals, laboratories, and pharmacies, and to provide public health entities access to the data. Such data are needed to create and support situational awareness, and thus improve capabilities for early public health emergency preparedness and response. HHS has defined processes and practices for managing the department’s collection of IT systems and resources under the governance of an established organization. This IT portfolio includes the systems used by the department to support public health situational awareness. Specifically, within HHS, the Office of the Chief Information Officer (CIO) defined processes for managing the IT portfolio when it published the Enterprise Performance Life Cycle Framework in July 2012. The framework was developed to guide the management of department IT resources in a way that facilitates participation with HHS partners. According to the framework, an IT project may be triggered as a result of business process improvement activities, changes in business functions, advances in IT, or it may arise from a law, such as the mandated establishment of electronic network capabilities defined by PAHPA and PAHPRA. The framework defines roles, responsibilities, and activities required to manage IT initiatives, to include those of business owners, critical partners, and integrated project teams. The business owner is the executive in charge of the organization and serves as the primary customer and advocate for an IT project. The business owner is responsible for identifying the business needs and performance measures to be satisfied by an IT project; providing funding for the project; establishing and approving changes to cost, schedule, and performance goals; and validating that the project initially and continually meets business requirements. In the case of a legislatively mandated program, when certain requirements and business needs are largely pre-determined, a business owner and IT project manager still must demonstrate that a proposed project will meet requirements stated in the mandate and do so in the optimal manner. Critical partners for an IT project are functional managers in areas such as enterprise architecture, security, acquisition management, finance, budget, and human resources. The critical partners are considered subject matter experts and participate in project management reviews and governance decisions to ensure compliance with policies in their respective areas. The integrated project team is chaired by an IT project manager with critical partner and business owner representatives to assist with planning and execution of the project. Further, HHS’s Enterprise Performance Life Cycle Framework defines the IT governance organization that will be responsible for ensuring that IT projects are technically sound, follow established project management practices, and meet the business owner’s needs. Components of this governance organization are an Information Technology Investment Review Board, the CIO’s Council/Technical Review Board, and the department’s CIO. In December 2014, FITARA enhanced the level of involvement that department CIOs should assume regarding the decision processes and policies related to IT resources implemented throughout the department, including those within programs such as those for public health emergency preparedness and response. Among other requirements, FITARA states that the CIO of a covered department such as HHS shall be included in the internal planning processes for how the department uses IT resources to achieve its objectives. This includes CIO involvement in planning for IT resources at all points in their life cycle. On June 10, 2015, the Office of Management and Budget (OMB) released a memo that provides federal agencies guidance for enhancing CIO responsibilities and involvement with IT resources in accordance with FITARA. The guidance states that the CIO shall approve the IT components of any plans through a process defined by the department head. The guidance also states that the CIO should establish and maintain a process to regularly engage with program managers to evaluate IT resources supporting each strategic objective. HHS updated its Enterprise Performance Life Cycle Framework IT guidance and governance approach to incorporate the FITARA requirements in October 2016. Although public health entities at the federal, state, and local levels have been using IT systems to support their day-to-day and emergency preparedness and response efforts for about 20 years, they have encountered obstacles in efforts to implement effective and timely electronic sharing of information on a nationwide basis. In addition to the December 2010 report previously discussed, we have issued multiple other reports since 2003 on the need for federal agencies—primarily HHS—to develop strategies and plans for coordinating public health IT initiatives. These include the implementation of IT systems and data- sharing networks among federal, state, and local public health entities. In these reports, we have described challenges related to sharing data among public health entities, including the lack of an overall strategy to guide the establishment of interoperability among related systems. We also have described issues related to benefits versus costs of collecting and integrating public health data at the federal level, and questions regarding the usefulness of such data. Specifically, we described state and local public health officials’ concerns regarding the cost and effort associated with providing data to federal entities to be integrated and shared on a nationwide basis, and whether those integrated data enhanced public health officials’ ability to prepare for and respond to emergencies. In 2003, we evaluated and reported on federal agencies’ efforts to develop IT to support public health emergency preparedness and response. In our report, we identified issues regarding the implementation of health care and public health IT standards and the lack of an overall strategy to guide IT development and initiatives. As a result of the deficiencies we reported, we recommended that the Secretary of HHS, in coordination with other key stakeholders—such as the Secretaries of Defense and Veterans Affairs—establish a national IT strategy for public health preparedness and response. HHS, through activities initiated by the Office of the National Coordinator for Health IT, took steps to implement this recommendation by establishing interoperability standards and addressing privacy concerns as part of its efforts to advance the nationwide implementation of health care IT. In a June 2005 report, we evaluated the progress of federal agencies on their major public health IT initiatives, including one broad initiative at CDC—the Public Health Information Network—that is intended to provide the nation with integrated public health information systems to support activities such as disease detection, tracking, outbreak management, and exchange of laboratory information. We reported that CDC and the Department of Homeland Security faced challenges related to the planning and implementation of IT initiatives, including a need for improvements in systems integration and interoperability, and coordination with state and local public health agencies. Based on the concerns we identified, we recommended that the Secretary of HHS ensure that the federal initiatives were (1) aligned with the national health IT strategy, the federal health architecture, and other ongoing public health IT initiatives and (2) coordinated with state and local public health initiatives. We also recommended that the Secretary ensure that federal actions taken to encourage the development, adoption, and implementation of health care data and communication standards across the health care industry address interoperability challenges associated with the exchange of public health information. The department addressed our recommendations by including public health IT initiatives within its overall strategy for nationwide health IT and by defining other initiatives for improving the exchange of clinical and public health data among public and private health care sectors. In November 2008, we reported on a key HHS syndromic surveillance program—the CDC’s BioSense program. We reported that CDC had not identified annual and long-term cost and timeline estimates and performance measures for implementation of its redesigned BioSense program. We recommended that the Director of CDC develop reliable cost and timeline estimates for implementing the BioSense program and, with stakeholder input, develop outcome-based performance measures. HHS subsequently took steps to implement the recommendations. Specifically, CDC initiated activities to define the estimates and worked with a panel of state and local stakeholders to define performance measures that are focused on the intended results of the program. The Public Health and Medical Situational Awareness Strategy that HHS developed included several objectives and strategies for establishing the network required by PAHPRA. The accompanying implementation plan identified specific actions for accomplishing the objectives. However, the actions identified in the implementation plan did not address all of the requirements defined by the law, including the identification of measurable steps to guide efforts in completing the actions. In the absence of an implementation plan that addressed these critical elements, as of May 2017, HHS had made limited progress toward establishing the required electronic public health situational awareness network capabilities. In addition, HHS did not follow established IT planning and management processes, which has further impeded the department’s ability to make progress toward establishing the network. PAHPRA required HHS to conduct four activities related to the establishment of the public health situational awareness network. Specifically, the law required the department to (1) define minimal data elements for the network; (2) use applicable interoperability standards to facilitate information exchange among public health entities; (3) collaborate with state, local, and tribal public health officials to integrate and build on existing capabilities to ensure simultaneous sharing of data, information, and analyses from the network; and (4) collaborate with state, local, and tribal public health officials to develop procedures and standards for the collection, analysis, and interpretation of data that states, regions, or other entities collect and report to the network. According to PAHPRA, the network was to incorporate data elements from three types of public health information providers: (1) state, local, and tribal health entities; (2) federal health agencies; and (3) zoonotic disease monitoring systems. The law also identified other data to be integrated into the network, if practicable, from other types of providers, including, hospitals, pharmacies, and poison control centers. HHS stated in its Public Health and Medical Situational Awareness Strategy a primary goal for achieving effective public health situational awareness—to protect human health, safety, and well-being by enhancing the nation’s operational capability to support decision making at all government levels and across critical infrastructure sectors before, during, and after an incident. HHS defined five objectives for accomplishing the goal and further described objective-level strategies that were to contribute to accomplishing each of the objectives. The five objectives and objective-level strategies are supported by 49 intended actions that are outlined in the accompanying implementation plan. While not all of these objectives, strategies, and actions are directly related to the development of IT capabilities needed to establish the electronic public health situational awareness network required by PAHPRA, we identified ten specific IT-related actions in the implementation plan that support three objectives and four strategies that are significant to achieving nationwide information-sharing capabilities to meet the law’s requirements. These objectives, strategies, and actions are summarized in table 1. Relative to PAHPRA, six of the 10 IT-related actions in the implementation plan address two of the four activities required by the law. Specifically, actions to improve health information exchanges (3.1.3) and to, where possible, innovate and improve the functional compatibility of health information systems (3.1.4) address the PAHPRA requirement to use interoperability standards. Further, four actions in the implementation plan address the requirement in the law that called for collaborating with public health officials at all levels to integrate and build on existing network capabilities: implement mechanisms for routine inter-disciplinary and interdepartmental health information sharing (2.2.3), comprehensively review and evaluate existing and planned data systems (3.3.1), inventory regional health information organizations and exchanges (3.3.2), and develop the capability to house, share, and appropriately use information related to public health situational awareness (3.3.6). Further, with regard to the sources of data for the network, the IT-related actions discussed in the implementation plan include two that support the collection of data from the three types of providers defined in PAHPRA. Specifically, actions 2.2.2 and 2.2.3 are intended to identify the collection of data from federal and non-federal partners, to include data related to zoonotic diseases. However, the implementation plan does not include actions that would address two other activities required by the law. Specifically, the plan lacks any actions to address a required activity for defining the minimal data elements needed to establish the network, and another activity for collaborating with public health officials to develop standards for interpreting and reporting on data collected by the network. When reporting on barriers to meeting requirements of PAHPRA, HHS described challenges related to the definition of essential data elements and the establishment of standards to enable system interoperability. Accordingly, ASPR officials did not include in the implementation plan any specific actions related to defining the minimal data needed or establishing applicable standards for the network. Table 2 summarizes the required activities and network data providers defined by PAHPRA, and actions included in the implementation plan that address the requirements of the law. Lacking the specific actions to define the minimal data elements needed from the sources and to develop standards for sharing the data in collaboration with state, local, and tribal public health officials, the implementation plan’s usefulness for ensuring that needed information is available to be shared in a standardized format and can be used by public health officials throughout the nation is diminished. Moreover, until HHS addresses all activities required by PAHPRA in its implementation plan, the department will not be able to ensure that public health situational awareness network capabilities will be established in accordance with all the requirements defined by the law. PAHPRA required HHS to identify measurable steps the Secretary would carry out to guide the efforts to develop, implement, and evaluate the network. Further, the law required the National Preparedness and Response Science Board to assist HHS in its planning efforts by providing expert advice and guidance, including recommendations, regarding the measurable steps the Secretary should take to modernize and enhance public health situational awareness information sharing capabilities through a biosurveillance network. To define measurable steps for IT projects, OMB guidance notes that implementation plans should include a timeline of tasks and steps toward implementing requirements; an estimate of costs to implement the tasks; resource requirements; and performance metrics to be used to determine whether tasks are completed on time and within resource requirements, and whether they result in the expected outcomes. However, the implementation plan that HHS developed does not identify timelines, estimates of cost and resource requirements, or performance metrics that can be used to track and measure progress made toward completing tasks and, thus, to determine whether expected progress and outcomes of the IT-related actions are being achieved. For example, actions included in the plan to enhance existing information-sharing networks in support of public health situational awareness are defined to be taken within a broad time frame—between 2016 and 2018—but do not include metrics, such as interim milestones for completing specific tasks, that could be used to monitor and measure progress toward completing the actions. Further, the plan does not identify cost estimates to implement the actions or any performance metrics to determine whether the outcomes of the actions deliver expected benefits on time and within cost, as suggested by OMB guidance. HHS officials also did not identify in the implementation plan specific resource requirements and responsibilities for taking the actions identified in the plan. For example, although the plan identifies HHS and state, local, tribal, and territorial stakeholders as the lead entities for taking a number of the actions, and the Departments of Homeland Security, Defense, and Veterans Affairs as participating entities, it does not designate identifiable contacts, such as particular offices within the departments or stakeholder contacts within the many public health entities identified in the plan. In addition, HHS officials did not include in the implementation plan any measurable steps related to the enhancement of public health situational awareness information sharing capabilities through a biosurveillance network, as required by the law. While the National Preparedness and Response Science Board provided to HHS a number of recommendations related to the integration of biosurveillance systems and information, it did not identify and recommend the specific tasks and the timelines, estimates of cost, and resources requirements necessary to achieve a national biosurveillance system based on existing state, regional, and community level capabilities. Instead, the board recommended that HHS establish a central authority within the department to define the measurable steps for achieving these capabilities. ASPR officials stated that they did not identify measurable steps for completing the actions identified in the implementation plan because they created the National Health Security Strategic Guidance Committee in the summer of 2016 to be responsible for developing the measures and overseeing the conduct of the actions, including those related to biosurveillance. However, the National Health Security Strategic Guidance Committee charter does not include any responsibilities related to defining steps or overseeing the actions for establishing the network, and, as of May 2017, the committee had not done so. Because HHS did not identify measurable steps, in accordance with PAHPRA and OMB guidance, it lacks key planning elements needed to ensure the actions are taken to develop the network. Moreover, until the department defines such steps, it will not have the information and planning tools it needs to make progress toward establishing the network required by PAHPRA. In the absence of an implementation plan that addresses all of the activities required by PAHPRA, the department has made limited progress toward establishing the public health situational awareness network. HHS issued a report in January 2017 that was intended to provide an update on the status of the actions identified in its implementation plan. The report discussed the outcomes from one action that had partially addressed the third objective of the implementation plan—to evaluate existing network capacity to ensure it is leveraged where appropriate and that new capacity is promoted where needed. Specifically, the report described existing capacity within the department that supports information sharing among public health entities. It noted that such capacity is achieved through the use of several systems that ASPR has implemented and operates within the SOC. (Appendix II provides an overview of these systems, as described in HHS’s report.) While ASPR officials stated that these systems provide information sharing capabilities required by PAHPRA, they did not take all the actions that were defined to fully address the third objective of the implementation plan, including actions 3.1.2, 3.1.3, and 3.1.4. Specifically, they did not assess network capacity existing among all levels of public health to gain an understanding of the networks and the contributions each could make to support nationwide public health situational awareness. The officials did not identify where interoperability existed or was needed between systems and networks, or whether integration techniques were needed to ensure that all relevant information from disparate networks could be shared. Further, ASPR officials did not identify and evaluate other federal agencies’ and state, local, and tribal public health entities’ existing electronic information-sharing network capabilities, as required by the law. Although actions for doing so were identified in the plan (actions 3.3.1, 3.3.2, 3.3.5, and 3.3.6), neither ASPR nor any other department officials had identified electronic information-sharing capabilities existing among public health entities that could be built upon to establish the network required by PAHPRA. As a result, outcomes of ASPR’s actions to evaluate existing capacity did not provide the information needed to determine what network capabilities already exist throughout all levels of public health and what system enhancements need to be developed to establish electronic public health situational awareness capabilities in accordance with PAHPRA. HHS’s January 2017 status report also did not address any other IT- related actions identified in the implementation plan for establishing the network. Specifically, the report did not discuss any actions taken to address the first and second objectives of the implementation plan and, therefore, did not reflect the status of HHS’s efforts to create a working group and develop a set of measures for each action to track progress toward developing the network capabilities required by PAHPRA. Likewise, the report does not address the status of any actions taken by the department to engage federal and nonfederal public health officials to ensure the information required to establish the network is available. ASPR officials told us that the development and implementation of the systems operating in the SOC represent the extent of their efforts that could address IT-related actions identified in the implementation plan. They stated that the specific actions outlined in the plan had not been taken because other public health partners within federal agencies and state, local, tribal, and territorial entities were designated in the plan to be responsible for leading and participating in the steps necessary to complete the actions. A director within ASPR further stated that, while they are responsible for establishing policy and making plans to address the PAHPRA mandate, they are not responsible for establishing the electronic network capabilities other than those provided through the operation of the systems in the SOC. However, neither the National Health Security Strategic Guidance Committee nor any other entity within HHS has taken responsibility to ensure that actions are taken to establish the network, and to track and monitor progress of the actions from initiation to completion. Further, according to ASPR officials, as of May 2017, the department had not designated funds to be used for purposes of planning for or establishing the network, and had not accounted for any funds used specifically to develop the strategy and implementation plan. Beyond the deficiencies in its plans for implementing the network, HHS did not follow the department’s overall IT planning and management processes, which contributed to the lack of progress in establishing the network. For example, HHS’s Enterprise Performance Life Cycle Framework defines the CIO’s authority over the department’s collection of IT systems and resources—its IT portfolio—which includes the systems within the SOC and other systems used for situational awareness purposes throughout the department. According to guidance provided by the framework, the CIO should, therefore, play a key role in managing and facilitating the department’s efforts to identify and implement any system improvements needed to enhance electronic public health situational awareness network capabilities to meet the requirements of PAHPRA. The Enterprise Performance Life Cycle Framework also establishes the roles and responsibilities of an integrated project team to manage an IT initiative. The team is to be chaired by an IT project manager. Among other activities, the project manager is responsible for: developing a project management plan to be used as the principal tool for organizing and managing IT projects; ensuring that all appropriate business stakeholders and technical experts are involved throughout the life cycle of an IT project; proactively reporting missed project milestones and variances in percentage of project cost, schedule, and performance; maintaining information on project status, control, performance, risk, corrective actions, and outlook; planning and conducting phase activities and verifying that the set of deliverables for the phase is complete; and conducting formal reviews at specified points in the life cycle of the project. The project manager for a statutorily mandated project, such as the electronic network required by PAHPRA, is to demonstrate that a proposed project will meet requirements stated in the mandate and do so in an optimal manner. The project team is also to include a business owner who is responsible for activities such as: identifying the business needs and performance measures to be satisfied by the project; providing funding for the IT project; establishing and approving changes to cost, schedule, and validating that the project initially meets business requirements and continues to meet business requirements; and conducting a preliminary enterprise architecture review to determine any potential duplication or contradictions with other existing projects. In addition, the department’s IT governance organization, led by the CIO, is to be responsible for ensuring that IT projects are technically sound, follow established project management practices, and meet the business owner’s needs. However, ASPR officials did not follow the department’s established processes when developing the implementation plan for the electronic network required by PAHPRA. Specifically, while ASPR designated the National Health Security Strategic Guidance Committee to be responsible for managing and overseeing the actions related to the establishment of the network, the committee’s authority was not established in accordance with department guidelines for managing IT resources. In particular, the committee does not include a project manager, business owner, or the CIO; rather, it is made up of policy and planning officials from HHS and other federal agencies. As such, HHS has not established the management structure needed to oversee the use of IT resources in any efforts taken to enhance electronic information sharing in accordance with PAHPRA. Further, in developing the department’s public health situational awareness implementation plan, ASPR officials did not take other steps required by departmental guidance for managing IT projects. For example, HHS’s Enterprise Performance Life Cycle Framework guidance calls for an IT project manager to develop a full project management plan to include costs, schedule, and resource requirements for actions to be taken. However, an IT project manager was not designated to take responsibility for defining and implementing any system improvements needed to enhance electronic public health situational awareness network capabilities, and no such plan was developed. Additionally, the framework requires an IT project’s business owner to establish and approve changes to performance metrics and a project manager to report variances and delays in meeting performance milestones. Such actions are needed to track progress made toward project completion and to ensure that expected performance outcomes are achieved. However, as noted previously, no performance metrics for establishing the network have been defined, and HHS did not designate a business owner to be responsible for tracking any progress made toward implementing the network capabilities required by PAHPRA. ASPR officials told us that, because they were tasked by the Secretary to develop the public health situational awareness strategy and implementation plan required by PAHPRA, no department entity having IT management responsibilities was involved. However, had HHS followed its own departmental guidance for managing IT resources—such as establishing an IT resource management structure, developing a project management plan, and defining metrics for tracking performance—the department would have had the planning tools, resources, and oversight mechanisms needed to actively pursue efforts to establish the required network capabilities. Until HHS adheres to departmental guidance for managing the IT resources necessary to identify and implement enhancements needed to improve electronic information-sharing capabilities of systems and networks in use by public health entities throughout the country, its efforts to establish the nationwide public health situational awareness network required by PAHPRA will continue to be hampered. HHS officials developed a public health situational awareness implementation plan that identifies actions to address a number of the requirements for evaluating and establishing network capabilities defined by PAHPRA. However, the usefulness of the implementation plan is diminished because it does not include all activities required by the law or steps that can be measured to determine whether actions have been initiated and completed. In the absence of a complete and useful implementation plan, the department has reported making limited progress toward establishing the network. Further, HHS did not follow established departmental processes for managing IT resources in its planning efforts, which may have contributed to its lack of progress. In particular, department officials did not call for the establishment of an integrated project team, in accordance with CIO guidance, for managing and overseeing the use of IT resources to implement the technical requirements called for by the law. The importance of HHS’s responsibility for supporting emergency preparedness and response at all levels of public health calls for the CIO to play a key role in managing HHS’s efforts to identify and implement any system capabilities needed to enhance electronic public health situational awareness network capabilities. Without leadership of the CIO, the agency will continue to lack the guidance and oversight needed to implement a network that provides the electronic information-sharing capabilities required by PAHPRA. Consequently, HHS will remain unable to provide Congress reasonable assurance that the outcomes of any ongoing and future efforts will result in progress towards accomplishing the goals and objectives for enhanced nationwide public health situational awareness as envisioned by the law. To ensure progress is made toward the implementation of any IT enhancements needed to establish electronic public health situational awareness network capabilities mandated by PAHPRA, we are recommending that the Secretary of HHS direct the Assistant Secretary for Preparedness and Response to take the following three actions: 1. Task an integrated project team, made up of an IT project manager and business owner, with including specific actions in the Public Health and Medical Situational Awareness Strategy Implementation Plan for conducting all activities required to establish and operate the network. 2. Task the integrated project team with developing a project management plan that includes measurable steps—including a timeline of tasks, resource requirements, estimates of costs, and performance metrics—that can be used to guide and monitor HHS’s actions to establish the network defined in the plans. 3. Conduct all IT management and oversight processes related to the establishment of the network in accordance with Enterprise Performance Life Cycle Framework guidance, under the leadership of the HHS CIO. We provided HHS a draft of this report for review and comment. Officials in the department’s Office of the Assistant Secretary for Legislation responded that they had no comments on the report’s findings and recommendations. We are sending copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The objective of our review was to determine what progress the Department of Health and Human Services (HHS) has made towards establishing electronic situational awareness network capabilities in accordance with the requirements of the Pandemic and All-Hazards Preparedness Reauthorization Act of 2013 (PAHPRA). To address the objective, we reviewed section 204 of PAHPRA to identify requirements for an electronic situational awareness network, which includes a strategy for establishing electronic public health situational awareness capabilities, developing a plan for implementing the strategy, and incorporating recommendations related to public health situational awareness planning, made by the National Preparedness and Response Science Board. We obtained and reviewed documents related to the implementation of information technology to enhance public health situational awareness including HHS’s 2014 Public Health and Medical Situational Awareness Strategy and 2015 Public Health and Medical Situational Awareness Strategy Implementation Plan, and the National Preparedness and Response Science Board’s recommendations published in October 2013. We compared information documented in the strategy and implementation plan, and the board’s recommendations, to the required activities and network elements in the law to determine whether they were included in the plans for establishing an electronic public health situational awareness network. We analyzed actions described in the implementation plan to determine which were significant to the development of new IT capabilities or enhancements to existing systems that would be needed to establish the network capabilities. We focused our study on those actions. We also reviewed a January 2017 status report related to HHS’s efforts to address the PAHPRA requirements. As part of our review, we identified systems that HHS reported had been developed and are currently used within HHS’s Secretary’s Operations Center to support public health emergency preparedness and response functions. We examined descriptions of the systems to identify the data sources accessed for information sharing within HHS and among other public health entities. We then compared the data sources to technical requirements defined by PAHPRA and determined the extent to which the systems were used to collect and share information in accordance with the law. We examined HHS’s enterprise lifecycle processes for managing and overseeing IT resources, along with other guidance provided by the Office of Management and Budget, to identify the roles, responsibilities, and authority needed to conduct actions that would need to be completed in order to implement the IT capabilities described in the plans. We then compared the contents of the strategy and plan against the department’s processes and the other federal guidance to determine whether HHS had addressed key elements of implementation planning and followed departmental processes for establishing and managing the IT resources needed to implement the IT-related actions included in the implementation plan. To supplement the information we collected from examination of documentation, we held discussions with HHS officials to better understand the processes they followed and steps they took to develop the strategy and implementation plan. We also discussed with them their responsibilities for establishing the network and the status of any progress that had been made toward completing actions to address the mandate. In addition, we interviewed an official of the National Preparedness and Response Science Board to gain an understanding of the recommendations made to HHS related to planning efforts to address the modernization and enhancement of biosurveillance systems, as required by PAHPRA. We assessed the reliability of the data we obtained from documented descriptions of HHS systems by reviewing related technical documentation and interviewing department officials knowledgeable of the efforts taken to address the electronic information-sharing requirements of PAHPRA. We found the data reliable for the purposes of our report. We conducted this performance audit from February 2016 to September 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Table 3 provides an overview of the Office of the Assistant Secretary for Preparedness and Response’s situational awareness systems, the users they were developed to support, entities that provide data, and the data the systems were designed to share that are required by the Pandemic and All-Hazards Preparedness Reauthorization Act of 2013. In addition to the contact named above, Teresa F. Tucker (Assistant Director), Thomas E. Murphy (Analyst in Charge), Melina I. Asencio, Christopher G. Businsky, Quintin I. Dorsey, and Nancy E. Glover contributed to this report. | A public health event, such as a widespread disease outbreak or health problems resulting from a weather-related emergency, could have catastrophic consequences for the nation. These potential threats can be partially mitigated by having a national public health situational awareness capability—that is, a capability for public health officials to be able to access real-time information about emerging threats to enable them to make timely, responsive decisions to prepare for and respond to emergencies. PAHPRA required HHS to establish a near real-time electronic nationwide public health situational awareness capability through an interoperable network of systems. PAHPRA also included a provision for GAO to evaluate HHS's progress in developing such a capability. This report addresses what progress HHS has made toward establishing the network. GAO analyzed documents describing HHS's plan for enhancing public health situational awareness and evaluated evidence of actions taken by HHS to establish the network required by PAHPRA. GAO also examined the department's IT planning and management processes and guidance, and interviewed HHS officials. The Pandemic and All-Hazards Preparedness Reauthorization Act of 2013 (PAHPRA) required the Secretary of Health and Human Services (HHS) to establish an electronic nationwide public health situational awareness network and to develop an implementation plan to guide its efforts. The law further required HHS to include in its plan specific activities for incorporating data into the network. HHS developed an implementation plan that identified several actions related to enhancing existing information-sharing capabilities needed to establish the network. However, the actions identified in the plan did not address all of the required activities, such as defining data elements and standards. Until the department addresses all required activities, it will lack an effective tool for ensuring that public health situational awareness network capabilities have been established in accordance with all of the requirements defined by the law. In addition, HHS did not identify measurable steps for completing and tracking the status of the activities required by the law. PAHPRA required HHS to include in its plan the measurable steps to be taken to establish the network. Federal guidance also suggests that implementation plans identify timelines of tasks, cost and resource estimates, and performance metrics that can be used to track and monitor progress toward completing tasks and delivering expected outcomes. According to HHS officials who developed the implementation plan, the department established a committee of policy and planning experts from various federal agencies to define the measurable steps for completing the actions identified in the plan. However, HHS did not assign responsibilities for defining such steps to the committee, and the committee had not done so. Until the department defines measurable steps, it will not have the information and planning tools it needs to make progress toward establishing a network that provides information-sharing capabilities needed by public health entities to prepare for and respond to emergencies, as required by PAHPRA. GAO identified other weaknesses in HHS's planning efforts that have contributed to the department's lack of progress toward establishing the network. Specifically, HHS did not follow guidance developed by its Chief Information Officer (CIO) for managing information technology (IT) resources. According to the guidance, officials who manage IT initiatives are to involve a governance organization led by HHS's CIO and designate a project team that includes a project manager and business owner. The team is to manage and oversee initiatives according to the guidance, including the development of a project management plan that identifies timelines and schedules, estimated project resources and costs, and performance metrics for tracking any progress made toward completing tasks and delivering expected outcomes. However, HHS did not designate such a team and did not involve the CIO in its planning efforts. As such, the department lacks the structure and mechanisms needed to plan, manage, and oversee actions for establishing the network. Until HHS adheres to its own guidance for managing the IT resources necessary to improve electronic information-sharing capabilities of systems and networks in use by public health entities throughout the country, it will likely continue to fall short in its efforts to establish the nationwide public health situational awareness network required by PAHPRA. GAO is recommending that HHS complete a plan that includes all actions for establishing the network, develop a project management plan that identifies measurable steps for completing the actions, and conduct IT management processes according to CIO guidance. HHS had no comments on the report or recommendations. |
For over 30 years, TCMP has been IRS’ primary program for gathering comprehensive and reliable taxpayer compliance data. It has been IRS’ only program for making statistically reliable estimates of compliance nationwide. It has also been used to identify areas where tax law needs to be changed to improve voluntary compliance and to estimate the tax gap and its components. TCMP data are also used outside IRS, including by Congress to make revenue estimates for new legislation and by the Department of Commerce’s Bureau of Economic Analysis to adjust national income accounts such as the gross domestic product. The 1994 TCMP survey, which was to consist of over 150,000 income tax returns, was to be the most comprehensive TCMP effort ever undertaken. By auditing the tax returns of individuals (Form 1040), small corporations with $10 million or less in assets (Form 1120), Partnerships (Form 1065), and S corporations (Form 1120S), IRS planned to obtain comprehensive compliance data. Most sample results were to be sufficiently precise to be reliable at the national level as well as at smaller geographic areas across the country. The 1994 TCMP was designed to fulfill the information needs for several compliance areas expected to be important to IRS’ functions over the next decade. The more important uses were to include development of audit selection formulas, validation of IRS’ revised approach to categorizing returns for audit, and development of new approaches to researching compliance across specific geographic areas. Each of these uses is discussed in more detail below. Since 1969, IRS has used TCMP data to update its Discriminant Function (DIF) formulas, which are mathematical formulas used to select tax returns with the greatest probability of change for audit. The current formulas for individuals are based on 1988 tax returns, IRS’ most recent individual TCMP audits. Formulas for small corporations are based on returns that were processed in 1987. IRS does not use DIF scores for partnerships and S corporations because of the age of the underlying TCMP audits. TCMP data were also to be used to test new compliance strategies. IRS planned to change the way it categorized returns for audit by adopting the market segment approach. Market segments represent groups of taxpayers with similar characteristics, such as those in manufacturing. IRS assumes that because these taxpayers have similar external characteristics, their tax compliance behavior will exhibit similar attributes. Finally, the 1994 TCMP was to provide compliance research data. IRS recently reorganized its compliance research function, establishing a National Office of Research and Analysis (NORA) and 31 District Office of Research and Analysis (DORA) sites. The 1994 TCMP was to be large enough to provide reliable compliance data for field and National Research Offices. IRS’ researchers planned to use TCMP data to identify national and geographically specific areas of noncompliance and, by focusing on key compliance issues, develop programs to improve voluntary compliance. It is through these research efforts that IRS planned to improve overall voluntary compliance. Noncompliance represents a major source of lost revenue for the nation. IRS’ most recent tax-gap estimates indicate that over $127 billion was lost to noncompliance in 1992. In an attempt to reduce this lost revenue, IRS established an objective of collecting at least 90 percent of the taxes owed through voluntary compliance and enforcement measures by the year 2001. However, this overall compliance rate has remained at about 87 percent since 1973. The 1994 TCMP was intended to provide data from which other programs could be developed to improve this rate and increase revenue. This nation’s tax system is based on individuals and businesses voluntarily paying the taxes they owe. To the extent that this system works, it improves the efficiency of tax collection. Measuring the extent to which the tax system works and identifying areas in which it does not is the job of compliance measurement. TCMP has been IRS’ only tool for measuring voluntary compliance and determining compliance issues. The postponed TCMP for 1994 tax returns was to establish the voluntary compliance benchmark to carry IRS into the next century. The objectives of this assignment were to (1) determine the possible effects on IRS’ compliance programs of postponing the 1994 TCMP and (2) identify some potential short- and long-term alternatives to the planned TCMP for collecting this data. To determine the possible effects of postponing the 1994 TCMP, we talked to responsible officials in IRS’ Research Division and the Examination Division. We obtained information on how these officials planned to use TCMP data and what will likely be affected now that TCMP has been postponed. To identify alternatives to the planned TCMP, we talked to IRS officials responsible for planning TCMP. We discussed alternative sampling methodologies with officials from IRS’ Statistics of Income (SOI) Branch who were responsible for preparing the original TCMP sample and asked them to determine sample sizes on the basis of revised requirements. We developed the revised requirements on the basis of our discussions with IRS’ Research Division staff as well as officials outside IRS, including congressional staff. Some of the observations in this report are based on the work we have done over the years on IRS’ compliance programs as well as our specific work on TCMP in recent years. We requested comments from you on a draft of this report. On February 23, 1996, we obtained oral comments from IRS’ Director of Research and the National Director of Compliance Specialization. We also obtained commented from you in a March 18, 1996, letter. These comments are discussed on page 13 of this report. We did our work in San Francisco, Dallas, and Washington, D.C., between August and December 1995 in accordance with generally accepted government auditing standards. The planned TCMP for 1994 tax returns was to establish the voluntary compliance benchmark to carry IRS into the next century. While agency officials said that postponing TCMP will help resolve budget problems, our work suggests that the loss of these or comparable data is also likely to disrupt IRS’ efforts to increase the total collection percentage to 90 percent by 2001. For example, without these data, IRS will have difficulty updating the formulas it uses to select returns for audit and, thus, it would be more likely that a higher percentage of the returns IRS selects for audit would not result in changes to the amount of tax owed by the taxpayer. Additionally, without such data IRS will be unlikely to have sufficient data to validate its market segment approach to audits or to be used by the DORA research functions to identify programs to improve voluntary compliance. It is not clear whether IRS will replace the data it had planned to obtain from TCMP. However, updated compliance data will be needed in the short term if IRS still plans to update the audit selection formulas and in the long term to validate and improve IRS’ compliance efforts. The primary system that will be disrupted by postponing TCMP is the one used by IRS to select returns for audit. Since 1969, IRS has used DIF formulas to select returns for audit. New DIF formulas are developed periodically from TCMP data and applied to all individual and small corporation income tax returns. IRS then selects returns for audit with the highest DIF scores. In 1992, over 55 percent of the audited returns of individuals were selected using the DIF score. The DIF selection system replaced programs that were largely dependent on auditor’s judgment. The DIF system has not only improved the efficiency of IRS’ audit efforts but also the consistency and objectivity of the selection process. The use of the DIF selection process has also resulted in fewer “no-change” audits, which not only waste IRS’ resources but unnecessarily burden compliant taxpayers. According to IRS, use of the DIF scoring system reduced the no-change rate from over 46 percent in 1969 to about 15 percent in 1992. IRS officials believe the DIF process is dependent on periodically updating the formulas used to score returns. Formulas are updated so that they will more accurately identify the returns with the greatest probability for change. Until 1988, data from TCMP had been used to update formulas for individual returns every 3 years. However, the most recent TCMP was conducted on 1988 individual returns. For small corporations, partnerships, and S corporations, IRS has updated formulas much less frequently. TCMPs were conducted on corporate returns filed in 1987, and partnership and S corporation returns filed in 1982 and 1985, respectively. IRS is not certain how well the DIF scores will continue to perform if not updated. IRS officials believe that by 1998, the year IRS planned to have TCMP data available, the DIF scores may become less effective at identifying returns with the greatest potential for change. They said this decrease in effectiveness may occur because of changes in tax laws and taxpayer behavior—resulting in an increased no-change rate for DIF selected returns and potentially lower revenue yields. This would mean greater burden on compliant taxpayers if more of them are selected for audit. IRS officials indicated that they plan to monitor the performance of DIF over time. The 1994 TCMP was also intended to provide information on IRS’ new market segment approach for grouping tax returns. IRS initiated the market segment approach on the basis of work done in its Western Region, which indicated that compliance rates and audit issues were likely to be similar for taxpayers with similar characteristics, such as businesses in the same industry (e.g., manufacturing or retail sales). Accordingly, IRS concluded that grouping taxpayers by market segments might result in selecting returns for audit that have a higher potential for change and might allow auditors to specialize in market segments. The 1994 TCMP was designed to provide data to test this hypothesis as well as to develop DIF scores by market segment rather than by audit class, as had been done in the past. Without TCMP or some alternative to provide similar information, IRS will not have data to show whether market segments are better for return selection purposes than traditional audit classes or be able to determine the compliance rate or compliance issues of the market segments. Because of these concerns, IRS no longer plans to test a selection of returns for audit by using the market segment approach. Instead, IRS plans to continue selecting returns for audit using the DIF score within audit classes. Finally, the 1994 TCMP was designed to provide compliance data for IRS’ National and District Research Offices. IRS established these offices to research taxpayer compliance at the national and local levels. These researchers were to identify programs to improve compliance not only through audits but also through larger scale nonaudit programs, such as improved guidance and assistance to taxpayers and tax-law changes. TCMP also was to be used to develop benchmark compliance data for measuring future progress and determine how effectively managers were meeting their objectives of improving compliance. Without TCMP or an alternative data source, IRS’ new research function would still be able to analyze noncompliance in filing returns and paying taxes. However, research on reporting compliance, the area where most of IRS’ compliance dollars are spent, would be very limited. Thus, researchers would have inadequate data to identify emerging trends in reporting compliance, to develop solutions, and to test the effectiveness of these solutions. As a result, IRS would likely continue its reliance on enforcement to improve compliance. However, enforcement has proven to be a costly and ineffective way to increase overall voluntary compliance. According to IRS officials, because of criticisms of TCMP and budget concerns, the 1994 TCMP is unlikely to be conducted. Although IRS officials told us they planned to use an alternative method to obtain TCMP data, they currently have no short-term proposal on how to obtain these data. Regardless of how IRS plans to mitigate the loss of 1994 TCMP data, it would have to start soon in order to minimize the adverse effects of not updating its compliance programs. According to IRS officials, a number of alternative sampling strategies could fill the short-term data gap created by postponing TCMP indefinitely. From these strategies, we identified several alternative samples that met three basic objectives we considered important: (1) reducing the sample size to make data collection less costly for IRS and less burdensome to taxpayers, (2) maintaining IRS’ ability to update the DIF scoring system, and (3) maximizing use of the work already completed to identify returns and collect data for the 1994 TCMP sample. One alternative sample would be for IRS to reduce the planned TCMP sample size and still provide some of the same data, although with less precision. This smaller sample could also be used to update the DIF score with little loss in accuracy. On the basis of our discussions with SOI officials, it appears IRS could reduce the sample size in any one of several ways, including decreasing the level of acceptable statistical precision for individual and corporate returns; selecting a sample with only businesses (sole proprietors, corporations, partnerships, and S corporations), with reduced precision; classifying TCMP sample returns and eliminating returns that past audit experience indicates are not likely to result in an audit adjustment; and selecting a sample that includes only sole proprietor and corporation returns. Numerous other alternatives to the sampling methodology and characteristics may give slightly different sample sizes. For example, by eliminating the requirement for updating the DIF formula, the sample size for the corporation and individual business option is reduced by about 12 percent, to 28,275. However, such an approach would lessen the value of TCMP because it would limit IRS’ ability to update the DIF score, a primary purpose of TCMP audits. Reducing the sample size would reduce the cost of TCMP audits. IRS’ cost estimates for the 1994 TCMP were divided into two types, (1) staffing costs and (2) opportunity costs. Staffing costs reflect IRS’ cost estimates for auditors to conduct the TCMP audits. Opportunity costs reflect IRS’ estimates of the difference between revenue generated through the regular audit program and revenue generated by TCMP audits. According to IRS officials, TCMP audits generate less revenue because the returns are randomly selected rather than identified by using the DIF score or as part of a special project and because the returns take longer to audit. Table 1 shows how the variations in sampling methodology and characteristics change the sample size and cost estimates. Changing the sample characteristics not only reduces the size but affects the usefulness of data from the sample. Each of the changes shown in table 1 has its own set of strengths and weaknesses that relate primarily to reliability and coverage. For example, reducing the sample to businesses only and reducing the precision would provide no information on nonbusiness individuals. Also, this sample would be of little use at the DORA level because it would not provide statistically reliable estimates of compliance below the national level. This sample could, however, provide some information on market segment compliance and be used to update the DIF formula for businesses and the return types where voluntary compliance is the lowest. Also, a business-only approach could be combined with a multiyear sample where the compliance of nonbusiness individual returns is evaluated in a future year. Although we did not fully evaluate the alternatives, the table in appendix I summarizes some of the more obvious trade-offs inherent in the alternatives discussed above. Deciding how to change the sampling strategy to reduce the sample size would require careful evaluation of the tradeoffs. It seems reasonable, however, to consider that any new sample should, at a minimum, allow some updating of the DIF formulas, since this was to be the primary purpose of the original TCMP. To the extent that other purposes can also be met through one of these alternative sampling strategies, the sample would be more valuable. Because a significant portion of IRS’ workload and future revenue depends on compliance programs, it is important that IRS determine how to measure compliance. Such measurements are an on-going need for any tax system that depends on voluntary compliance. It is also important that any long-term solution to obtaining compliance measurement information address the issue of sustainability so that long-term consistent measurement data are available. Sustainability means that the program’s costs, in terms of IRS’ budget and perceived burden on the taxpayer, must be clearly defensible. Additionally, to be efficient and effective, it would be necessary to design a program that provides timely data and clearly identifies the objectives and uses of these compliance data. We identified several alternatives to the traditional TCMP that would meet some of the data needs that were lost when TCMP was postponed, including (1) conducting multiyear TCMP audits on smaller samples and combining the results; (2) using operational audit data; and (3) conducting a mini TCMP to identify compliance issues, with a more focused TCMP audit on the identified issues. We discuss these three options below. The multiyear TCMP alternative envisions annual TCMP-type audits on a smaller sample of tax returns which, over the course of several years, could be combined to obtain the required statistical precision. For example, IRS could disaggregate an entity type, such as individual taxpayers, into separate market segments or audit classes and conduct the audits of each segment on a 3-year cycle. Table 2 below shows an example of how such a program might operate. One benefit of such an approach to IRS would be that after the initial 3-year period, new and current data would become available for one of the segments every year, making it easier to fine-tune the compliance system. Such an approach, however, would require considerable effort from IRS’ statisticians to ensure that the sample design was statistically sound. Also, it would require a long-term commitment from IRS managers to ensure that returns were audited regularly. A second option is to use data from operational audits already being done. Using data from operational audits would provide a large amount of compliance data. This option is also probably the most sustainable of the three we discuss because it would be less burdensome on compliant taxpayers and have no marginal staffing and opportunity costs. However, there are weaknesses. IRS currently has no system to track operational audit issues. While such a system is currently being developed, it is not yet operational and testing is not planned to begin until later in 1996. According to IRS officials, this database is to identify audit issues as well as provide codes to identify the causes of noncompliance. Also, IRS officials believe that using a database of operational audit results could not be used for updating the DIF formulas, determining ways to improve voluntary compliance, or systematically identifying emerging audit issues because the audited returns would not be randomly selected. A third option is to periodically conduct a very small TCMP that covers all taxpayers and follow up with mini TCMP audits on specific issues identified as concerns. Using this approach, IRS may be able to reduce the sample size and focus the majority of the audits on less compliant taxpayers, thus reducing cost and taxpayer burden. This approach may also provide IRS with insight into the areas of greatest noncompliance because efforts would be more focused. IRS officials said that this approach, however, would probably not provide sufficient data to update the DIF formulas and may be of little use at DORA sites because too few randomly selected returns would likely be examined. A significant proportion of IRS’ present and future compliance programs have been predicated on the information obtained from TCMP. Benchmarking current compliance, validating the market segment approach, updating return selection formulas, researching noncompliance issues and developing programs to address them, and estimating the tax gap all depend on TCMP information. Without updated compliance data, increasing voluntary compliance, as envisioned by IRS, is less likely to occur. IRS has options to replace at least some of the data that would have been available from the 1994 TCMP audits. Auditing a smaller sample size by eliminating some return types and accepting a decrease in precision, is a factor in such options. While each of these alternatives has limitations, they would meet some of the data needs that were lost when TCMP was postponed. It is important for IRS to make a decision soon on how to replace TCMP data because it will take some time to implement a replacement, and IRS projects that the currently available 1988 data will be less effective by 1998. If IRS does not develop a sustainable compliance measurement program, IRS’ compliance programs may be disrupted as the proportion of audits that result in no-changes increases and IRS’ access to information on emerging compliance issues decreases. In the long term, such disruptions are likely to result in increased burdens on compliant taxpayers as more of them are selected for audit. To provide the data necessary to help meet the objectives of IRS’ compliance strategies, we recommend that you identify a short-term alternative strategy to minimize the negative effects of the compliance information that is likely to be lost because TCMP was postponed, and develop a cost-effective, long-term strategy to ensure the continued availability of reliable compliance data. We requested comments from you on a draft of this report. Responsible IRS officials, including the National Director, Compliance, Research and National Director, Compliance Specialization, provided comments in a February 23, 1996, meeting. These officials agreed with our recommendations and provided some technical comments, which we have incorporated where appropriate. In a March 18, 1996, letter, you restated those agreement and indicated that over the next several months IRS would devote substantial effort to investigating all potential options for capturing reliable compliance information as an alternative to TCMP. We believe the actions that IRS proposes, if properly implemented, will be responsive to our recommendations. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this letter. A written statement also must be sent to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this letter. We are sending copies of this report to pertinent congressional committees with responsibilities related to IRS, the Secretary of the Treasury, and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix II. If you have any questions, please contact me on (202) 512-9044. Useable to update DIF scores, provides baseline compliance for market segments, useable at the DORA level for most market segments, very precise compared with other options. Large sample size requiring significant resource and cost commitment. Useable to update DIF scores, provides baseline data for national market segments, reduces the sample size and burden. Not useable at the DORA level. Useable to update DIF formula for businesses, where the most noncompliance occurs, provides baseline data for national market segments, reduces the sample size and burden. Not usable to update the DIF score for individual returns, not useable at the DORA level. Possibly useable to update DIF formulas, would provides some national market segment information, reduces the sample size and burden. Not useable at the DORA level, problems identifying no-change returns. Useable to update DIF formulas for selected classes of business return, provides national market segment compliance data, reduces the burden on individual taxpayers. Not useable to update the DIF score or identify compliance issues for nonbusiness individuals, partnerships, and S corporations not useable at the DORA level. Ralph T. Block, Assistant Director Louis G. Roberts, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO assessed the potential effects on the Internal Revenue Service's (IRS) compliance programs of postponing the 1994 Taxpayer Compliance Measurement Program (TCMP) survey and identified some potential short- and long-term TCMP alternatives. GAO found that: (1) IRS postponed the 1994 TCMP because of criticisms and budget constraints; (2) IRS does not know how it will obtain the taxpayer compliance data it needs; (3) the loss of 1994 TCMP data could increase compliant taxpayers' burden over the long term because audits may become less targeted; (4) to mitigate the data losses over the short term, IRS could employ a number of alternatives, including doing a smaller survey; (5) any alternative should reduce sample size to lessen taxpayer burden and administrative costs, maintain IRS ability to update the discriminant function scoring system, and maximize the use of already completed work; (6) a limited survey would reduce the quantity and quality of the data collected, but still provide national compliance data; (7) IRS must determine how it will measure compliance over the long term, since its workload and future revenues depend on taxpayers' voluntary compliance; (8) long-term alternatives include conducting small multiyear TCMP audits, using data from operational audits to assess compliance changes, and conducting periodic national mini-TCMP audits; (9) IRS must decide on a compliance information-gathering alternative in the near term, since any alternative will take several years to develop and implement; and (10) the alternatives will likely not gather data as comprehensive as the originally planned TCMP data. |
In 1986, the President signed a joint resolution of Congress that directed the Secretary of Defense to establish a unified combatant command for special operations forces. In April 1987, the Secretary of Defense established USSOCOM with the mission to provide trained and combat- ready special operations forces to DOD’s geographic combatant commands. Since 2003, DOD has further expanded the role of USSOCOM to include greater responsibility for planning and leading the department’s efforts in the war on terrorism. In addition to training, organizing, equipping, and deploying combat-ready special operations forces to the geographic combatant commands, USSOCOM has the mission to lead, plan, synchronize, and, as directed, execute global operations against terrorist networks. DOD doctrine describes the characteristics of special operations forces, and provides joint force commanders with the guidance and information necessary to identify, nominate, and select missions appropriate for special operations forces. According to doctrine, special operations forces perform two types of activities: special operations forces perform tasks that no other forces in DOD conduct, and they perform tasks that other DOD forces conduct but do so according to a unique set of conditions and standards. In particular, special operations forces are specifically organized, trained, and equipped to accomplish nine core tasks, which represent the collective capabilities of all special operations forces rather than those of any one unit. Table 1 defines these core tasks. Since 1987, the Marine Corps and USSOCOM have taken several steps to expand the relationship between the two organizations. For example, beginning in 1993, the Marine Corps and USSOCOM established a working group to discuss efforts to improve communication, cooperation, and interoperability. These efforts received a renewed emphasis with the onset of the war on terrorism. In 2002, the Secretary of Defense requested the military services to increase their support to USSOCOM. In 2003, the Marine Corps established a specially trained and equipped unit as a concept to demonstrate the Marine Corps’ ability to conduct special operations missions under the operational control of USSOCOM. This unit deployed to Iraq in April 2004 to perform selected special operations missions. The Secretary of Defense approved the establishment of a Marine Corps service component to USSOCOM in October 2005. In February 2006, the Marine Corps activated its special operations command. Since August 2006, the Marine Corps special operations command has deployed its forces to perform special operations missions to support the geographic combatant commanders’ requirements. Figure 1 provides a timeline. The Marine Corps Forces Special Operations Command is the Marine Corps service component to USSOCOM. The Command is headquartered on Marine Corps Base Camp Lejeune, North Carolina. The Marine Corps special operations command has five major subordinate units. These units include two Marine Special Operations Battalions, the Marine Special Operations Advisor Group, the Marine Special Operations Support Group, and the Marine Special Operations School. Table 2 provides a description of each unit. By fiscal year 2011, the Command will be authorized 2,516 personnel— 2,483 military personnel and 33 civilians. With the exception of one Marine Corps reserve position, all of the authorized military personnel will be drawn from the military services’ active components. The Marine Corps special operations component will be the smallest service component under USSOCOM. The other military services’ special operations components include the following. The Army component is the U.S. Army Special Operations Command. Army special operations forces include Special Forces, Rangers, Special Operations Aviation, Civil Affairs, and Psychological Operations units. The Navy component is the Naval Special Warfare Command. Naval Special Warfare forces include SEAL Teams, SEAL Delivery Vehicle Teams, and Special Boat Teams. The Air Force component is the Air Force Special Operations Command. Air Force special operations forces include fixed and rotary wing aviation squadrons, a combat aviation advisory squadron, special tactics squadrons, and an unmanned aerial vehicle squadron. Figure 2 shows the number of military personnel positions in fiscal year 2007 authorized for DOD’s special operations forces in the active component and reserve component. The authorizations include positions in special operations forces warfighter units, support units, and headquarters units such as USSOCOM and its service component commands. Since fiscal year 2006, the Marine Corps and USSOCOM have requested baseline and supplemental funding for the Marine Corps special operations command. In fiscal year 2006, the Marine Corps and USSOCOM received $109.3 million in supplemental funds to establish the Marine Corps special operations command. In fiscal year 2007, the Marine Corps and USSOCOM received an additional $368.2 million in baseline funds for the Command, and $32 million in supplemental funding. As shown in table 3, the Marine Corps and USSOCOM have projected military construction, operation and maintenance, and procurement funding for the Command for fiscal years 2008 through 2013. Although the Marine Corps has made progress in establishing its special operations command, the Command has not fully identified the force structure needed to enable it to perform its assigned missions. The Marine Corps has taken several steps to establish its special operations command, such as activating the Command’s headquarters, establishing Marine Corps special operations forces units, and deploying these units to conduct special operations missions; however, DOD did not use critical practices of effective strategic planning when developing the initial force structure plans for the Command. As a result of limitations in the strategic planning process, the Marine Corps special operations command has identified several force structure challenges that will likely affect the Command’s ability to perform its full range of responsibilities, and is working to revise its force structure to address these challenges. The Marine Corps has taken several steps to establish the Marine Corps special operations command. For example, the Marine Corps has activated the headquarters of its special operations command, established some of its special operations forces units—including 4 special operations companies and 12 foreign military training teams to date—and deployed these units to conduct special operations missions. However, the initial force structure plans for the Command were not developed using critical practices of effective strategic planning. According to officials from the Office of the Secretary of Defense, USSOCOM, and the Marine Corps, the Secretary of Defense directed that the Marine Corps establish a special operations command to meet the growing demand for special operations forces in the war on terrorism. The Secretary of Defense, with input from the Marine Corps, determined that 2,516 personnel was an appropriate size for the Command based on the assumptions that the Command was to be staffed within the existing Marine Corps end-strength, and the establishment of the Command could not significantly affect the Marine Corps budget. Marine Corps planners then based the composition and number of Marine Corps special operations forces units on existing units within the service that had trained to perform similar missions in the past. For example, Marine Corps officials told us that the force structure plans for its special operations companies were modeled after a Maritime Special Purpose Force, which had previously trained to conduct some special operations missions for conventional Marine Corps units. Additionally, Marine Corps officials told us the initial force structure plan to establish nine special operations companies was based on the need to accommodate the deployment schedule of its Marine Expeditionary Units. The initial force structure plan also included the transfer of the Foreign Military Training Unit from the conventional force to its special operations command. Using this existing force structure, the Marine Corps planned to establish 24 foreign military training teams under its special operations command. DOD did not fully incorporate critical practices of effective strategic planning when it developed these initial force structure plans for the Marine Corps special operations command. We have previously reported that strategic planning is important to ensure that an organization’s activities support its strategic goals. Effective planning principles, such as those embodied in the Government Performance and Results Act of 1993 and used by leading organizations, require federal agencies to set strategic goals and develop strategic plans to accomplish those goals. Our prior work has identified several critical practices for effective strategic planning, including the alignment of activities and resources to meet organizational missions and stakeholder involvement. Our prior work has shown that leading organizations recognize that an organization’s activities, core processes, and resources must be aligned to support its mission and help it achieve its goals. Organizations should assess the extent to which their programs and activities contribute to meeting their mission and desired outcomes. In addition, successful organizations base their strategic planning, to a large extent, on the interests and expectations of their stakeholders. Stakeholder involvement is important to help agencies ensure that their efforts and resources are targeted at the highest priorities. Just as important, involving stakeholders in strategic planning efforts can help create a basic understanding among the stakeholders of the competing demands that confront most agencies, the limited resources available to them, and how those demands and resources require careful and continuous balancing. However, in our review of the planning process that preceded the establishment of the Marine Corps special operations command, we found the Command’s activities and resources were not fully aligned with the organization’s mission. For example, although the alignment of activities and resources to meet organizational missions, a critical practice of effective strategic planning, should include an analysis of the number of personnel required for an organization to accomplish its missions, Marine Corps officials stated that the size of the Marine Corps special operations command (2,516 personnel) was not determined through an analysis of the Command’s assigned missions. Specifically, neither the Office of the Secretary of Defense nor the Marine Corps conducted a comprehensive, data-driven analysis to determine the number of personnel needed to meet the Marine Corps special operations command’s mission requirements that directly tied the number of personnel authorized for the Command with its assigned missions. USSOCOM did not provide official mission guidance to the Marine Corps until October 2006, almost 1 year after the Command’s personnel authorizations had been determined. In the absence of specific guidance, Marine Corps planners did not conduct a comprehensive, data- driven analysis to determine the number of personnel needed to meet the Marine Corps special operations command’s full range of mission requirements. Our prior work has shown that valid and reliable data on the number of employees required to meet an agency’s needs are critical because human capital shortfalls can threaten an agency’s ability to perform its missions efficiently and effectively. The alignment of activities and resources should also include an analysis of the number and composition of Marine Corps special operations forces units. However, the Marine Corps did not determine the number and composition of its special operations forces units based on specific guidance from USSOCOM. Although the Marine Corps special operations command was established as the Marine Corps service component under USSOCOM, USSOCOM did not provide guidance to Marine Corps planners on the full range of missions assigned to the Command, or on the number of special operations forces that the Marine Corps needed to provide. Both USSOCOM and Marine Corps officials reported that USSOCOM provided only informal guidance to Marine Corps planners on the core tasks that would be assigned to Marine Corps special operations forces units. According to Marine Corps officials involved in the planning for the Marine Corps special operations command, the informal guidance did not prioritize the core tasks to focus Marine Corps planning efforts, and the guidance did not identify the required capacity for specific capabilities within the Command. The official guidance that USSOCOM provided to the Marine Corps special operations command in October 2006 contained a complete list of missions the Command would be expected to perform. However, the guidance did not prioritize these missions to focus the Command’s planning efforts. Additionally, the guidance did not establish milestones and benchmarks that the Command could use to determine when, and to what level of proficiency, Marine Corps special operations forces units should be able to perform all of their assigned missions. In the absence of specific guidance, Marine Corps officials told us the initial force structure plan to establish nine special operations companies was not based on a USSOCOM requirement for the number of these companies. Moreover, while the decision to transfer the foreign military training teams to the Marine Corps special operations command met the Command’s mission to provide USSOCOM with a foreign internal defense capability, the decision on the number of teams needed by the Command to meet USSOCOM’s mission requirements was left to the Marine Corps. Marine Corps officials also told us that in the absence of clear guidance on the required capacity for support personnel within the Command, Marine Corps planners prioritized the assignment of personnel in warfighter positions in special operations forces units over positions in support units. Specifically, because planners were basing the Command’s force structure decisions on the personnel limit established by DOD, the Marine Corps exchanged positions related to support functions within the Command for positions in its warfighter units. Support functions such as vehicle maintenance, motor transportation, intelligence operations, communication support, and engineering support provide important and necessary support to Marine Corps special operations forces units, as well as other special operations forces units in USSOCOM’s other service components. Furthermore, we found a lack of involvement by some key stakeholders in the establishment of the Marine Corps special operations command. For example, the special operations components with the department’s geographic combatant commands—which are responsible for commanding special operations forces around the world—were not involved in the process to establish the Marine Corps special operations command or in the decisions to target the service’s resources to their highest priorities and mission requirements. Officials with the U.S. Pacific Command’s special operations command who are responsible for functions such as operations and planning told us they provided little input into the planning process to help determine how Marine Corps special operations forces units should be organized and what capabilities were needed in these units to meet the mission requirements of the geographic combatant commands. Similarly, officials from the U.S. Central Command’s special operations command who were responsible for operations and planning in that command told us they were not included in the planning process that preceded the establishment of the Marine Corps special operations command. In particular, officials told us they were not involved in the decisions regarding the types of missions that Marine Corps special operations forces units would need to perform, although as we noted in our July 2006 report on special operations forces deployment trends, 85 percent of all fiscal year 2005 special operations forces deployments were to the U.S. Central Command’s area of responsibility. The Marine Corps special operations command has identified several force structure challenges that stem from limitations in DOD’s strategic planning process that will likely affect its ability to perform its full range of responsibilities, and the Command is revising its force structure plans to address these challenges. For example, the Command has determined that the number and composition of its special operations forces units are not aligned with the Command’s mission requirements. In particular, the Command has identified shortages in positions such as authorized intelligence personnel, which will affect the Command’s ability to simultaneously provide intelligence support to Marine Corps special operations forces and USSOCOM. Moreover, according to Marine Corps special operations command officials, the limited number of personnel available to perform support functions will prevent the Command from effectively performing all of its mission requirements. To illustrate this point, Marine Corps special operations command officials told us that the initial force structure plans for the Command call for less than one support person available for every person assigned to a warfighter position. According to Command officials, this ratio is less than what would be expected for a command of similar size and assigned missions. Officials said an expected ratio for a command such as theirs would be at least two support personnel to one warfighter, and therefore their goal is to adjust the force structure to meet this ratio. In addition, Marine Corps special operations command officials reported that the number of positions authorized for support personnel will also affect the Command’s ability to meet its responsibilities to organize, train, and equip Marine Corps special operations forces. Officials stated the number of personnel assigned to its command elements, such as the headquarters and the staffs of the subordinate units, is insufficient to effectively accomplish these responsibilities. Current force structure plans authorize approximately 780 military personnel and 33 civilian personnel for the Command’s headquarters and the staffs of its major subordinate units. At the time of our work, the Marine Corps special operations command was developing several proposals to significantly revise its force structure to address the challenges stemming from the limitations in the planning process and to better align the Command to meet USSOCOM’s mission guidance. These revisions would adjust the number and size of the Command’s warfighter units to better meet mission requirements. Additionally, if approved, some of the positions made available through the revisions could be used to remedy shortfalls in personnel who perform support functions such as personnel management, training, logistics, intelligence, and budget-related activities. Command officials told us these proposals would likely mitigate many of the challenges that have resulted from the lack of a comprehensive strategic planning process, but they acknowledged that many of the decisions that are needed to implement the force structure changes will be made by Headquarters, Marine Corps. In order to move forward with its proposals, the Command is working to complete several analyses of the personnel and funding requirements that are tied to these proposed force structure changes. It has set milestones for when these analyses should be completed in order to determine whether any additional funding or personnel would be required. However, the Command expects to be able to implement these proposals within the funding levels already identified and planned for future fiscal years. Until the analyses are completed, the Command will be unable to determine whether the approved plans for its personnel and funding should be adjusted in order for the Command to perform all of its assigned missions. Although preliminary steps have been taken, the Marine Corps has not developed a strategic human capital approach to manage the critical skills and competencies required of personnel in its special operations command. While the Marine Corps special operations command has identified some skills that are needed to perform special operations missions, it has not conducted a comprehensive analysis of the critical skills and incremental training required of personnel in its special operations forces units. Such analyses are critical to the Marine Corps’ efforts to develop a strategic human capital approach for the management of personnel in its special operations forces units. Without the benefit of these analyses, the Marine Corps has developed an interim policy to assign some personnel to special operations forces units for extended tour lengths to account for the additional training and skills needed by these personnel. However, this interim policy is inconsistent with the Marine Corps special operations command’s goal for the permanent assignment of some personnel within the special operations community. While the Marine Corps special operations command has identified some critical skills and competencies that are needed to perform special operations missions, it has not fully identified these requirements because it has not yet conducted a comprehensive analysis to determine all the critical skills and additional training required of personnel in its units. We have previously reported that strategic human capital planning is essential to federal agencies’ efforts to transform their organizations to meet the challenges of the 21st century. Generally, strategic human capital planning addresses two needs: (1) aligning an agency’s human capital program with its current and emerging mission and programmatic goals, and (2) developing long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. Our prior work has shown that the analysis of critical skill and competency gaps between current and future workforce needs is an important step in strategic human capital planning. We have also reported that it is essential that long-term strategies include implementation goals and timelines to demonstrate that progress is being made. As part of the effort to identify these critical skills, the Marine Special Operations School is developing a training course that will provide baseline training to newly assigned personnel to prepare them for positions in warfighter units. For example, the Command plans to provide these personnel with training on advanced survival skills and foreign language in order to prepare them to perform special operations missions. However, the Marine Corps special operations command has not fully identified and documented the critical skills and training that are required for personnel to effectively perform special operations missions, and that build on the skills that are developed in conventional Marine Corps units. Officials told us the Command had not yet identified the full range of training that will be provided in this course in order to establish a minimum level of special operations skills for the Command’s warfighters. Additionally, the Marine Corps special operations command has not fully identified the advanced skills and training necessary to support some of the Command’s more complex special operations missions, such as counterterrorism, information operations, and unconventional warfare. While the Marine Corps special operations command has established a time frame for when it wants to conduct the training course under development, it has not set milestones for when it will complete its analysis of the critical skills and competencies required of its personnel. Moreover, the Marine Corps special operations command has not yet fully determined which positions should be filled by specially trained personnel who are strategically managed to meet the Command’s missions. Officials told us there is broad agreement within the Command that personnel assigned to operational positions in its warfighter units require specialized training in critical skills needed to perform special operations missions, and should therefore be strategically managed to meet the Command’s mission requirements. These personnel include enlisted reconnaissance and communications Marines assigned to the Marine Special Operations Battalions and infantry Marines assigned to the Marine Special Operations Advisor Group, as well as some officers assigned to these units. At the time of our review, however, we found that the Command had not yet determined which additional positions should also be filled by personnel who are strategically managed. In particular, we were told by officials from the Command’s headquarters that a determination has not yet been made as to whether personnel who deploy with warfighter units to provide critical combat support, such as intelligence personnel, require specialized skills and training that are incremental to the training provided in conventional force units. For example, officials have not yet decided whether intelligence personnel should attend the initial training course that is under development. However, the Marine Special Operations School plans to provide these personnel with specialized intelligence training to enable them to support certain sensitive special operations missions in support of deploying units. Officials acknowledge that until the Command determines the extent to which support personnel require specialized skills and training to perform their missions, the Command cannot fully identify which positions should be filled by personnel who are strategically managed. To address the personnel needs of the Marine Corps special operations command, Headquarters, Marine Corps, has established an interim policy that provides for extended assignments of some personnel in special operations forces units; however, the absence of a comprehensive analysis of the critical skills and training required of personnel in special operations forces units has contributed to a lack of consensus within the Marine Corps on a strategic human capital approach to manage these personnel. The extended assignments apply to Marines who are beyond their first term of enlistment, which is typically 3 to 5 years, and who are assigned to one of the Marine Corps special operations command’s warfighter, training, or intelligence units. The policy directs that these personnel will be assigned to the Command for 48 months, in part, to account for the additional training provided to personnel in these units. According to officials at Headquarters, Marine Corps, and the Marine Corps special operations command, the 48-month assignment policy is designed to retain designated personnel within special operations forces units long enough to complete at least two deployments. All other Marines will be assigned to the Command for approximately 36 months, which is a typical tour length for Marines in conventional force units. The interim policy also addresses a concern that personnel assigned to special operations forces units will have opportunities for career progression. In general, Marines are managed according to established career progression models for their respective career fields. These career progression models identify the experiences, skills, and professional military education necessary for personnel to be competitive for promotion to the next grade. For example, as personnel are promoted to a higher grade, they are typically placed in positions with increased responsibilities that are consistent with their career progression models in order to remain competitive for further promotion. The Marine Corps has not established a separate career field for special operations forces personnel; instead, the Marine Corps is assigning personnel from a variety of career fields, such as reconnaissance, to its special operations forces units. However, the current structure of the Marine Corps special operations command cannot support long-term assignments of personnel within the Command, in some cases, due to limited opportunities for progression into positions with increased responsibilities. For example, our analysis of the Marine Corps special operations command’s force structure shows that the Command is authorized 76 percent fewer reconnaissance positions for personnel in the grade of E-7 as compared to the number of reconnaissance positions for personnel in the grade of E-6. The Marine Corps has established targets for the promotion of reconnaissance personnel to the grade of E-7 after they have spent approximately 5 years in the grade of E-6. As a result, many reconnaissance personnel who are promoted to E-7 while assigned to a special operations forces unit will need to be reassigned to the conventional force in order to move into an E-7 position and remain competitive for further promotion. The interim policy is also consistent with the approved plan to increase the authorized end-strength of the Marine Corps. In January 2007, the President approved plans to increase the active duty end-strength of the Marine Corps from 179,000 in fiscal year 2006 to 202,000 by fiscal year 2011. This plan includes growth in the number and size of conventional force units and is intended to reduce the stress on frequently deployed units, such as intelligence units, by achieving a 1 to 2 deployment to home station ratio for these units. Marine Corps officials associated with units that will be affected by these increases, such as reconnaissance and intelligence units, told us that the rotation of personnel from Marine Corps special operations units back into the conventional force is important to help ensure that conventional force units are staffed with experienced and mature personnel. For example, our analysis of Marine Corps data shows that by fiscal year 2009, the Marine Corps will increase the servicewide requirement for enlisted counterintelligence/human intelligence personnel by 50 percent above fiscal year 2006 levels. Although the Marine Corps is adjusting its accession, training, and retention strategies to meet the increased requirement for enlisted counterintelligence/human intelligence personnel, officials stated the rotation of these experienced personnel from the Marine Corps special operations command back into the conventional force can help meet the increased personnel needs of conventional intelligence units, while also ensuring that conventional force units have an understanding of special operations tactics, techniques, and procedures. Additionally, officials told us the rotation of personnel from special operations forces units to conventional force units supports the Marine Corps’ process for prioritizing the assignment of personnel to units that are preparing for deployments to Iraq and other war on terrorism requirements. Notwithstanding the intended outcome of the interim policy, Marine Corps special operations command officials told us that the policy might impact the Command’s ability to prepare its forces to conduct the full range of its assigned missions and that the policy is inconsistent with the Command’s stated goal for the permanent assignment of personnel in its special operations forces units. In congressional testimony, the Commander of the Marine Corps special operations command specified his goal to develop a personnel management strategy that would retain some personnel within the special operations community for the duration of their careers. Officials from the Command told us that a substantial investment of time and resources is required to train personnel in special operations forces units on the critical skills needed to perform special operations missions. For example, Marine Corps special operations forces personnel will receive in-depth training to develop foreign language proficiency and cultural awareness, which is consistent with DOD’s requirement to increase the capacity of special operations forces to perform more demanding and specialized tasks during long-duration, indirect, and clandestine operations in politically sensitive environments. However, these officials believe that the Command’s ability to develop and sustain these skills over time will be hampered if its special operations forces units experience high personnel turnover. In addition, according to USSOCOM doctrine, personnel must be assigned to a special operations forces unit for at least 4 years in order to be fully trained in some advanced special operations skills. Consequently, officials from the Command have determined that limited duration assignments would challenge the Command’s ability to develop the capability to conduct more complex special operations core tasks, and to retain fully trained personnel long enough to use their skills during deployments. The Marine Corps special operations command has determined that to achieve its goal of permanent personnel assignments within the special operations community, it requires a separate career field for its warfighter personnel. According to officials from the Command, a separate career field would allow the Marine Corps to manage these personnel based on a career progression model that reflects the experiences, skills, and professional military education that are relevant to special operations missions. Moreover, according to officials from the Command, the establishment of a special operations forces career field would allow the Marine Corps to develop and sustain a population of trained and qualified personnel, while providing the Command and USSOCOM with a more appropriate return on the investment in training personnel to perform special operations missions. The Command’s goal for the permanent assignment of some special operations forces personnel is also consistent with USSOCOM’s current and projected needs for special operations forces personnel. USSOCOM has identified the retention of experienced personnel who possess specialized skills and training as a key component in its strategy to support the war on terrorism. In its vision of how special operations forces will meet long-term national strategic and military objectives, USSOCOM has identified the need for a comprehensive special operations forces career management system to facilitate the progression of these personnel through increasing levels of responsibility within the special operations community. In addition, senior USSOCOM officials have expressed support for an assignment policy that allows Marine Corps personnel to remain within the special operations community for the duration of their careers. Headquarters, Marine Corps, plans to review its interim policy for assigning personnel to its special operations command annually to determine whether it meets the mission requirements of the Command. Additionally, the Commandant of the Marine Corps recently directed Headquarters, Marine Corps, to study the assignment policies for personnel in certain Army special operations forces units who rotate between conventional Army units and special operations forces units. According to a Headquarters, Marine Corps, official, one purpose of this study is to evaluate whether a similar management strategy may be applied to personnel in Marine Corps special operations forces units. Notwithstanding these efforts, officials with Headquarters, Marine Corps, and the Marine Corps special operations command acknowledge that the analysis of the critical skills and training required of personnel in the Command’s special operations forces units is a necessary step in the development of a strategic human capital approach to the management of these personnel. Until the Marine Corps special operations command completes a comprehensive analysis to identify and document the critical skills and additional training needed by its future workforce to perform the Command’s full range of assigned special operations missions, the Marine Corps will not have a sound basis for developing or evaluating alternative strategic human capital approaches for the management of personnel assigned to its special operations forces units. USSOCOM does not have a sound basis for determining whether Marine Corps special operations forces training programs are preparing units for their missions because it has not established common training standards for many special operations skills and it has not formally evaluated whether these programs will prepare units to be fully interoperable with DOD’s other special operations forces. The Marine Corps special operations command has provided training for its forces that is based on training that was provided to conventional units that were assigned some special operations missions prior to the activation of the Command, and by selectively incorporating the training that USSOCOM’s other service components provide to their forces. However, USSOCOM has not formally validated that the training used to prepare Marine Corps special operations forces meets special operations standards and is effective in training Marine Corps special operations forces to be fully interoperable with the department’s other special operations forces. The Marine Corps special operations command has taken several actions to implement programs to fulfill its responsibility for training personnel to perform special operations missions. For example, the Command operates the Marine Special Operations School, which has recently finalized plans for a training pipeline to initially screen all of the Marines and Sailors identified for assignment to the Command to determine their suitability for such assignments. Once the initial screening is completed, personnel who volunteer for assignments in one of the Command’s warfighter units— such as the Marine Special Operations Battalions and the Marine Special Operations Advisor Group—will undergo an additional assessment that measures mental and physical qualifications. As indicated by the Command’s plans, personnel who successfully complete this assessment will be provided with additional baseline special operations training prior to being assigned to one of the Command’s warfighter units. The Marine Special Operations School also provides training to personnel in special operations companies. This training consists of both classroom instruction and the practical application of specialized skills. For example, the school has provided training to personnel in skills such as precision shooting, close quarters battle, and special reconnaissance techniques. In addition, the school’s instructors conduct exercises to train the special operations companies on the unit’s tactics, techniques, and procedures, as well as predeployment training events, to certify the companies are capable of performing the primary special operations missions assigned to these units. The Command’s Marine Special Operations Advisor Group has also developed a comprehensive training program designed to build the individual and collective skills required to perform the unit’s mission to provide military training and advisor support to foreign forces. The program includes individual training for skills such as light infantry tactics and cultural and language training, as well as training for advanced skills in functional areas such as communications, intelligence, and medical training. The training program culminates with a capstone training event that evaluates the proficiency of personnel in mission-essential skills. The training event is used as a means of certifying that these units are trained to perform their assigned missions. In addition, Marine Corps special operations companies and Marine Special Operations Advisor Group teams conduct unit training to prepare for the missions that will be performed during deployments. According to officials with these units, this training is tailored to prepare personnel for the specific tasks that will likely be performed during the deployment. For example, officials stated that unit training may include enhanced language and cultural awareness training for specific countries and training in environmental terrains where these units will be deployed. Marine Corps special operations forces have used conventional Marine Corps training standards to prepare personnel and units to conduct some special operations missions. Officials with the Marine Corps special operations command and its subordinate units told us that its special operations forces units have trained personnel in some skills based on the training programs for conventional units that were assigned some special operations missions prior to the activation of the Command. For example, according to Marine Corps policy, the service formerly deployed specially organized, trained, and equipped forces as part of the Marine Expeditionary Units that were capable of conducting some special operations missions, such as direct action operations. Officials with the Marine Corps special operations command and the Marine Corps Special Operations Battalions told us that the special operations companies have been provided with training for skills such as urban sniper, specialized demolitions, and dynamic assault that is based largely on the training and standards for these skills that were established for conventional Marine Corps forces. For other skills, Marine Corps special operations forces personnel have reviewed and incorporated the training plans that USSOCOM’s Army, Navy, and Air Force service components use to prepare their special operations forces. Marine Corps special operations command officials told us that conventional Marine Corps units are not typically trained in many of the advanced skills required to perform some special operations missions, such as counterterrorism and unconventional warfare. To develop programs to train personnel on the skills required to perform these and other special operations missions, Marine Corps special operations forces have incorporated the training and standards from the training publications of the U.S. Army Special Operations Command, the Naval Special Warfare Command, and the Air Force Special Operations Command. However, according to a senior USSOCOM official, Marine Corps special operations forces have had the discretion to select the standards to use when training forces to perform special operations skills. During our review, we met with servicemembers who had recently completed deployments with Marine Corps special operations forces units as well as with servicemembers who were preparing for planned deployments. In general, these servicemembers told us that they believed they were adequately trained and prepared to perform their assigned missions. Team leaders with the Marine Special Operations Advisor Group, for example, stated that they received sufficient guidance to properly plan and execute special operations missions during deployments to train and advise foreign military forces. However, at the time of our work, the Marine Corps special operations companies that participated in the first deployments of these units had not yet completed their deployments. As a result, we were unable to discuss whether the training that was provided was adequate to fully meet their mission requirements. USSOCOM has not formally validated that the training used to prepare Marine Corps forces meets special operations standards and prepares forces to be fully interoperable with the department’s other special operations forces. The Marine Corps special operations command has made progress in developing and implementing training programs for Marine Corps special operations forces. However, the Command has not used common training standards for special operations skills because USSOCOM has not developed common training standards for many skills, although work to establish common standards is ongoing. USSOCOM officials stated the headquarters and the service components are working to develop common training standards, where appropriate, because USSOCOM recognizes that the service-specific training conducted for advanced special operations skills may not optimize opportunities for commonality, jointness, or efficiency. In addition, USSOCOM officials told us that common training standards would further promote departmentwide interoperability goals, address potential safety concerns, and provide greater assurances to future joint force commanders that special operations forces are trained to similar standards. Our prior work has shown that the lack of commonality in training standards for joint operations creates potentially hazardous conditions on the battlefield. For example, we reported in 2003 that the military services and the special operations community did not use common standards to train personnel to control air support of ground forces. In particular, we found that the standards for these personnel in special operations units differed among the Army, Navy, and Air Force because personnel were required to meet their service-specific training requirements, which led to hesitation by commanders in Afghanistan to employ some special operations forces personnel to direct air support of ground forces. In 2005, USSOCOM established minimum standards for training, qualifying, evaluating, and certifying special operations forces personnel who control air support of ground forces. USSOCOM formalized a process in 2006 to establish and validate common training standards for special operations skills. As part of this process, USSOCOM established a working group comprised of representatives from USSOCOM and each service component to determine the baseline tasks that define the training standard and the service component training requirements for special operations skills. According to a USSOCOM official, the working group first identified the common training requirements and standards for the skills of military free fall and combat dive. In addition, USSOCOM and its service components are working incrementally to identify common training standards for other special operations skills, such as the training required for personnel assigned to combined joint special operations task forces. However, officials with USSOCOM and the Marine Corps special operations command told us the process to establish common training standards for applicable special operations skills will likely take a considerable amount of time to complete due to the number of advanced special operations skills and the challenge of building consensus among the service components on what constitutes a common training standard. Furthermore, USSOCOM has not formally validated whether the training used to prepare Marine Corps forces meets special operations standards and prepares forces to be fully interoperable with the department’s other special operations forces. USSOCOM has taken some limited steps to evaluate the training provided to Marine Corps special operations forces. In November 2006, for example, USSOCOM representatives attended a training exercise on Marine Corps Base Camp Pendleton for a Marine special operations company that was preparing for an upcoming deployment. In addition, USSOCOM representatives observed training exercises in February 2007 for Marine Special Operations Advisor Group teams that were preparing to deploy. A USSOCOM official told us that the purpose of these evaluations was to observe some of the planned training tasks and focus on areas where USSOCOM could assist the Marine Corps special operations command in future training exercises. However, USSOCOM has not formally assessed the training programs used by the Marine Corps special operations command to prepare its forces for deployments, despite the fact that USSOCOM is responsible for evaluating the effectiveness of all training programs and ensuring the interoperability of all of DOD’s special operations forces. Our review of the reports prepared for USSOCOM leadership and provided to Marine Corps personnel showed that they did not contain a formal evaluation of the training content and they did not provide an assessment of the standards used during the training to determine whether the training was in accordance with special operations forces standards. Officials with the Marine Corps special operations command and its subordinate units told us that USSOCOM has not been extensively involved in the development of Marine Corps special operations forces training programs and the performance standards used to train Marine Corps special operations forces. In addition, USSOCOM officials told us that a formal assessment of Marine Corps training programs has not occurred, and will likely not occur, because the management of the Marine Corps special operations command’s training programs is, like the other service components, a responsibility delegated to the Marine Corps component commander. These officials told us the service component commander has the primary responsibility for establishing training programs and certifying that special operations forces are capable of performing special operations missions prior to deployments. In addition, a USSOCOM official stated that any training-related issues affecting the readiness of special operations forces are identified in readiness reports and are discussed during monthly meetings between senior USSOCOM leadership and the service component commanders. However, without common training standards for special operations skills or a formal validation of the training used to prepare Marine Corps special operations forces for planned deployments in the near term, USSOCOM cannot demonstrate the needed assurances to the geographic combatant commanders that Marine Corps special operations forces are trained to special operations forces standards and that these forces meet departmentwide interoperability goals for special operations forces, thereby potentially affecting the success of future joint operations. Since activating a Marine Corps component to USSOCOM, the Marine Corps has made considerable progress integrating into the special operations force structure, and several Marine Corps units have successfully completed deployments to train foreign military forces—a key focus area in DOD’s strategy for the war on terrorism. The Marine Corps has also taken an initial step to meet the unique personnel needs of its special operations command. However, it does not have complete information on all of the critical skills and additional training required of its personnel in special operations forces units. This information would enable the Marine Corps to assess the effectiveness of its human capital planning to date and build consensus on the development of alternative approaches for the management of its personnel assigned to special operations forces units. Until the Marine Corps develops a strategic human capital approach that is based on an analysis of the critical skills and training required of personnel in Marine Corps special operations forces units, it may be unable to align its personnel with the Marine Corps special operations command’s actual workforce requirements, which could jeopardize the long-term success of this new Command. The Marine Corps special operations command faces an additional challenge in training its forces to special operations forces standards and meeting DOD interoperability goals because USSOCOM has not yet established common training standards for many advanced skills. In the absence of common training standards, the Marine Corps special operations command is training its newly established special operations forces units in some skills that were not previously trained in conventional Marine Corps units. Unless USSOCOM validates that the training currently being used to prepare Marine Corps special operations forces is effective and meets DOD’s interoperability goals, it will be unable to ensure that Marine Corps special operations forces are interoperable with other special operations forces in the department, thereby potentially affecting the success of future joint operations. To facilitate the development of a strategic human capital approach for the management of personnel assigned to the Marine Corps special operations command and to validate that Marine Corps special operations forces are trained to be fully interoperable with DOD’s other special operations forces, we recommend that the Secretary of Defense take the following two actions. Direct the Commandant of the Marine Corps to direct the Commander, Marine Corps Forces Special Operations Command, to conduct an analysis of the critical skills and competencies required of personnel in Marine Corps special operations forces units and establish milestones for conducting this analysis. This analysis should be used to assess the effectiveness of current assignment policies and to develop a strategic human capital approach for the management of these personnel. Direct the Commander, USSOCOM, to establish a framework for evaluating Marine Corps special operations forces training programs, including their content and standards, to ensure the programs are sufficient to prepare Marine Corps forces to be fully interoperable with DOD’s other special operations forces. In written comments on a draft of this report, DOD generally concurred with our recommendations and noted that actions consistent with the recommendations are underway. DOD’s comments are reprinted in appendix II. DOD also provided technical comments, which we incorporated into the report as appropriate. DOD partially concurred with our recommendation to require the Commandant of the Marine Corps to direct the Commander, Marine Corps Forces Special Operations Command, to establish milestones for conducting an analysis of the critical skills and competencies required in Marine Corps special operations forces units and, once completed, use this analysis to assess the effectiveness of current assignment policies and develop a strategic human capital approach for the management of these personnel. DOD stated that the Marine Corps special operations command is currently conducting a detailed analysis of the critical skills and competencies required to conduct the missions assigned to the Command. The department further noted that the Command will also fully develop mission-essential task lists, and individual and collective training standards in order to clearly state the requirements for training and personnel. DOD also stated that USSOCOM is providing assistance so that these processes are integrated with USSOCOM’s development of the Joint Training System, which is mandated by the Chairman of the Joint Chiefs of Staff. We believe these are important steps if fully implemented. We note, however, DOD’s response does not address the issue of milestones and gives no indication when the ongoing analysis will be completed. We believe milestones are important because they serve as a means of holding people accountable. Furthermore, DOD did not address the need for the Marine Corps to use the analysis being conducted by the Command to assess the effectiveness of the current assignment policy. Without such an assessment, neither the Marine Corps nor DOD will have needed assurances that the current Marine Corps policy for assigning personnel to its special operations command is providing DOD with an appropriate return on the investment the department is making to train Marine Corps special operations forces personnel. Moreover, without a strategic human capital approach that is based on the comprehensive analysis of the critical skills and training required of its special operations forces personnel, the Marine Corps may be unable to effectively align its personnel with the Marine Corps special operations command’s workforce requirements. DOD partially concurred with our recommendation to require the Commander, USSOCOM, to establish a framework for evaluating Marine Corps special operations forces training programs to ensure the programs are sufficient to prepare Marine Corps forces to be fully interoperable with DOD’s other special operations forces. DOD stated that USSOCOM is currently implementing the Joint Training System that is mandated by the Chairman of the Joint Chiefs of Staff Instruction 3500.01D. According to DOD, the Joint Training System will provide the framework for USSOCOM to evaluate component training programs to ensure special operations forces operational capabilities are achieved. DOD also stated that Headquarters, USSOCOM, established the Training Standards and Requirements Integrated Process Team to complement the Joint Training System, which is focusing on standardizing training for individual skills across USSOCOM, and ensuring increased efficiency and interoperability. DOD stated that USSOCOM delegates many authorities to its service component commanders, including training their service-provided forces. DOD further stated that the Marine Corps special operations command has established the Marine Corps Special Operations School, which is tasked with evaluating all unit training programs to assess their combat capability and interoperability with special operations forces. While we agree that implementing the Joint Training System and standardizing training through the integrated process team will help ensure the interoperability of Marine Corps special operations forces, according to USSOCOM officials, these efforts will likely take several years to complete. We continue to believe that in the near term, USSOCOM needs to evaluate the Marine Corps special operations forces training programs that are currently being conducted. While the Marine Corps has trained its conventional forces in skills related to the special operations forces’ core tasks of direct action and special reconnaissance, it has not traditionally trained its forces in other special operations forces core tasks, such as unconventional warfare. For this reason, it is incumbent on USSOCOM to validate the ongoing training to ensure these new Marine Corps special operations forces units are adequately prepared to perform all of their assigned missions and are interoperable with DOD’s other special operations forces. We are sending a copy of this report to the Secretary of Defense, the Secretary of the Navy, the Commandant of the Marine Corps, and the Commander, United States Special Operations Command. We will also make copies available to other interested parties upon request. In addition, this report will be made available at no charge on the GAO Web site at www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-9619 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To assess the extent to which the Marine Corps special operations command (Command) has identified the force structure needed to perform its mission, we identified and reviewed Department of Defense (DOD) reports related to the department’s efforts to increase the size of special operations forces by integrating Marine Corps forces into the U.S. Special Operations Command (USSOCOM). These documents included the 2002 Special Operations Forces Realignment Study, the 2006 Operational Availability Study, the 2006 Quadrennial Defense Review Report, and the 2006 Unified Command Plan. We analyzed available internal DOD documentation such as briefings, guidance, and memoranda that identified DOD’s plans and time frames for establishing the Marine Corps special operations command. We discussed with officials at DOD organizations the processes that DOD utilized to determine and implement the plans for the new Command. These organizations include, but are not limited to, the Office of the Secretary of Defense, Assistant Secretary of Defense for Special Operations and Low Intensity Conflict; the Joint Staff, Force Structure, Resources, and Assessment Directorate; Marine Corps Plans, Policies, and Operations; Marine Corps Combat Development Command; and Marine Corps Manpower and Reserve Affairs. We also interviewed officials with USSOCOM and the special operations components of the U.S. Central Command and U.S. Pacific Command to determine the role of these commands in the decision-making processes. We reviewed prior GAO reports and the Government Performance and Results Act of 1993 that discuss key elements of effective strategic planning. We interviewed officials from the Marine Corps special operations command to determine the status of the Command’s efforts to activate Marine Corps special operations forces units and discussed the challenges the Command has identified that may affect the Command’s ability to meet its full range of responsibilities. We analyzed documents that describe the Marine Corps special operations command’s proposals to readjust its force structure to overcome its identified challenges. We discussed the status of these proposals with officials from the Marine Corps special operations command and Headquarters, Marine Corps. However, at the time of our review, the Marine Corps special operations command had not finalized decisions on proposed changes to its force structure and concepts of employment for its special operations forces units. As a result, we were unable to assess the extent to which any proposed changes to the Command’s force structure would mitigate identified challenges and specified personnel shortfalls. To assess the extent to which the Marine Corps has determined a strategic human capital approach to manage the critical skills and competencies required of personnel in its special operations command, we examined relevant Marine Corps policies for assigning personnel to conventional force units and the service’s interim policy for assigning personnel to special operations forces units. We interviewed officials from the Marine Corps special operations command and Headquarters, Marine Corps, to discuss the service’s career progression models for personnel assigned to Marine Corps special operations forces units. We also reviewed DOD plans to increase the active duty end-strength of the Marine Corps, and interviewed officials from Headquarters, Marine Corps, to discuss the service’s strategy to meet the personnel needs of its special operations forces units and its conventional force units. We analyzed the Marine Corps special operations command’s planned force structure and interviewed officials with Headquarters, Marine Corps, and the Marine Corps special operations command to determine the challenges the Marine Corps may face in developing a long-term plan to assign personnel to its special operations forces units. To better understand the unique personnel needs of the Marine Corps special operations command, we interviewed officials from the Command to discuss the specialized skills and training that are required by personnel who are assigned to special operations forces units to perform the Command’s assigned missions. We reviewed available documentation on the current and proposed training plans that identify the critical skills and training that will be provided to Marine Corps special operations forces personnel, and we interviewed officials with the Command to discuss the status of their efforts to fully identify all special operations critical skills and training requirements. We reviewed congressional testimony by the Commander of the Marine Corps special operations command and relevant Command planning documents to identify the Marine Corps special operations command’s goal for a human capital plan that supports its assigned missions. We examined USSOCOM annual reports and strategic planning documents relevant to the Marine Corps special operations command, and interviewed USSOCOM officials to discuss the management of special operations forces personnel. We also reviewed our past reports that discuss effective strategies for workforce planning. To assess the extent to which USSOCOM has determined whether Marine Corps special operations training programs are preparing these forces for assigned missions, we examined relevant laws and DOD doctrine related to the responsibilities of the Marine Corps and USSOCOM for training special operations forces personnel. We analyzed Marine Corps special operations command and USSOCOM training guidance for special operations forces. We examined USSOCOM documents related to the processes in place to establish common training standards for advanced special operations skills, and interviewed officials to discuss the status of USSOCOM’s efforts to establish common training standards for special operations skills. We examined available documents that detail training programs for Marine Corps special operations forces. We interviewed officials from the Marine Corps special operations command and USSOCOM to discuss the processes used to identify and select training standards for special operations skills. We collected and analyzed documents related to USSOCOM’s evaluations of Marine Corps special operations forces training, and we discussed the efforts that have been taken by the Marine Corps special operations command and USSOCOM to assess the effectiveness of these training programs. We conducted our work from August 2006 through July 2007 in accordance with generally accepted government auditing standards. Using our assessment of data reliability, we concluded that the data used to support this review were sufficiently reliable to answer our objectives. We interviewed the source of these data to determine how data accuracy was ensured, and we discussed their data collection methods, standard operating procedures, and other internal control measures. We interviewed officials and obtained documentation at the following locations: Office of the Secretary of Defense Office of the Assistant Secretary of Defense for Special Operations and Force Structure, Resources, and Assessment Directorate, J8 U.S. Marine Corps Headquarters (Combat Development Command) U.S. Marine Corps Headquarters (Installations and Logistics Department) U.S. Marine Corps Headquarters (Intelligence Department) U.S. Marine Corps Headquarters (Manpower and Reserve Affairs) U.S. Marine Corps Headquarters (Plans, Policies, and Operations) U.S. Marine Corps Headquarters (Programs and Resources) U.S. Marine Corps Headquarters (Training and Education Command) In addition to the contact named above, Carole Coffey, Assistant Director; Renee Brown; Jason Jackson; David Malkin; Karen Thornton; and Matthew Ullengren also made key contributions to this report. | The Department of Defense (DOD) has relied on special operations forces to conduct military operations in Afghanistan and Iraq and to perform other tasks such as training foreign military forces. To meet the demand for these forces, DOD established a Marine Corps service component under the U.S. Special Operations Command (USSOCOM) to integrate Marine Corps forces. Under the authority of the Comptroller General, GAO assessed the extent to which (1) the Marine Corps special operations command has identified its force structure requirements, (2) the Marine Corps has developed a strategic human capital approach to manage personnel in its special operations command, and (3) USSOCOM has determined whether Marine Corps training programs are preparing its forces for assigned missions. GAO performed its work with the Marine Corps and USSOCOM and analyzed DOD plans for this new command. While the Marine Corps has made progress in establishing its special operations command (Command), the Command has not yet fully identified the force structure needed to perform its assigned missions. DOD developed initial force structure plans to establish the Command; however, it did not use critical practices of strategic planning, such as the alignment of activities and resources and the involvement of stakeholders in decision-making processes when developing these plans. As a result of limitations in the strategic planning process, the Command has identified several force structure challenges that will likely affect the Command's ability to perform its full range of responsibilities, and is working to revise its force structure. Although preliminary steps have been taken, the Marine Corps has not developed a strategic human capital approach to manage the critical skills and competencies required of personnel in its special operations command. While the Command has identified some skills needed to perform special operations missions, it has not conducted a comprehensive analysis to determine all of the critical skills and incremental training required of personnel in its special operations forces units. These analyses are critical to the Marine Corps' efforts to develop a strategic human capital approach for the management of personnel in its special operations forces units. Without the benefit of these analyses, the Marine Corps has developed an interim policy to assign some personnel to special operations forces units for extended tour lengths to account for the additional training and skills; however, the policy is inconsistent with the Command's goal for the permanent assignment of some personnel within the special operations community. Until the Command completes an analysis to identify and document the critical skills and competencies needed by its future workforce to perform its full range of special operations missions, the Marine Corps will not have a sound basis for developing or evaluating alternative strategic human capital approaches for managing personnel assigned to its special operations forces units. USSOCOM does not have a sound basis for determining whether the Command's training programs are preparing units for their missions because it has not established common training standards for many special operations skills and it has not formally evaluated whether these programs prepare units to be fully interoperable with other special operations forces. The Command is providing training to its forces that is based on training programs for conventional units that were assigned some special operations missions prior to the Command's activation and incorporates the training that USSOCOM's other service components provide to their forces. However, USSOCOM has not validated that the training for Marine Corps forces prepares them to be fully interoperable with DOD's other special operations forces. Without an evaluation, USSOCOM cannot demonstrate the needed assurances that Marine Corps forces are fully interoperable with its other forces, which may jeopardize the success of future joint missions. |
In September 1993, the National Performance Review called for an overhaul of DOD’s temporary duty (TDY) travel system. In response, DOD created a task force to examine the department’s travel operations. The task force found that those operations were costly, inefficient, fragmented, and did not adequately support DOD’s mission travel needs. On December 13, 1995, the Under Secretary of Defense for Acquisition and Technology (AT&L) and the Under Secretary of Defense (Comptroller)/Chief Financial Officer issued a memorandum, “Reengineering Travel Initiative,” which established the PMO-DTS and tasked it with acquiring travel services that would be used DOD-wide. In a 1997 report to the Congress, the DOD Comptroller reported that the existing DOD TDY travel systems were never designed to be integrated. The report stated that because there was no centralized focus on the department’s travel practices, the travel policies were issued by different organizations and the process had become fragmented and “stovepiped.” The report further noted that there was no vehicle in the current structure to overcome these deficiencies as no single individual or organization within the department had specific responsibility for management control of DOD TDY travel. In 1998, the department initiated efforts to develop and implement DTS to provide the department with a single, integrated, end-to-end travel system. According to DTMO officials, the department projects that DTS will be deployed to all intended locations—about 9,800— during fiscal year 2009. In response to congressional concerns regarding the implementation and operation of DTS, the John Warner National Defense Authorization Act for Fiscal Year 2007 directed that the department have an independent assessment of DTS to determine the most cost-effective method of meeting DOD’s travel requirements. The assessment, which was completed by the Institute for Defense Analyses (IDA) in March 2007, focused on three mandatory elements specified in the legislation. The first two pertained to the department’s travel reservation process and the third to the feasibility of making the DTS financial infrastructure mandatory for all DOD travel transactions and phasing out legacy travel systems. The IDA study found that the department’s mid-February 2007 updates to DTS effectively addressed the underlying issues and concerns raised by the study regarding continued use of DTS’s travel reservation process and recommended its continued use. Regarding the feasibility of making DTS mandatory for all DOD travel transactions, the study concluded that while the institute found that legacy systems are being used even when DTS could be used, there were situations—such as certain travel types (e.g., permanent change of station) that DTS cannot accommodate and sites where DTS has not yet been fielded—that must be addressed before the use of DTS can be made mandatory DOD-wide. As a result, the study recommended that DOD mandate the use of DTS for all travel that it is currently capable of supporting. Our January 2006 and September 2006 reports contained 14 recommendations aimed at improving DOD’s management oversight and implementation of DTS and related travel policies. DOD officials have indicated that the department has taken action to close all 14 of our recommendations. However, based upon our work to date to validate DOD’s actions, we consider 7 of the 14 recommendations as closed and the remaining 7 open. The 7 closed recommendations pertained to premium-class travel, unused airline tickets, use of restricted airfare, proper testing of system interfaces, and streamlining of certain travel processes, such as the process for approving travel voucher expenses. Our preliminary analysis of the 7 closed recommendations found that the actions taken by the department responded to the intent of our recommendations; however, we need to perform additional work to validate the department’s closed status regarding these recommendations. Of the 7 open recommendations, 3 related to the adequacy of DTS’s requirements management and system testing, 3 related to DTS underutilization, and 1 related to developing an approach that will permit the use of automated methods to reduce the need for hard copy receipts to substantiate travel expenses. Below are two examples of where DOD has acted upon our prior recommendations and two examples where the recommendations remain open. Premium-class travel. We reported in January 2006 that the commercial travel offices (CTO) were not adhering to the department’s policy restricting the use of premium-class travel and recommended that the department take action to ensure that CTOs do so. Because each premium-class ticket costs the government up to thousands of dollars more than a coach-class ticket, unauthorized premium-class travel can result in millions of dollars in unnecessary travel costs annually. Our preliminary work found that the department has made changes to DTS requiring approval of premium-class travel by the authorizing official prior to the issuance of the airline ticket to the traveler by the CTO. Additionally, in October 2007, DOD released a Web-based management tool, which captures premium-class travel approvals and provides monthly reports related to premium-class travel to DTMO. Further, according to DOD officials, the CTO contracts include a monthly reporting requirement regarding premium-class travel. The department’s actions are responsive to the intent of our recommendation. Unused airline tickets. We reported in January 2006 that DOD had not recovered millions of dollars in airline tickets that DOD travelers purchased but did not use. To address this issue, we recommended that the department consider the viability of using commercial databases to identify unused airline tickets, for which reimbursement should be obtained, and to help ensure that the actual travel taken was consistent with the information shown on the travel voucher. In its efforts to implement this recommendation, DTMO found that commercial sources could not readily identify unused airline tickets. In implementing this recommendation, DTMO officials acknowledged that the ongoing CTO initiative, which is scheduled for completion by June 2009, requires CTOs to identify and cancel an unused airline ticket 30 days after the planned trip date and then initiate the refund process. CTOs will be required to provide monthly unused airline ticket reports. DTMO officials stated that as the department negotiates new CTO contracts, this reporting requirement will be included in all new contracts. The department’s actions are responsive to the intent of our recommendation. Requirements management and system testing. Our January 2006 and September 2006 reports noted problems with DTS’s ability to properly display flight information and traced those problems to inadequate requirements management and system testing. Specifically, the system was not displaying all eligible flights that travelers could choose within their anticipated departure and arrival times due to inadequately defined requirements. Properly defined requirements are a key element in developing and implementing systems that meet their cost, schedule, and performance goals since requirements define the (1) functionality that is expected to be provided by the system and (2) quantitative measures by which to determine through testing whether that functionality is operating as expected. We recommended that DOD implement the processes necessary to provide reasonable assurance that requirements are properly documented and adequately tested and to simplify the display of airfares in DTS. To determine if the department acted on our three previous recommendations, we selected 90 requirements related to DTS’s display of flight information for detailed review and analysis of the testing performed. We also selected an additional 119 requirements that were covered by DOD’s testing process that was newly implemented in July 2007. Based upon our preliminary analysis and discussions with DTMO, PMO-DTS, and the prime contractor for the development and implementation of DTS, we found that while DTS’s requirements management and testing process has improved, problems still persist. The problems were generally related to missing documentation, the limited scope of requirements testing performed, or both. For example, one requirement indicated that DTS should not allow a traveler to select flight departure or arrival dates that were outside the established itinerary trip dates. Our review of DOD’s test of this requirement showed that only 3 of the 6 boundary conditions needed to fully test this requirement had been tested. Neither DOD nor its contractor could provide documentation supporting testing for the day after the traveler’s departure date, the day before the arrival date, and the day after the arrival date. Based on our analysis, this requirement was not adequately tested. Another requirement indicated that if the contract carrier for the specified General Services Administration (GSA) city pair is Southwest, then DTS shall identify the available flights based on Southwest’s published Y-class fares for the specified city pair. Our analysis found that the test documentation associated with this requirement only displayed the flights for GSA limited availability fares, which did not include the Southwest Y-class fares called for by the requirement. Therefore, this requirement was not adequately tested. Our review of the 119 requirements included in DOD’s new testing process disclosed that the process does not fully address the problems related to weak requirements management and system testing that we identified in our prior DTS reports. For example, we found that requirements were not adequately tested. The three recommendations we made in the area remain open. The department has provided additional documentation and we are in the process of analyzing the documentation to determine the extent to which the revised requirement management and testing processes have improved. DTS underutilization. Our January 2006 and September 2006 reports noted the challenge facing the department in attaining planned DTS utilization. More specifically, as discussed in our September 2006 report, we found that while the military services have issued various memorandums that mandate the use of DTS to the fullest extent possible at those sites where DTS has been deployed, sites were still using legacy travel systems to process TDY travel. Additionally, we found that the department did not have reasonable quantitative metrics to measure and reliably report on the extent to which DTS was actually being used. As of the issuance of our September 2006 report, DTS utilization rates reported by DOD were based on the DTS Voucher Analysis Model developed in calendar year 2003 using military service data, which were not verified or validated. Furthermore, PMO-DTS officials acknowledged that the model had not been updated with actual data over the years. As a result, estimated DTS utilization reported to DOD management and the Congress was questionable. In our September 2006 report, we recommended that (1) the department develop a process by which the military services would use validated quantitative data from DTS and their individual legacy systems to identify the total universe of DTS-eligible transactions on a monthly basis and (2) these data be used to update the DTS Voucher Analysis Model to report actual DTS utilization rates. Our preliminary observations show that while the department has taken some action to implement this recommendation, DOD still does not have reasonable quantitative metrics to measure the extent of DTS utilization as its metrics continue to be based, at least in part, on estimates. DTMO officials stated that DOD no longer uses the DTS Voucher Analysis Model to report DTS utilization. Instead, in March 2007, DTMO began consolidating travel voucher processing data provided by the military services and publishing this information in the Defense Travel Enterprise Quarterly Metrics Reports. These reports include metrics for DTS fielding, DTS voucher processing, and DTS reservation module usage performance. These reports are provided to DOD management and the military services and include military service data for legacy systems and data available from DTS. The Defense Travel Enterprise Quarterly Metrics Report states that the number of TDY vouchers processed in legacy systems is an estimate because of limitations in DTMO’s ability to collect these data from the legacy systems of the military services and defense agencies. Military service officials stated that they are unable to determine the number of legacy system vouchers that should have been processed by DTS (total universe of travel vouchers). As of September 30, 2008, DTS’s reported voucher processing utilization rates were 73 percent for the Army, 64 percent for the Navy, and 49 percent for the Air Force. Because the department is unable to identify the total universe of travel vouchers, the estimated utilization rates may be over- or understated and the three recommendations in this area remain open. In our September 2006 report, we reported that the DTS utilization rate should be calculated by comparing actual vouchers processed in DTS to the total universe of vouchers that should be processed in DTS. The universe would exclude those travel vouchers that could not be processed through DTS, such as those related to permanent change of station or deployment travel. A key component of DOD’s efforts to transform its travel process is the elimination of the department’s legacy travel systems. As highlighted in the 1995 DOD Travel Reengineering Report, continued use of legacy travel systems not only diminishes the efficiency of the department’s travel operations, it also results in additional costs. Our preliminary work found that the department has not yet identified and validated the number of legacy travel systems still used by the military services and the cost of operating them. Information provided by DTMO indicates that the military services are still using 23 legacy travel systems. However, information provided by the military services identified only 12 legacy travel systems— 10 of which were included on the DTMO list. Regarding potential savings, other than budget information provided by the military services for four legacy travel systems, cost information for the other legacy travel systems was not provided. We reviewed the department’s fiscal year 2009 information technology budget in an attempt to identify the universe of legacy travel systems and their associated operating and maintenance costs. However, 20 of the 23 systems on DTMO’s list were not identified in the budget. Without a valid inventory of legacy travel systems, it is unlikely that DOD management or the Congress—in particular, this subcommittee—will receive reliable reports regarding when these systems are likely to be eliminated and the continuing annual cost to operate and maintain them. Furthermore, without accurate information about legacy travel systems, DOD is at risk of not fully achieving its goal of eliminating stovepiped legacy travel systems. Some legacy travel systems will be used for the foreseeable future even after DTS is deployed to all its intended locations during fiscal year 2009. For example, the Air Force has indicated that it will continue to operate and maintain the Reserve Travel System to process permanent duty travel by civilians. Similarly, the Army will continue to operate and maintain its Windows Integrated Automated Travel System for the same purpose. This functionality is not in DTS and the department does not currently have a time frame for including this functionality. Continued operation of legacy travel systems, particularly where DTS has been deployed, diminishes savings available through electronic processing of travel vouchers and related travel information. At present, it is not possible to measure the lost savings because DOD has not identified the total universe of travel vouchers that it ideally should be processing electronically, nor does DOD have accurate information about legacy travel systems currently in use. As long as the military services continue to use legacy travel systems, they will continue to rely on manual versus electronic voucher processing even at locations where DTS has been deployed. As a result, these DOD components pay DFAS higher fees to process travel vouchers. Given that the Army is DFAS’s largest customer of manually processed travel vouchers, DFAS officials stated that the Army will benefit the most from the electronic voucher processing capabilities that DTS provides. DFAS provides only limited manual travel voucher processing for the Navy and the Air Force. As new functionality is added to DTS, the use of legacy travel systems should decrease, resulting in a reduction of the aggregate DFAS cost to process manual vouchers. For example, the department reported that in fiscal year 2008, the Army processed more than 1.5 million vouchers, and about 1.1 million of those vouchers were processed through DTS. However, as discussed above, both DFAS and Army officials acknowledged that they are unable to determine how many of the remaining 400,000 legacy system travel vouchers should have been processed by DTS (the total universe of travel vouchers). In addition, our preliminary work to review the reasonableness of the rates DFAS charges for electronic and manual travel voucher processing identified some calculation errors. For fiscal year 2009, DFAS estimates it will charge DOD components an average of $2.47 for travel vouchers processed electronically and $36.52 for travel vouchers processed manually. However, in reviewing the price computation, we found that DFAS allocated too much general and administrative cost to its travel voucher processing activities. DFAS personnel were unaware of the error until our review, but indicated that it was most likely a misinterpretation of the guidance. Overhauling DOD’s financial management and business operations represents a daunting challenge. DTS implementation is an example of the difficulties the department faces in achieving transformation of its travel operations through implementation of best practices and a standardized travel system. With over 3.3 million military and civilian personnel as potential travel system users, at approximately 9,800 locations around the world, the sheer size and complexity of the undertaking overshadows any such project in the private sector. As we have previously reported, because each DOD component receives its own funding for the operation, maintenance, and modernization of its own systems, nonintegrated, local business systems have proliferated throughout the department. The elimination of stovepiped legacy systems and use of less expensive electronic processing, which could be achieved with the successful implementation of DTS, are critical to realizing the anticipated savings. In closing, we also would like to reiterate that following this testimony, we plan to issue a report on the status of DOD’s actions on GAO’s previous recommendations, which will include any further recommendations needed to improve the department’s implementation of DTS and ensure its success in the future. Mr. Chairman, this concludes my prepared statement. We would be happy 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 Asif A. Khan at (202) 512-9095 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the above contacts, the following individuals made key contributions to this testimony: Darby Smith, Assistant Director; Evelyn Logue, Assistant Director; J. Christopher Martin, Senior-Level Technologist; F. Abe Dymond, Assistant General Counsel; Jehan Abdel-Gawad; Beatrice Alff; Margaret Mills; and John Vicari. To determine the status of our 14 recommendations to improve the Department of Defense’s (DOD) travel processes and Defense Travel System (DTS) implementation, we met with representatives of the Defense Travel Management Office (DTMO) and the Program Management Office- Defense Travel System (PMO-DTS) to obtain an understanding of actions taken, under way, or planned by the department in response to our recommendations. We obtained and analyzed documentation, such as policies, procedures, and testing documentation, that supported the actions DOD has taken. More specifically, to determine the specific actions taken related to our previous recommendations on requirements management and system testing, in November 2008, we analyzed 90 requirements and reviewed relevant documentation to determine if the requirements had been tested and the result of the tests. The requirements selected for review related primarily to the display of flight information— since that was an area of concern in our prior work. Subsequently, in January 2009, we analyzed another 119 requirements because the program’s requirements management and testing practices changed in July 2007, and we wanted to verify whether the changes had been effectively implemented. We discussed the results of our requirements management and system testing analysis with representatives of the DTMO, the PMO- DTS, and the prime contractor. For some recommendations, such as the one related to premium-class travel, we obtained a demonstration of the new procedures that had been implemented and reviewed reports produced by DTS when premium-class travel was taken. Furthermore, to obtain an understanding of the actions taken to address the concerns we had reported regarding DTS utilization, we met with officials in the DTMO, PMO-DTS, and travel management representatives of the military services. To assess DOD’s plans regarding the use of legacy travel systems after the DTS is fully implemented, we obtained legacy travel system inventory data from the DTMO and compared them with data obtained from military service personnel responsible for travel for their respective components to determine if there were any differences. We also obtained from the military services a listing of the legacy travel systems that will continue to operate once the DTS is deployed to all intended locations and the rationale for the continued operation of these systems. To determine the cost to operate and maintain the legacy travel systems, we requested information from the DTMO and the military services. In addition, we reviewed the department’s fiscal year 2009 information technology budget request to identify the universe of legacy travel systems and their associated operating and maintenance costs. To assess the reasonableness of DOD’s cost estimates for processing travel vouchers electronically versus manually, we met with Defense Finance and Accounting Service (DFAS)-Indianapolis officials to obtain an understanding of the methodology used to determine the price charged a customer to process a travel voucher. More specifically, we (1) obtained and analyzed documentation supporting the methodology used by the DFAS to compute the cost estimates for electronically and manually processing a travel voucher and (2) used our cost assessment guide as a reference to determine whether the DFAS considered all appropriate and reasonable cost elements in developing its computation of costs for processing manual and electronic travel vouchers. We conducted fieldwork from July 2008 through March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for the preliminary findings and conclusions presented in this testimony based upon the audit objectives. We discussed the preliminary findings included in our testimony with DOD officials. After completing additional work, we plan to issue a report on the status of DOD’s actions on GAO’s previous recommendations, which will include any further recommendations needed to improve the department’s implementation of DTS and ensure its success in the future. 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 1995, the Department of Defense (DOD) began an effort to implement a standard departmentwide travel system--the Defense Travel System (DTS). As part of its ongoing monitoring, GAO's April 2008 testimony before this subcommittee highlighted challenges confronted by the department in its implementation efforts. GAO's testimony today is based on its current follow-up work conducted at the request of this subcommittee, as well as the Subcommittee on Readiness. GAO's testimony today focuses on the actions DOD has taken to (1) implement previous GAO recommendations regarding implementation of DTS and related travel policies, (2) phase out legacy travel systems and their associated costs, and (3) implement electronic travel voucher processing. To address these objectives, GAO (1) analyzed specific documentation, such as test documentation, travel policies, and budget data, and (2) interviewed appropriate DOD travel personnel. GAO has made 14 recommendations aimed at improving DOD's management oversight and implementation of DTS and related travel policies to make DTS the standard departmentwide travel system. GAO considers 7 of the 14 recommendations closed and the remaining 7 recommendations as being open. The 7 closed recommendations pertained to premium-class travel, unused airline tickets, use of restricted airfare, proper testing of system interfaces, and streamlining of certain travel processes, such as the process for approving travel voucher expenses. GAO's analysis of the 7 closed recommendations found that the actions taken by the department responded to the intent of the recommendations. Of the 7 open recommendations, 3 related to the adequacy of DTS's requirements management and system testing, 3 to DTS underutilization, and 1 to developing an approach that will permit the use of automated methods to reduce the need for hard copy receipts to substantiate travel expenses. In the area of requirements management and testing, GAO found that while DTS's requirements management and testing process has improved, problems still persist. The problems were generally related to missing documentation, the limited scope of requirements testing performed, or both. In the area of DTS utilization, GAO found that the department still does not have in place the metrics to determine the number of manual travel vouchers that should have been processed through DTS. Further, DOD does not have accurate and complete information on the number of legacy travel systems that are still in use by the military services. Defense Travel Management Office (DTMO) data indicates that there are 23 legacy travel systems, but military services' data identify 12--10 of which are on the DTMO list. In addition, GAO found that the department lacks visibility of the cost to operate and maintain these legacy systems. The DTMO and the military services could only provide limited cost data for each identified legacy travel system and the department's fiscal year 2009 information technology budget contained cost data for only 3 of the 23 systems on the DTMO list. According to the military services, some of the legacy systems will be needed even after DTS has been deployed to all intended locations because DTS will not include certain functionality, such as the processing of civilian permanent duty travel. Without a valid inventory of legacy travel systems, it is unlikely that DOD management or the Congress will receive reliable reports regarding when duplicative systems are likely to be eliminated and the annual savings available from avoiding the associated operating and maintenance costs. Finally, GAO found that there is a significant difference between the costs of processing a travel voucher manually and electronically. Based upon departmental data , the fee charged to process a travel voucher manually is about 15 times greater than electronic voucher processing--approximately $37 manually and $2.50 electronically. Shutting down legacy travel systems, which require manual processing, would provide cost savings to the department related to the processing of travel vouchers. |
As we have reported in the past, the impact of invasive species in the United States is widespread, and their consequences for the economy and the environment are profound. Invasive species affect people’s livelihoods and pose a significant risk to industries such as agriculture, ranching, and fisheries. The cost to control invasive species and the cost of damages they inflict, or could inflict, on property and natural resources are estimated in the billions of dollars annually. For example, according to the U.S. Department of Agriculture (USDA), each year the Formosan termite causes at least $1 billion in damages and control costs in 11 states; USDA also estimates that, if not managed, fruit flies could cause more than $1.8 billion in damage each year. Invasive species continue to be introduced in new locations, with recent examples including the northern snakehead fish in Maryland, the emerald ash borer in Michigan, and the monkeypox virus in the Midwest. Invasive species may arrive unintentionally as contaminants of bulk commodities, such as food, and in packing materials, shipping containers, and ships’ ballast water. Ballast water is considered a major pathway for the transfer of aquatic invasive species. Ballast is essential to the safe operation of ships because it enables them to maintain their stability and control how high or low they ride in the water. Ships take on or discharge ballast water over the course of a voyage to counteract the effects of loading or unloading cargo, and in response to sea conditions. The ballast that ships pump aboard in ports and harbors may be fresh, brackish, or salt water. These waters could potentially contain various organisms that could then be carried to other ports around the world where they might be discharged, survive, and become invasive. Other invasive species may be introduced intentionally; kudzu, for example—a rapidly growing invasive vine that thrives in the southeastern United States—was intentionally introduced from Japan as an ornamental plant and was used by USDA in the 1930s to control soil erosion. Federal agencies implement a variety of invasive species-related programs and activities pursuant to their specific missions and responsibilities. USDA, for example, spends significant resources on prevention and control activities for invasive species that harm agricultural and forest products. USDA is also responsible for preventing infectious diseases, some of which are considered invasive, from spreading among livestock. States also play a major role in addressing invasive species, either through their own programs or through collaboration with or funding from federal programs. Such programs and the amount of resources expended on them vary considerably among the states. In response to concerns that we were losing the battle against invasive species, President Clinton signed Executive Order 13112 in February 1999 to prevent the introduction of invasive species; provide for their control; and minimize their economic, environmental, and human health impacts. The executive order established the National Invasive Species Council, which is now composed of the heads of 11 federal departments and agencies, to provide national leadership on invasive species and to ensure that federal efforts are coordinated and effective, among other things. The executive order also required the Secretary of the Interior to establish a federal advisory committee to provide information and advice to the Council. To achieve the goals of the executive order, the Council was to develop a national management plan that would serve as the blueprint for federal action on invasive species. S. 525, if enacted, would call on the Council to carry out several other activities such as implementing a strategy to share information collected under the proposed legislation and to develop a program for educating the public about certain pathways for invasive species; it would also authorize funds for the Council to carry out these activities. The National Invasive Species Council’s management plan, Meeting the Invasive Species Challenge, issued in January 2001, calls for actions that are likely to help control invasive species, such as issuing additional regulations to further reduce the risk of species introductions via solid wood packing material, developing methods to determine rapid response measures that are most appropriate for specific situations, and devoting additional resources to strengthening inspection services at ports of entry. However, as we observed in our October 2002 report, the plan lacks a clear long-term goal and quantifiable performance criteria against which to evaluate its overall success. For example, the plan does not contain performance-oriented goals and objectives, such as reducing the introduction of new species by a certain percentage or reducing the spread of established species by a specified amount. Instead, the plan contains an extensive list of actions that, while likely to contribute to preventing and controlling invasive species, are not clearly part of a comprehensive strategy. Similarly, many of the actions in the plan call for federal agencies to take certain steps rather than to achieve specific results and do not have measurable outcomes. For example, the plan calls for the Council to work with relevant organizations to “expand opportunities to share information, technologies, and technical capacity on the control and management of invasive species with other countries.” The plan also calls for the Council to support international conferences and seminars. These types of actions are more process-oriented than outcome-oriented; taken individually, the actions may be useful, but judging whether they are successful and have contributed to an overall goal, will be difficult. Federal officials involved in developing the plan told us that they recognize that it has deficiencies and are working on improvements. The Council acknowledged in the plan itself that many of the details of the actions called for would require further development in the implementation phase. The executive director of the Council staff told us that, in her opinion, given the scope of this first-time effort, it would have been unrealistic and difficult to agree on specific measurable goals. She also said that, in many areas, the federal government does not have the data on invasive species conditions needed to set long-term goals and develop better performance measures. She said that many of the actions called for in the management plan are designed to help develop needed data but pointed out that doing so for some aspects of invasive species management will be difficult given the comprehensive data needed. The management plan also called for the Council to establish a transparent oversight mechanism by April 2001 to report on implementation of the plan and compliance with the executive order. This mechanism, however, is just now being set in place. Without this mechanism, the only available measure that could have be used to assess overall progress in implementing the plan was the percentage of planned actions that were completed by the dates set in the plan. By this measure, implementation has been slow. Specifically, federal agencies had completed less than 20 percent of the 65 actions that were called for by September 2002. Council agencies had started work on over 60 percent of the remaining planned actions, however, including some that have a due date beyond September 2002. Several actions in the plan that were completed on time related to the development of the Council’s Web site, which is found at www.invasivespecies.gov. In addition, the National Oceanic and Atmospheric Administration, the Coast Guard, the Department of the Interior, and the Environmental Protection Agency (EPA) had sponsored research related to ballast water management. Nevertheless, a vast majority of the members of the Invasive Species Advisory Committee, which we surveyed for our October 2002 report, said that the Council was making inadequate or very inadequate progress. We found several reasons for the slow progress in implementing the plan. First, delays occurred in establishing the teams of federal and nonfederal stakeholders that were intended to guide implementation of various parts of the plan. Second, our review of agencies’ performance plans (prepared pursuant to the Government Performance and Results Act) indicated that while some agencies’ plans described efforts taken to address invasive species under their own specific programs, none of the plans specifically identified implementing actions called for by the plan as a performance measure. Some stakeholders expressed the view that the low priority given to implementing the plan and associated limited progress may be due to the fact that the Council and plan were created by executive order, and thus do not receive the same priority as programs that are legislatively mandated. Finally, we also noted a lack of funding and staff specifically devoted to implementing the plan. To address these shortcomings, we recommended that the Council co- chairs (the Secretaries of Agriculture, Commerce, and the Interior) ensure that the updated management plan contains performance-oriented goals and objectives and specific measures of success and give high priority to establishing a transparent oversight mechanism for use by federal agencies complying with the executive order and reporting on implementation of the management plan. We also recommended that all member agencies of the National Invasive Species Council with assigned actions in the current management plan recognize their responsibilities in either their departmental or agency-level annual performance plans. The agencies generally agreed with our recommendations. Since we issued our report, the Council made significant progress on its first crosscutting budget—one of the planned actions in the management plan that should help to develop performance measures and promote better coordination of actions among agencies. The Office of Management and Budget is currently reviewing the Council’s proposal for the fiscal year 2004 budget cycle. In addition, according to Council staff, the oversight mechanism should be finalized in July 2003, and the first revision to the management plan should be finalized later this summer. According to experts and agency officials we consulted, current efforts by the United States are not adequate to prevent the introduction of aquatic invasive species into the Great Lakes via ballast water of ships, and they need to be improved. Since 1993, federal regulations have required vessels entering the Great Lakes from outside the Exclusive Economic Zone—a zone extending 200 nautical miles from the shore—to exchange their ballast water in the open ocean (that is, water deeper than 2,000 meters) before entering the zone. Exchanging ballast water before arriving in the Great Lakes is intended to serve two purposes: to flush aquatic species taken on in foreign ports from the ballast tanks and to kill with salt water any remaining organisms that happen to require fresh or brackish water. If a ship bound for the Great Lakes has not exchanged its ballast water in the open ocean it must hold the ballast in its tanks for the duration of the voyage through the lakes or conduct an exchange in a different approved location. Data from the Coast Guard show that the percentage of ships entering the Great Lakes after exchanging their ballast water has steadily increased since the regulations took effect in 1993 and averaged over 93 percent from 1998 through 2001. Despite this, numerous aquatic invasive species have entered the Great Lakes via ballast water and have established populations since the regulations were promulgated. Experts have cited several reasons for the continued introductions of aquatic invasive species into the Great Lakes despite the ballast water regulations. In particular, the Coast Guard’s ballast water exchange regulations do not apply to ships with little or no pumpable ballast water in their tanks, which account for approximately 70 percent of ships entering the Great Lakes from 1999 through 2001. These ships, however, may still have thousands of gallons of residual ballast and sediment in their tanks that could harbor potentially invasive organisms from previous ports of call and then be discharged to the Great Lakes during subsequent ballast discharges. There are also concerns that open-ocean ballast water exchange is not an effective method of removing all potentially invasive organisms from a ship’s ballast tank. Federal officials believe that they should do more to develop treatment standards and technologies to protect the Great Lakes from ballast water discharges. The Coast Guard is now working to develop new regulations that would include a performance standard for ballast water—that is, a measurement of how “clean” ballast water should be before discharge within U.S. waters. The Coast Guard is expecting to have a final rule ready for interdepartmental review by the fall of 2004 that will contain ballast water treatment goals and a standard that would apply not only to ships entering the Great Lakes but to all ships entering U.S. ports from outside the Exclusive Economic Zone. Once the Coast Guard sets a performance standard, firms and other entities will be able to use this as a goal as they develop ballast water treatment technologies. While several technologies are being investigated, such as filtration and using physical biocides such as ultraviolet radiation and heat treatment, a major hurdle to be overcome in developing technological solutions is how to treat large volumes of water being pumped at very high flow rates. In addition, small container vessels and cruise ships, which carry a smaller volume of ballast water, may require different technologies than larger container vessels. As a result, it is likely that no single technology will address the problem adequately. Consequently, it could be many years before the world’s commercial fleet is equipped with effective treatment technologies. Without more effective ballast water standards, the continued introduction of aquatic invasive species into the Great Lakes and other aquatic systems around the country is likely to cause potentially significant economic and ecological impacts. We reported in October 2002 that the Coast Guard and the Department of Transportation’s Maritime Administration are developing programs to facilitate technology development. In addition, the National Oceanic and Atmospheric Administration and the U.S. Fish and Wildlife Service have funded 20 ballast water technology demonstration projects at a total cost of $3.5 million since 1998 under a research program authorized under the National Invasive Species Act. Other programs also support research, and the Maritime Administration expects to make available several ships of its Ready Reserve Force Fleet to act as test platforms for ballast water technology demonstration projects. Once effective technologies are developed, another hurdle will be installing the technologies on the world fleet. New ships can be designed to incorporate a treatment system, but existing ships were not designed to carry ballast water technologies and may have to go through an expensive retrofitting process. With each passing year without an effective technology, every new ship put into service is one more that may need to be retrofitted in the future. Public and private interests in the Great Lakes have expressed dissatisfaction with the progress in developing a solution to the problem of aquatic invasive species introduced through ballast water. An industry representative told us that she and other stakeholders were frustrated with the slow progress being made by the Coast Guard in developing a treatment standard. More broadly, in the absence of stricter federal standards for ballast water, several Great Lakes states have considered adopting legislation that would be more stringent than current federal regulations. In addition, in a July 6, 2001, letter to the U.S. Secretary of State and the Canadian Minster of Foreign Affairs, the International Joint Commission and the Great Lakes Fishery Commission stated their belief that the two governments were not adequately protecting the Great Lakes from further introductions of aquatic invasive species. They also noted a growing sense of frustration within all levels of government, the public, academia, industry, and environmental groups throughout the Great Lakes basin and a consensus that the ballast water issue must be addressed now. The two commissions believe that the reauthorization of the National Invasive Species Act is a clear opportunity to provide funding for research aimed at developing binational ballast water standards. S. 525 sets forth a more aggressive program against the introduction of aquatic invasive species through ballast water and related pathways. In particular, it would require ballast water standards for ships in all waters of the U.S., instead of the current voluntary program for waters outside of the Great Lakes. It also specifically authorizes significantly more funding in the form of grants to states, and federal funding and grants for research, including research on pathways, likely aquatic invaders, and development of cost-effective control methods. Now let me turn to our most recent work gathering state perspectives on invasive species legislation and management. State officials who responded to our survey identified several gaps in, or problems with, existing federal legislation on aquatic and terrestrial invasive species, as well as other barriers to their efforts to manage invasive species. According to our new work, the lack of legal requirements for controlling already-established or widespread invasive species was the gap in existing legislation on aquatic and terrestrial species most frequently identified by state officials. Specifically, they said that this is a problem for species that do not affect a specific commodity or when a species is not on a federal list of recognized invasives. Officials noted that if there is no federal requirement, there is often little money available to combat a species and that a legal requirement would raise the priority for responding to it. For example, one state official complained about the lack of authority to control Eurasian ruffe, an invasive fish that has spread through several Great Lakes and causes great harm to native fisheries. He compared this to the authorities available to control the sea lamprey, which has a mandated control program that is funded by the U.S. and Canada. In addition, some state officials said that in the absence of federal requirements, differences among state laws and priorities also pose problems for addressing established species, for example, when one state may regulate or take actions to control a species and an adjacent state does not. Some state officials noted that they have little authority to control or monitor some species and that getting laws or regulations for specific species, such as those for the sea lamprey, takes time. Many state officials also identified ineffective federal standards for ballast water as a problem for addressing invasive species. Specifically, some state officials complained that standards and treatment technologies, regulations, compliance with reporting requirements, and penalties for noncompliance are lacking and say that research and legislation are needed to address the problem. As we reported in October 2002, federal regulations for ballast water are not effective at preventing invasive species from entering our waters and are only required for ships entering the Great Lakes. Some state officials also said that federal leadership is essential to fund efforts in these areas and to provide coordination among states. As I have already noted, S. 525 would authorize a more aggressive program for developing standards and technologies for regulating ballast water. Although some state officials believe solving the ballast water problem is possible, some officials pointed to difficulties in doing so with some methods. Specifically, these officials noted that some environmentalists are opposed to chemical treatments, while industry groups have objected to the cost of some technologies. S. 525 would revise the definition of “environmentally sound” (as in environmentally sound control measures) to delete the emphasis on nonchemical measures. State officials reported that inadequate federal funding for state efforts was the key barrier to addressing invasive species—both aquatic and terrestrial. In particular, state officials were concerned about having sufficient funds to create management plans for addressing invasive species, particularly as more states begin to develop plans, and for inspection and enforcement activities. State officials also identified the need for additional funds to conduct monitoring and detection programs, research, and staffing. In particular, some state officials noted that uncertainty in obtaining grant funds from year to year makes it difficult to manage programs, especially when funding staff positions relies on grants. S. 525 would specifically authorize significantly more funding in grants to address invasive species than is specifically authorized under the current legislation. Many state officials also identified a lack of public education and outreach as a barrier to managing terrestrial invasive species. Public education and outreach activities are important components of the battle against invasive species, as many invasives have been introduced through the activities of individuals, such as recreational boating, and the pet, live seafood, and plant and horticultural trades. For example, the outbreak of the monkeypox virus that has sickened at least 80 people in the Midwest is thought to have spread from a Gambian rat imported from Africa to be sold as a pet. S. 525 includes efforts intended to provide better outreach and education to industry, including the horticulture, aquarium, aquaculture, and pet trades, and to recreational boaters and marina operators, about invasive species and steps to take to reduce their spread. State officials identified a lack of cost-effective control measures as a key barrier to addressing aquatic invasive species. Some officials commented that there is a need for more species-specific research to identify effective measures. For example, one successful control effort—the sea lamprey control program—costs about $15 million per year. However, similar control programs for all invasive species would be problematic and officials told us that targeted research on control methods is needed, particularly for aquatic invasive species. S. 525 would authorize a grant program for research, development, demonstration, and verification of environmentally sound, cost-effective technologies and methods to control and eradicate aquatic invasive species. State officials’ opinions varied on the preferred leadership structure for managing invasive species and whether to integrate legislative authority on invasive species. Many state officials indicated that specifically authorizing the National Invasive Species Council would be an effective management option and favored integrated authority, but in both cases, the margins were relatively small. Currently, no single agency oversees the federal invasive species effort. Instead, the National Invasive Species Council, which was created by executive order and is composed of the heads of 11 federal departments and agencies, is intended to coordinate federal actions addressing the problem. State officials most often identified specifically authorizing the Council in legislation as an effective leadership structure for managing invasive species. Almost all of the Invasive Species Advisory Committee members that responded to our survey agreed with this approach. During our work for our October 2002 report, the executive director of the Council noted that legislative authority for the Council, depending on how it was structured, could be useful in implementing the national management plan for invasive species by giving the Council more authority and, presumably, authorizing more resources. Officials from USDA, the Department of Defense, and EPA also told us that legislative authority, if properly written, would make it easier for Council agencies to implement the management plan, as implementing actions under the executive order are perceived to be lower in priority than are programs that have been legislatively mandated. Many state officials, however, also believed that keeping the current Council authority as established by executive order is an effective option. As you know, federal authorities for addressing invasive species are scattered across a patchwork of laws under which aquatic and terrestrial species are treated separately. Questions have been raised about whether this is the most effective and efficient approach and whether the federal government’s ability to manage invasive species would be strengthened if integrated legal authority addressed both types of invasives. Some believe such an approach would provide for more flexibility in addressing invasive species; others are concerned that such an approach would disrupt existing programs that are working well. On the basis of the responses from state officials, no clear consensus exists on whether legislative authority for addressing aquatic and terrestrial invasive species should be integrated. Overall, state officials were in favor of integrating legislative authority, but the margin was relatively small. Differences were more distinct, however, when we considered the state officials’ expertise. Specifically, we asked officials whether they considered themselves experts or knowledgeable in aquatic invasive species, terrestrials, or both. A large majority of the state officials who identified themselves as having expertise solely in aquatic invasive species were against integrating aquatic and terrestrial authority. The terrestrial experts were also against integrated authority, but with a smaller majority. These positions contrast with those of the state officials who said they were experts or knowledgeable in both aquatic and terrestrial invasives; these officials favored integrated authority by a large majority. About twice as many members of the Invasive Species Advisory Committee who responded to our survey favored integrating legislation on aquatic and terrestrial invasive species compared to those who did not. Regarding the drawbacks of integrating authority for aquatic and terrestrial invasive species, many state officials said that it could be difficult to address all possible situations with invasive species and some species or pathways may get overlooked, and were concerned that it may reduce state flexibility implementing invasive species programs. Some state officials said that the two types of invasives should be handled separately, since the ecological complexities of aquatics and terrestrials are very different—different pathways of entry and spread, and different requirements for control methods and expertise. In addition, some officials stated that combining legislative authority would result in competition among various invasive species programs for scarce resources. In particular, one official referred to the “issue of the moment” phenomenon, where a specific invasive species becomes the focus of great public attention and receives a large share of resources, while many other species may get very few resources. On the other hand, many state officials saw an increased focus on pathways for invasive species—as opposed to on specific species—as a possible benefit of integrating authority for aquatic and terrestrial invasive species. Such an approach could facilitate more effective and efficient efforts to address invasive species. Many state officials also believed that integration of legislative authority could result in increased coordination between federal agencies and states. Some state officials described the efforts needed to address invasives as requiring broad, interdisciplinary coordination and characterized the current federal effort as fragmented and ineffective. In addition, some state officials said that the classification of species into aquatic or terrestrial types might not be clear-cut and that the current separation between them is “an artificial federal construct,” citing, for example, the difficulty of classifying amphibians. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Mark Bondo, Mark Braza, Kate Cardamone, Curtis Groves, Trish McClure, Judy Pagano, Ilga Semeiks, and Amy Webbink also made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Invasive species--nonnative plants and animals--have caused billions of dollars in damage to natural areas, businesses, and consumers. In 2001, the federal government issued a National Management Plan to coordinate a national control effort involving the 20 or so federal agencies that are responsible for managing invasive species. In October 2002, GAO reported on the implementation of the management plan and efforts to manage ballast water, among other things. This testimony discusses some of GAO's findings and recommendations in that report. It also presents the results of a subsequent GAO survey of state officials responsible for managing terrestrial and aquatic invasive species. This survey sought state perspectives on (1) the perceived gaps in existing legislation and barriers to addressing terrestrial and aquatic invasive species and (2) the federal leadership structure for addressing invasive species, as well as the integration of federal legislation on terrestrial invasive species with legislation on aquatic invasives. In 2002, GAO reported that while the National Management Plan calls for many actions that are likely to contribute to preventing and controlling invasive species in the United States, it does not clearly articulate specific long-term goals toward which the government should strive. For example, it is not clear how implementing the actions in the plan will move national efforts toward outcomes such as reducing new invasive species by a specific number or reducing the spread of established species by a specific amount. Moreover, GAO found that the federal government had made little progress in implementing many of the actions called for by the plan. Reasons for the slow progress included delays in establishing teams to be responsible for guiding implementation of the planned actions, the low priority given to implementation by the National Invasive Species Council and federal agencies, and the lack of funding and staff responsible for doing the work. In addition, GAO reported that current federal efforts are not adequate to prevent the introduction of invasive species into the Great Lakes via the ballast water of ships. Although federal officials believe more should be done to protect the Great Lakes from ballast water discharges, their plans for doing so depend on the development of standards and technologies that will take many years. More recently, state officials who responded to GAO's survey, identified a number of gaps in, or problems with, existing legislation addressing invasive species and other barriers to managing invasives. Many state officials identified a lack of legal requirements for controlling invasive species that are already established or widespread as a key gap in legislation addressing both aquatic and terrestrial invasive species. State officials also often recognized ineffective standards for ballast water as a major problem in aquatics legislation. Regarding barriers to managing invasive species, state officials identified a lack of federal funding for state invasive species efforts, public education and outreach, and cost-effective control measures as major problems. State officials' opinions varied on the preferred leadership structure for managing invasive species and whether to integrate legislative authority on invasive species. Many officials indicated that specifically authorizing the National Invasive Species Council would be an effective management option and favored integrated authority, but in both cases, the margins were relatively small. State officials indicated that the possible benefits of integrated legislation would be increased coordination between federal agencies and states and an increased focus on invasive species pathways, as opposed to focusing on individual species. The possible drawbacks identified included concerns that a single piece of legislation would not be able to address all possible situations dealing with invasive species and might reduce state flexibility in addressing invasives. |
Federal agencies and our nation’s critical infrastructures—such as energy, transportation systems, communications, and financial services— are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. The information systems and networks that support federal operations are highly complex and dynamic, technologically diverse, and often geographically dispersed. This complexity increases the difficulty in identifying, managing, and protecting the myriad of operating systems, applications, and devices comprising the systems and networks. The security of federal information systems and data is vital to public confidence and the nation’s safety, prosperity, and well-being. However, systems used by federal agencies are often riddled with security vulnerabilities—both known and unknown. For example, the national vulnerability database maintained by the National Institute of Standards and Technology (NIST) identified 82,384 publicly known cybersecurity vulnerabilities and exposures as of February 9, 2017, with more being added each day. Federal systems and networks are also often interconnected with other internal and external systems and networks, including the Internet, thereby increasing the number of avenues of attack and expanding their attack surface. In addition, cyber threats to systems supporting the federal government and critical infrastructure are evolving and becoming more sophisticated. These threats come from a variety of sources and vary in terms of the types and capabilities of the actors, their willingness to act, and their motives. For example, foreign nations—where adversaries possess sophisticated levels of expertise and significant resources to pursue their objectives—pose increasing risks. Cybersecurity professionals can help to prevent or mitigate the vulnerabilities that could allow malicious individuals and groups access to federal IT systems. The ability to secure federal systems depends on the knowledge, skills, and abilities of the federal and contractor workforce that uses, implements, secures, and maintains these systems. This includes federal and contractor employees who use the IT systems in the course of their work as well as the designers, developers, programmers, and administrators of the programs and systems. However, the Office of Management and Budget (OMB) has noted that the federal government and private industry face a persistent shortage of cybersecurity and IT talent to implement and oversee information security protections to combat cyber threats. In addition, the RAND Corporation and the Partnership for Public Service have reported that there is a nationwide shortage of cybersecurity experts, in particular in the federal government. According to these reports, this shortage of cybersecurity professionals makes securing the nation’s networks more challenging and may leave federal IT systems vulnerable to malicious attacks. We and others have identified a number of key challenges federal agencies are facing to ensure that they have a sufficient cybersecurity workforce with the skills necessary to protect their information and networks from cyber threats. These challenges pertain to identifying and closing skill gaps as part of a comprehensive workforce planning process, recruiting and retaining qualified staff, and navigating the federal hiring process. A high-performance organization needs a workforce with talent, multidisciplinary knowledge, and up-to-date skills in order to achieve its mission. To ensure such a workforce for cybersecurity, we have identified key practices for strategic IT workforce planning that focus especially on the need for organizations to identify and address gaps in critical skills. These practices include (1) setting the strategic direction for IT workforce planning, (2) analyzing the workforce to identify skill gaps, (3) developing strategies and implementing activities to address these gaps, and (4) monitoring and reporting progress in addressing gaps. However, over the last several years, we and others have reported on federal agencies’ challenges to define their cybersecurity workforces and address their IT skills gaps. For example: In November 2011, we reported that eight federal agencies had identified challenges in their workforce planning efforts. For example, they were not able to determine the size of their cybersecurity workforce because of variations in how the cyber-related work was defined and the lack of a cybersecurity specific occupational series. In addition, we noted that the eight agencies had taken varied steps to implement workforce planning practices for cybersecurity personnel. For example, five of the eight agencies had established cybersecurity workforce plans or other agency-wide activities addressing cybersecurity workforce planning. However, these plans did not always include strategies for addressing gaps in critical skills or competencies, among other things. To address these shortcomings, we made six recommendations to enhance individual agency workforce planning activities. Of the six agencies to which we made individual recommendations, five agreed and one neither agreed nor disagreed with our recommendations. Since our report was issued, the agencies have implemented most of these recommendations. In January 2015, we reported that the Office of Personnel Management (OPM) and a Chief Human Capital Officers Council working group had identified skills gaps in government-wide, mission- critical occupations, including cybersecurity. We noted that, although these initial efforts had created an infrastructure for addressing skills gaps, overall progress was mixed. At times, goals had targets that were difficult to measure. Likewise, agency officials chose to track metrics that often did not allow for an accurate assessment of progress made toward these goals for closing skills gaps. In addition, OPM had not established time frames or a process for collecting government-wide staffing and competency data to help agencies determine the competencies that are critical to successfully achieving their mission. We pointed out that OPM and selected agencies could improve efforts to address skills gaps by strengthening their use of quarterly data-driven reviews (known as HRstats). Based on these findings, we recommended that OPM (1) strengthen its methodology for identifying and addressing skills gaps, (2) establish a schedule and process for collecting government-wide staffing and competency data, and (3) develop a set of metrics for agency HRstat reviews. OPM generally concurred with the first and third recommendations, but did not concur with the second recommendation, citing funding constraints. These recommendations have not yet been implemented. In an April 2015 report, the Partnership for Public Service noted a continuing need for the government to develop an understanding of the size and skills of the current cybersecurity workforce; project the government’s future cybersecurity human capital needs; assess qualitative and quantitative gaps between the current workforce and the workforce needed to address future challenges; and develop strategies, as well as program and policy goals, designed to close those gaps. The Partnership attributed these challenges to the lack of a government-wide master cybersecurity workforce strategy, leaving agencies to operate largely on their own under a haphazard system. In November 2016, we reported that five selected agencies had made mixed progress in assessing their IT skill gaps. These agencies had started focusing on identifying cybersecurity staffing gaps, but more work remained in assessing competency gaps and in broadening the focus to include the entire IT community. For example, four of the five agencies had not demonstrated an established IT workforce planning process, which would assist them in identifying and addressing skill gaps. In several cases, these shortcomings were due to a lack of comprehensive policies and procedures for assessing workforce needs. We recommended that the agencies take steps to fully implement IT workforce planning practices. The agencies agreed or partially agreed with our recommendations; however, the recommendations have not yet been implemented. An effective hiring process meets the needs of agencies and managers by filling positions with quality employees through the use of a timely, efficient, and transparent process. To recruit and retain personnel with the critical skills needed to accomplish their missions, federal agencies can offer incentives, such as recruitment, relocation, and retention incentive payments; student loan repayments; annual leave enhancements; and scholarships. Agencies can also use training and development opportunities as an incentive to help recruit and retain employees. However, we and others have found that agencies have faced persistent challenges in recruiting and retaining well-qualified cybersecurity talent: In November 2011, we reported that the quality of cybersecurity training and development programs varied significantly across the eight agencies in our review. Additionally, most of the eight agencies in our review said they used some incentives to support their cybersecurity workforce; however, they either had not evaluated or had difficulty evaluating whether incentives effectively support hiring and retaining highly skilled personnel in hard-to-fill positions. We also found that, although OPM had planned to develop guidance and tools to assist agencies in the administration and oversight of their incentive programs, it had not yet done so. To address this shortcoming, we recommended that OPM finalize and issue guidance to agencies on how to track the use and effectiveness of incentives for hard-to-fill positions, including cybersecurity positions; OPM has since implemented this recommendation. In August 2016, we reported the results of our review of the current authorities of agency chief information security officers (CISO). Among other things, CISOs identified key challenges they faced in fulfilling their responsibilities. Several of these challenges related to the cybersecurity workforce, such as not having enough personnel to oversee the implementation of the number and scope of security requirements. In addition, CISOs stated that they were not able to offer salaries that were competitive with the private sector for candidates with high-demand technical skills. Furthermore, CISOs said that some security personnel lacked security skills or were not sufficiently trained. Others have also noted the challenge of hiring and retaining qualified cybersecurity professionals. For example, the April 2015 Partnership for Public Service report highlighted obstacles to federal recruitment of cybersecurity talent, including the inability of the government to offer salaries competitive with those in the private sector. In addition, according to a January 2017 report from the federal CIO Council, chief information officers (CIO) reported that it is difficult for agencies to offer well-qualified candidates a salary that is competitive with the private sector. This salary issue in turn can create problems in retaining talented government employees. OMB has also identified additional potential issues, such as job candidates’ concern that a private sector position may give them more autonomy and a more flexible work culture than a federal information security position. We have previously reported that the federal hiring process all too often does not meet the needs of (1) agencies in achieving their missions; (2) managers in filling positions with the right talent; and (3) applicants for a timely, efficient, transparent, and merit-based process. In short, we noted that the federal hiring process is often an impediment to the very customers it is designed to serve in that it makes it difficult for agencies and managers to obtain the right people with the right skills, and applicants can be dissuaded from public service because of the complex and lengthy procedures. As we and others have reported, the federal hiring process can pose obstacles to the efficient and effective hiring of cybersecurity talent: The Partnership for Public Service reported in 2015 that the government loses top candidates to a slow and ineffective hiring process characterized by “self-inflicted” process delays and outdated assessment methods. The CIO Council also reported in January 2017 that CIOs were often frustrated with the federal hiring process. Its report noted that the hiring process for federal agencies often takes significantly longer than in the private sector and that selection officials with limited cybersecurity expertise may misevaluate candidates’ capabilities, leading to under-qualified candidates advancing ahead of well-qualified ones. In August 2016, we issued a report on the extent to which federal hiring authorities were meeting agency needs. Although competitive hiring has been the traditional method of hiring, agencies can use additional hiring authorities to expedite the hiring process or achieve certain public policy goals. Among other things, we noted that agencies rely on a relatively small number of hiring authorities (as established by law, executive order, or regulation) to fill the vast majority of hires into the federal civil service. Further, while OPM collects a variety of data to assess the federal hiring process, neither it nor agencies used this information to assess the effectiveness of hiring authorities. Conducting such assessments would be a critical first step in making more strategic use of the available hiring authorities to more effectively meet their hiring needs. We recommended that OPM work with agencies to determine the extent to which hiring authorities were meeting agency needs and use this information to refine, eliminate, or expand authorities as needed. OPM generally concurred with these recommendations but has not yet implemented them. As noted previously, we have identified both information security and strategic human capital management as government-wide high-risk areas. To address these high-risk areas, agencies need to take focused, concerted action, including implementing our outstanding recommendations, which can help mitigate the challenges associated with developing an effective cybersecurity workforce. This will help ensure that the federal government has a capable cybersecurity workforce with the necessary knowledge, skills, and competencies for carrying out its mission. Based on a review of our previous work, we identified a number of ongoing efforts to improve the cybersecurity workforce. The executive branch, Congress, and federal agencies have recognized the need for, and taken actions aimed at achieving, an effective federal cybersecurity workforce. Specifically, executive branch organizations have initiatives under way to help government agencies address workforce-related challenges; Congress passed legislation intended to improve workforce planning and hiring; and federal agencies have instituted other ongoing activities that may assist the federal government in enhancing its cybersecurity workforce. A number of executive branch initiatives have been undertaken over the last several years intended to improve the federal cybersecurity workforce. They include the following, among others: The National Initiative for Cybersecurity Education (NICE): This initiative, which began in March 2010, is a partnership between government, academia, and the private sector that is coordinated by NIST to help improve cybersecurity education, including efforts directed at training, public awareness, and the federal cybersecurity workforce. The mission of NICE is to energize and promote a robust network and an ecosystem of cybersecurity education, training, and workforce development. NICE fulfills this mission by coordinating with government, academic, and industry partners to build on existing successful programs, facilitate change and innovation, and bring leadership and vision to increase the number of skilled cybersecurity professionals helping to keep our nation secure. National Cybersecurity Workforce Framework: In April 2013, NICE published a national cybersecurity workforce framework, which was intended to provide a consistent way to define and describe cybersecurity work at any public or private organization, including federal agencies. The framework defined 31 cybersecurity-related specialty areas that were organized into seven categories: (1) securely provision, (2) operate and maintain, (3) protect and defend, (4) investigate, (5) collect and operate, (6) analyze, and (7) oversight and development. In November 2016, NIST issued a draft revision to the framework. Among other things, the revised framework defines work roles within each specialty area and also describes cybersecurity tasks for each work role and the knowledge, skills, and abilities demonstrated by a person whose cybersecurity position includes each work role. The revised framework is intended to enable agencies to examine specific IT, cybersecurity, and cyber-related work roles, and identify personnel skills gaps, rather than merely examining the number of vacancies by job series. OMB Cybersecurity Strategy and Implementation Plan: In October 2015, OMB issued its Cybersecurity Strategy and Implementation Plan (CSIP) for the Federal Civilian Government to present the results of a comprehensive review of the federal government’s cybersecurity (known as the “Cybersecurity Sprint”). According to the CSIP, the Cybersecurity Sprint identified two key observations related to the federal cybersecurity workforce: (1) the vast majority of federal agencies cited a lack of cyber and IT talent as a major resource constraint that impacted their ability to protect information and assets; and (2) there were a number of existing federal initiatives to address this challenge, but implementation and awareness of these programs was inconsistent. To address these challenges, among other things, the CSIP tasked OPM to provide agencies with information on a number of hiring, pay, and leave flexibilities to help recruit and retain individuals in cybersecurity positions, and called for OMB and OPM to publish a cybersecurity human resources strategy and identify possible actions to help the federal government recruit, develop, and maintain a pipeline of cybersecurity talent. Cybersecurity National Action Plan: Announced by the White House in February 2016, the Cybersecurity National Action Plan was intended to build on the CSIP activities while calling for innovation and investments in cybersecurity education and training to strengthen the talent pipeline. As part of this plan, the fiscal year 2017 President’s Budget proposed investing $62 million to, among other things, expand the CyberCorps Scholarship for Service program to include a CyberCorps Reserve program offering scholarships for americans who wish to gain cybersecurity education and serve their country in the civilian federal government; develop a cybersecurity core curriculum for academic institutions; and strengthen the National Centers for Academic Excellence in Cybersecurity Program to increase the number of participating academic institutions and expand cybersecurity education across the nation. These initiatives were intended to help the federal government recruit and retain cybersecurity talent with the technical skills, policy expertise, and leadership abilities necessary to secure federal assets and networks well into the future. Federal Cybersecurity Workforce Strategy: As called for by the CSIP, OMB and OPM issued the Federal Cybersecurity Workforce Strategy in July 2016, detailing government-wide actions to identify, expand, recruit, develop, retain, and sustain a capable and competent workforce in key functional areas to address complex and ever- evolving cyber threats. The strategy identified a number of key actions within four broad goals to address cybersecurity workforce challenges. Table 1 describes the goals of the strategy and associated activities. According to OMB’s 2016 report on agency implementation of the Federal Information Security Modernization Act of 2014 (FISMA), agencies had made progress in implementing this strategy to address workforce shortages. Specifically, OMB reported that agencies hired over 7,500 cybersecurity and IT employees in 2016; by comparison, federal agencies hired 5,100 cybersecurity and IT employees in 2015. These executive branch initiatives include many actions that could help address the challenges of identifying and closing skill gaps, recruiting and retaining staff, and navigating the federal hiring process. While responsible agencies have begun to take action on many of these items, it will be important to continue this momentum if these efforts are to be effectively implemented and foster a significant improvement in the federal cybersecurity workforce. In addition to the aforementioned executive-level initiatives, several recently enacted federal laws include provisions aimed at improving the federal cybersecurity workforce. For example: The Cybersecurity Enhancement Act of 2014 includes provisions intended to address challenges related to recruiting and hiring. Specifically, the law requires the Department of Commerce, National Science Foundation (NSF), and DHS, in consultation with OPM, to support competitions and challenges to identify, develop, and recruit talented individuals to perform duties relating to the security of information technology in federal, state, local, and tribal government agencies, and the private sector. The law also calls for NSF, in coordination with OPM and DHS, to continue a federal cyber scholarship-for-service program to recruit and train the next generation of information technology professionals, industrial control system security professionals, and security managers to meet the needs of the cybersecurity mission for federal, state, local, and tribal governments. The Border Patrol Agent Pay Reform Act of 2014 includes provisions intended to improve recruiting and hiring of cybersecurity staff at DHS. Specifically, the law authorizes the Secretary of Homeland Security to establish, as positions in the excepted service, such positions in DHS as the Secretary determines to be necessary to carry out certain responsibilities relating to cybersecurity. The Homeland Security Cybersecurity Workforce Assessment Act (2014) requires DHS to take certain actions related to cybersecurity workforce planning. Specifically, the Secretary of Homeland Security is to identify all positions in DHS that perform cybersecurity functions and identify cybersecurity work categories and specialty areas of critical need. The Federal Cybersecurity Workforce Assessment Act of 2015 assigns specific workforce planning-related actions to federal agencies. These actions include developing a coding structure to capture the work roles outlined in the revised National Cybersecurity Workforce Framework (OPM, in coordination with NIST); establishing procedures for implementing the coding structure to identify all civilian cybersecurity positions (OPM, in coordination with DHS, NIST, and the Office of the Director of National Intelligence); identifying all IT or cyber positions at agencies, and assigning the appropriate codes to each (federal agencies); and identifying IT and cyber-related work roles of critical need, and report these needs to OPM (each federal agency, in consultation with OPM, NIST, and DHS). The act also requires GAO to analyze and monitor the implementation of the act’s requirements and report on this assessment to Congress. We plan to report on the results of our review by no later than December 18, 2018. Similar to the executive branch initiatives discussed above, these laws call for actions that, if effectively implemented, can address challenges related to skill gaps and recruiting, hiring, and retaining skilled cybersecurity professionals. Further, these laws are an important mechanism to hold agencies accountable for taking action and demonstrating results in building an effective cybersecurity workforce. Beyond the government-wide initiatives and recently enacted legislation discussed previously, federal agencies have instituted other ongoing activities that may assist the federal government in enhancing its cybersecurity workforce. These include the following, among others: Promoting cyber and science, technology, engineering and mathematics (STEM) education: A recent presidential commission on cybersecurity highlighted the need for federal programs that support education at all levels to incorporate cybersecurity awareness for students as they are introduced to and provided with Internet- based devices. As an example of such a program, the National Integrated Cyber Education Research Center (NICERC), an academic division of the Cyber Innovation Center funded by DHS, was created to design, develop, and advance both cyber and STEM academic outreach and workforce development programs across the nation. NICERC develops cyber-based curricula for use by K-12 teachers across the country. The curricula developed by NICERC is free to any K-12 educator within the United States and comprises a library of cyber-based curricula that provides opportunities for students to become aware of cyber issues, engage in cyber education, and enter cyber career fields. CyberCorps scholarship: According to the Partnership for Public Service, one way agencies can increase the supply of cyber talent is through the use of undergraduate and graduate scholarships to promising cybersecurity and STEM students. One such program—the Scholarship for Service program operated by DHS and NSF— provides scholarships and stipends to undergraduate and graduate students who are pursuing information security-related degrees, in exchange for 2 years of federal service after graduation. According to a November 2015 memo from the federal Chief Human Capital Officer Council, since 2000 these scholarships have been awarded to more than 1,650 students. There are also nearly 400 graduating students in related academic programs to meet agencies’ cybersecurity needs each year. National Centers of Academic Excellence: Sponsored by DHS and the National Security Agency, this program designates specific 2- and 4-year colleges and universities as “centers of academic excellence” (CAE) based on their robust degree programs and close alignment to specific cybersecurity-related knowledge units, validated by subject matter experts. Currently, over 200 colleges and universities across 44 states, the District of Columbia, and the Commonwealth of Puerto Rico are designated CAEs for cyber-related degree programs. This program is intended to help institutions of higher education produce skilled and capable cybersecurity professionals and equip students with the necessary knowledge, skills, and abilities needed to protect and defend our nation’s infrastructures. National Initiative for Cybersecurity Careers and Studies: DHS, in partnership with several other agencies, launched the National Initiative for Cybersecurity Careers and Studies (NICCS) in February 2013 as an online resource to connect government employees, students, educators, and industry with cybersecurity training providers across the nation. NICCS provides a catalog of cybersecurity-focused training courses that are delivered by accredited universities, CAEs, federal agencies, and other training providers. Each course is mapped to the National Cybersecurity Workforce Framework. In coordination with a strategic, government-wide approach to improving the workforce, these programs and activities are intended to provide valuable resources for agencies as they attempt to mitigate the shortage of cybersecurity professionals. In summary, recruiting, developing, and retaining a qualified and competent cybersecurity workforce remains a critical challenge for the federal government. This is highlighted by the ever-evolving nature of the cyber threat and the vulnerabilities that we have identified over the years in agencies’ information security programs. The federal government continues to be challenged in key areas—such as identifying skills gaps, recruiting and retaining qualified staff, and navigating the federal hiring process—that are essential to ensuring the adequacy of its cybersecurity workforce. To better equip agencies to adequately protect federal information and information systems from increasingly sophisticated and ever-changing cyber threats, it is critical that a number of our open recommendations be addressed. Recent federal initiatives and legislation are intended to address the challenges associated with the cybersecurity workforce, and agencies may also be able to draw on other ongoing activities to help assist in mitigating cybersecurity workforce gaps. If effectively implemented, these initiatives, laws, and activities could help establish the cybersecurity workforce needed to secure and protect federal IT systems. Chairman Hurd, Ranking Member Kelly, and Members of the Subcommittee, this concludes my statement. I would be pleased to address any questions that you have. If you have any questions about this statement, please contact Nick Marinos at (202) 512-9342 or [email protected]. Other contributors to this statement include Tammi Kalugdan, assistant director; William Cook, analyst-in-charge; Chris Businsky; David Hong; Franklin Jackson; Lee McCracken; Luis Rodriguez; Adam Vodraska; Daniel Wexler; and Merry Woo. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government faces an ever-evolving array of cyber-based threats to its systems and information. Further, federal systems and networks are inherently at risk because of their complexity, technological diversity, and geographic dispersion, among other reasons. GAO has designated the protection of federal information systems as a government-wide high-risk area since 1997. In 2001, GAO introduced strategic government-wide human capital management as another area of high risk. A key component of the government's ability to mitigate and respond to cyber threats is having a qualified, well-trained cybersecurity workforce. However, shortages in qualified cybersecurity professionals have been identified, which can hinder the government's ability to ensure an effective workforce. This statement discusses challenges agencies face in ensuring an effective cybersecurity workforce, recent initiatives aimed at improving the federal cyber workforce, and ongoing activities that could assist in recruiting and retaining cybersecurity professionals. In preparing this statement, GAO relied on published work related to federal cybersecurity workforce efforts, and information reported by other federal and non-federal entities focusing on cybersecurity workforce challenges. GAO and others have identified a number of key challenges facing federal agencies in ensuring that they have an effective cybersecurity workforce: Identifying skills gaps: As GAO reported in 2011, 2015, and 2016, federal agencies have faced challenges in effectively implementing workforce planning processes for information technology (IT) and defining cybersecurity staffing needs. GAO also reported that the Office of Personnel Management (OPM) could improve its efforts to close government-wide skills gaps. Recruiting and retaining qualified staff: Federal agencies continue to be challenged in recruiting and retaining qualified cybersecurity staff. For example, in August 2016, GAO reported that federal chief information security officers faced significant challenges in recruiting and retaining personnel with high-demand skills. Federal hiring activities: The federal hiring process may cause agencies to lose out on qualified candidates. In August 2016 GAO reported that OPM and agencies needed to assess available federal hiring authorities to more effectively meet their workforce needs. To address these and other challenges, several executive branch initiatives have been launched and federal laws enacted. For example, in July 2016, OPM and the Office of Management and Budget issued a strategy with goals, actions, and timelines for improving the cybersecurity workforce. In addition, laws such as the Federal Cybersecurity Workforce Assessment Act of 2015 require agencies to identify IT and cyber-related positions of greatest need. Further, other ongoing activities have the potential to assist agencies in developing, recruiting, and retaining an effective cybersecurity workforce. For example: Promoting cyber and science, technology, engineering and mathematics (STEM) education: A center funded by the Department of Homeland Security (DHS) developed a kindergarten to 12th grade-level cyber-based curriculum that provides opportunities for students to become aware of cyber issues, engage in cyber education, and enter cyber career fields. Cybersecurity scholarships: Programs such as Scholarship for Service provide tuition assistance to undergraduate and graduate students studying cybersecurity in exchange for a commitment to federal service. National Initiative for Cybersecurity Careers and Studies: DHS, in partnership with several other agencies, launched the National Initiative for Cybersecurity Careers and Studies in 2013 as an online resource to connect government employees, students, educators, and industry with cybersecurity training providers across the nation. If effectively implemented, these initiatives, laws, and activities could further agencies' efforts to establish the cybersecurity workforce needed to secure and protect federal IT systems. Over the past several years, GAO has made several recommendations to federal agencies to enhance their IT workforce efforts. Agencies are in various stages of implementing these recommendations. |
To develop and maintain a national system of safe airports, FAA promulgates federal standards and recommendations for the design of airport infrastructure. FAA’s airport design standards regulate how an airport must be configured to safely serve aircraft with certain characteristics, such as wingspan and weight. Design Group V standards serve the B-747, while Design Group VI standards will serve NLA (see fig. 1). FAA has established a process to grant modifications to airport design standards according to an airport’s unique local conditions. Under a recently established policy, FAA headquarters officials have the sole authority to approve modifications to the standards for accommodating NLA. Generally, an airport’s request must show that an acceptable level of safety, economy, durability, and workmanship will continue despite any modification. (See app. II for more detailed information on airport design standards and the process for requesting and granting modifications.) With the arrival of NLA closer and the availability of more up-to-date information to airport officials about whether airlines plan to offer NLA service at their airports, 14 airports reported that they expect to serve NLA by 2010. Determining the cost to serve NLA is difficult because a number of issues are unresolved including whether and the extent to which FAA revises NLA’s design standards or which airlines actually buy NLA and the frequency of NLA service at U.S. whether NLA will begin service in the United States as early as 2006, as planned; and the extent to which the cost estimates reported by the airports are attributable to NLA instead of changes to accommodate growth in air traffic. The 14 airports that expect to serve NLA by 2010 collectively reported that their cost estimate for infrastructure changes is $2.1 billion. However, even with these changes, officials from most of these airports told us that they do not expect their airports to fully meet current Design Group VI standards. (See app. III for a list of these cost estimates by airport. See app. IV for the cost estimates from these 14 airports to upgrade their four major types of infrastructure.) Regarding the unresolved issues, most airport officials told us that they plan to apply to FAA for modifications to the standards or to serve NLA by restricting its operations. FAA has three studies underway to evaluate certain Design Group VI standards to determine which ones should be revised. One study uses actual data from taxiing B-747 aircraft to determine how much pilots deviate from a taxiway’s centerline. The amount of deviation is important to help determine a taxiway’s required width to operate NLA safely. According to FAA, it has continuously kept airport and industry officials informed of preliminary results of its on- going studies. However, FAA will not know until 2003, when the final results are expected, whether to revise the current Design Group VI standards and/or grant modifications or what the nature of any changes might be. There are certain Design Group VI standards for which modifications cannot be granted. For example, runway and taxiway bridges designed to safely support a B-747 with a maximum taxiing weight of 875,000 pounds cannot support an A380 with a maximum taxiing weight of 1.4 million pounds. Which airlines actually buy NLA, how they use these aircraft in their route structure, and the total number of NLA that are put into service will influence which airports eventually receive NLA and the cost for infrastructure changes. For example, Honolulu International Airport is a likely destination for NLA if Japan Airlines or All Nippon Airways, two of the key airlines that serve this airport, buy them. If not, Honolulu International Airport would not likely receive NLA on a regular basis and could possibly accommodate them through modifications to standards, thereby avoiding more costly infrastructure changes. The total number of NLA in service and which airlines purchase them will be influenced by market demand, which is even more uncertain than when the estimates were made because of the September 11th terrorist attacks. Before and after these attacks, Airbus has estimated that 1,500 NLA would be flying worldwide by 2019. In contrast, in July 2001, Airbus’ competitor, Boeing, said that it estimated that 500 NLA would be flying by then—a threefold difference. Each company’s future vision of air travel accounts for the large difference between their estimates. Officials at many of the airports we surveyed believe that if they serve only a few NLA, they might be able to accommodate these aircraft with operational restrictions, thus making full compliance with Design Group VI standards unnecessary. For example, to help ensure safety, an airport could restrict NLA’s ground movement to designated taxi routes, terminal gates, and runways, and/or could restrict the ground movement of other aircraft. The total estimated cost to accommodate NLA could also change because the timing of its arrival is uncertain. The A380 has not been completely built and the first flight (certification trial) is not expected until 2004. The A380 is not expected to arrive in the United States until 2006. Meanwhile, many factors, including commercial decisions and unforeseen technical problems in certifying the aircraft for service, could delay this schedule. This uncertainty has led some airports to decide that they will not upgrade their infrastructure unless they are reasonably certain that some of the airlines they serve will be using NLA there. Lastly, distinguishing, where possible, between the costs for growth and those specific to serving NLA would affect the estimated costs of infrastructure changes. Costs that airports would incur for growth, regardless of whether they serve NLA, should be separated from those that an airport is incurring only because it is serving NLA. Airbus officials stated that most of the estimated costs airports reported for infrastructure upgrades are attributable to growth rather than accommodating NLA. However, airport officials have told us that, in some cases, costs attributable to growth and serving NLA are so interrelated that it is very difficult to separate them. Within the next 2 years, we expect some of these issues will be resolved. For example, FAA expects to have final results from its tests on certain airport design standards in 2003 and will then be able to decide whether to revise the standards. With these issues resolved, airports will have a clearer understanding of the infrastructure changes that must be made and their costs. We sent a draft of this report to the Department of Transportation, the Airports Council International-North America, and Airbus for their review and comment. We met with Transportation officials, including the Director, Office of Airport Safety and Standards, FAA. These officials suggested that we explain why some airports indicated large differences between the costs for meeting Design Group VI standards reported to FAA in 1997 and those we received in 2001. We believe that the costs for making infrastructure changes to fully meet Design Group VI do not provide a realistic estimate of the changes that airports expect to make to serve NLA. Therefore, we revised the report to focus on the airports that expect to serve NLA and the costs of those infrastructure changes they expect to make. FAA officials also provided a number of clarifying comments, which we have incorporated. The Senior Vice-President, Technical and Environmental Affairs, Airport Council International-North America, provided oral comments. He suggested that we clarify the relationship between Design Group VI standards for new construction at airports and NLA’s operational requirements. He said that the draft report made reference to airports’ inability to meet Design Group VI standards without noting that airports can accommodate NLA with operating restrictions. We revised the report to clarify this point. The Deputy Vice President of Safety and Technical Affairs for Airbus provided written comments (see app. V for the full text of Airbus’ comments). Airbus agreed with the list of 14 airports that reported that they expect to serve NLA by 2010. However, the company said that the estimates from these airports overstated the costs to accommodate NLA. The company’s collective estimate for the 14 airports that expect to serve NLA is $520 million, as opposed to the $2.1 billion collectively estimated by the airports. The company provided two major reasons for this difference. First, Airbus said that, in the majority of cases, there is no safety need to bring existing airport infrastructure to Group VI standards to accommodate the A380. Second, Airbus said that the cost estimates reported by the airports are “rough” and do not reflect detailed analysis. Airbus said that most of the cost estimates airports reported could be attributed to the growth of air traffic and are not directly related to accommodating NLA. With respect to whether airports can safely accommodate NLA now, the report was revised to acknowledge that many airports could accommodate NLA by placing ground restrictions on its movement or the movement of other aircraft and that these measures might obviate the need for immediate infrastructure changes. However, if Airbus’ expectation of a robust demand for its NLA becomes reality, these measures are not likely to provide an efficient long-term solution, especially at those large airports that have experienced delay and congestion problems in the past. As for the rigor of the estimates, we asked the airports to derive their cost estimates from those used to support such planning documents as their master plan and capital budget. We revised the report to clarify the basis for their estimates. While the draft report acknowledged that the estimates were based on assumptions about several factors, we revised it to state that distinguishing between the costs attributable to growth versus the costs specific to serving NLA would affect an airport’s cost estimate. Airport officials have told us that it is very difficult to separate these costs, especially when an airport expects to serve NLA as a part of its growth. Airbus also disagreed with including any costs for the five airports that are not likely to receive NLA by 2010. However, if these costs are included, the company estimated the costs for 19 airports to fully meet Design Group VI standards at $1.7 billion, as opposed to the $4.6 billion reported to us. We agree with Airbus that including the costs for five airports to fully meet standards when they do not expect to accommodate NLA does not provide a useful estimate. Moreover, some airports told us that they do not expect to make some of the changes that they reported would be necessary to meet these standards because of space limitations or other factors. Therefore, we revised the report to focus on the airports that expect to accommodate NLA and their cost estimates for the infrastructure changes they plan to make. We performed our work from June to December 2001 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the Ranking Minority Members, Senate Committee on Commerce, Science, and Transportation and its Aviation Subcommittee; interested Members of Congress; the Secretary of Transportation; and the Administrator, FAA. This report is also available on GAO’s home page at http://www.gao.gov. If you have any questions on matters discussed in this report, please call me at (202) 512-3650 or call Belva Martin, Assistant Director, at (202) 512- 4285. We can also be reached by e-mail at [email protected] and [email protected], respectively. See appendix VI for a list of key contributors to this report. We mailed a survey to officials at 23 airports and asked them to update the cost estimates to upgrade their airport infrastructure that they had reported to the Federal Aviation Administration (FAA) in 1997. We sent surveys to the same 22 airports that FAA had surveyed because those airports provided nearly all of the B-747 service or serve as hubs for airlines that might purchase New Large Aircraft (NLA) and therefore are likely to also serve NLA. We also included Indianapolis because it is a cargo hub for Federal Express, which has already placed an order with Airbus for 10 NLA. Because 4 years have elapsed, we expected that airport officials would have more recent information to estimate the following: the cost to accommodate NLA, if FAA revises the Design Group VI standards or grants modifications to them and the cost to fully meet Design Group VI standards. The officials were asked to specify their airport’s total estimated costs to upgrade the following four major types of infrastructure for NLA: runways; taxiways; bridges, culverts, and tunnels; and terminals, concourses, and aprons. (See app. IV for estimates of these costs by category.) We also asked additional questions about their plans for serving NLA, such as the number of aircraft they expect to serve and the time frame for service. When answers were unclear or incomplete, we conducted follow-up telephone calls for clarification. We asked airports to derive their cost estimates from those that were used to support planning documents, such as an airport’s master plan and capital budget. We did not verify the airports’ estimates for accuracy. We received responses from 22 of the 23 airports, including 19 of the 20 that responded in 1997 and 3 additional airports. Only Lambert-St. Louis International Airport did not respond. In 1997, FAA received responses from 20 of the 22 airports it surveyed; Honolulu International and Orlando International did not respond. The FAA establishes airport design standards to configure an airport’s infrastructure to safely serve aircraft with certain characteristics, such as wingspan and weight. Design Group V standards serve the Boeing 747, while Design Group VI standards will serve NLA. FAA defines Design Group V aircraft as those having a wingspan of at least 171 feet but less than 214 feet. Design Group VI aircraft are those having a wingspan of at least 214 feet but less than 262 feet. The standards for Design Group VI were published in 1983 and are currently under review by FAA. The agency has established an NLA Facilitation Group to help introduce NLA at airports. This group is made up of FAA, Boeing, Airbus, and other aviation officials, including representatives of airports, airlines, and pilots. Unique local conditions might require modifications to airport design standards on a case-by-case basis. FAA’s approval is required for modifying airport design standards that are related to new construction, reconstruction, expansion, or an upgrade at an airport that receives federal or federally approved funding. FAA has established a process to approve modifications to standards. An airport’s request for a modification must be submitted to the appropriate FAA regional or district office for evaluation to determine whether the modification is appropriate, and, if it is, the proper level of approval. Under a recently established policy, FAA headquarters officials have sole authority to approve modifications to standards related to serving NLA. Some of the Design Group VI standards that pose the most difficult challenges for airports are runway and taxiway widths, separation distances (e.g., for a runway and parallel taxiway and for parallel taxiways), and infrastructure strength (e.g., for bridges and culverts). Clearances on aprons, ramps, gate areas, and terminals at many airports might also need to be upgraded to meet these standards. For example, John F. Kennedy International Airport (JFK) does not fully meet all of the current Design Group V standards because the airport is severely limited by a lack of airfield space. Airport management is developing plans to get the airport to Design Group V and hopes that with FAA’s granting a modification to the airport or revising certain Design Group VI standards, the airport would be able to safely serve NLA. (See table 1 for a comparison of current design group requirements for key infrastructure features of airports and specific features at JFK.) Our survey asked airports to provide cost estimates for four major types of airport infrastructure: runways; taxiways; bridges, culverts, and tunnels; and terminals, concourses, and aprons. According to a 1997 survey, these areas represent those that are most likely to require upgrades to accommodate NLA. Figure 3 shows the percentage of the $2.1 billion total estimated cost to upgrade each major type of airport infrastructure at the 14 airports that expect to accommodate NLA through revisions or modifications to FAA’s airport design standards. The $663 million reported for upgrading runways accounts for the largest percentage of cost (32 percent). NLA. Moreover, Los Angeles International Airport’s estimate to upgrade its runways accounts for $398 million of the total reported by 14 airports. Upgrading bridges, tunnels, and culverts accounts for 28 percent of the total cost ($593 million). The vast majority of the bridge and tunnel costs are attributable to a $508-million project at Los Angeles where the freeway runs under the airfield. Upgrading the cost for taxiways accounts for 24 percent ($509 million) of the total cost, and upgrading terminals, concourses, and aprons accounts for 15 percent of the total cost ($317 million). At some airports, airlines are responsible for these areas, so upgrading them does not show up as a cost to airports. Additionally, since two airports, Indianapolis International and Memphis International, are primarily going to receive the cargo version of the A380, terminal upgrades would not be needed. Key contributors to this assignment were Carolyn Boyce, Jean Brady, Stephen Brown, James Fields, David Hooper, Michael Horton, Mitchell Karpman, Kieran McCarthy, Richard Scott, and Kate Wulff. | Airbus Industrie plans to introduce the New Large Aircraft (NLA) to U.S. airports in 2006. The Boeing 747 (B-747)is currently the largest commercial aircraft. The Federal Aviation Administration (FAA) sets standards that govern how an airport must be configured to safely serve aircraft with certain wingspans and weight. A B-747 operates under Design Group V standards, while FAA has determined that NLA will operate under Design Group VI standards. Determining the cost to serve NLA is difficult because several possible infrastructure changes at airports are unresolved. These include (1) whether and the extent to which FAA revises the standards or grants modifications, (2) which airlines buy NLA and the frequency of NLA service at U.S. airports, (3) when NLA begin serving these airports, and (4) the extent to which the cost estimates reported by the airports are attributed to NLA instead of changes to accommodate growth in air traffic. The 14 airports that expect to serve NLA by 2010 collectively report that their cost estimate for infrastructure changes is $2.1 billion; however, the ultimate cost will depend on how issues that affect cost will be resolved. As these issues are resolved, airports will have a clearer understanding of what infrastructure changes must be made at their costs. |
As part of DOD’s annual Planning, Programming, Budgeting, and Execution process, the military services and defense agencies submit a budget request—known as the Budget Estimate Submission—that addresses their estimated annual funding requirements for both base and OCO activities. In building their budget requests the military services and defense agencies use guidance issued by the Office of the Under Secretary of Defense (Comptroller) as well as guidance issued within their own organizations, including criteria for determining whether requirements belong in the base or in the OCO budget requests. Specifically, the military services and defense agencies use guidance in the September 2007 Financial Management Regulation, DOD 7000.14-R, volume 12, chapter 23, and OMB’s September 2010 Criteria for War/Overseas Contingency Operations Funding Requests for determining whether requests for funding should be included in the base or in the OCO funding requests. The Under Secretary of Defense (Comptroller) is responsible for conducting and coordinating DOD’s budget review activities, which include preparation of annual budget request submissions. Upon receipt of the budget request from the military services and defense agencies, budget analysts in the Office of the Under Secretary of Defense (Comptroller) review the requests, focusing on issues such as whether the requested funds can be executed in the budget year. Per agreement between the Office of the Under Secretary of Defense (Comptroller) and the OMB, senior budget examiners from the OMB also participate in the budget review process at this point to preclude the necessity for a separate review by the OMB. Officials from both offices work together to review the military services’ budget submissions to ensure that requested funding aligns with current policy and is sufficiently justified to Congress. Once approved, the Budget Estimate Submission is included in the annual President’s Budget. The Budget Control Act of 2011, as amended, imposes government-wide discretionary spending limits for fiscal years 2012 through 2021 to reduce projected spending by about $1 trillion over a 10-year period. All amounts appropriated to DOD are subject to specific limits on defense spending. Appropriated amounts designated for OCO that would otherwise exceed the annual limits established for defense spending will instead result in an adjustment to the overall defense spending limit established for a particular fiscal year, and will not trigger a sequestration, which is an automatic cancellation of budgetary resources provided by discretionary appropriations or direct spending laws. The Bipartisan Budget Act of 2015 provided for a base funding level in fiscal year 2017 of $551 billion for defense and provided for a specified amount of $58.8 billion in adjustments to the defense cap for OCO funding for fiscal year 2017. Consistent with the expected amount set by the Bipartisan Budget Act of 2015, DOD’s initial fiscal year 2017 budget request for OCO was $58.8 billion. In November 2016, DOD submitted to Congress an amendment to its initial request for an additional $5.8 billion in OCO funding to support requirements that were unforeseen at the time of the original budget submission. In 2010, in collaboration with DOD, the OMB developed updated criteria for deciding whether items properly belong in the base or in the OCO funding request, but these criteria do not address the full scope of activities included in DOD’s fiscal year 2017 OCO budget request. DOD uses the OMB’s guidance in determining what costs are eligible to be included in its OCO budget requests. However, the criteria were issued in 2010, when military operations in Iraq and Afghanistan were the principal contingency operations supported by DOD, and these criteria do not address geographic areas, such as Syria and Libya, where DOD has begun combat operations since the criteria were first developed. Further, according to officials, the criteria were not applied to the department’s deterrence and counterterrorism initiatives, such as the $3.4 billion requested in fiscal year 2017 for the European Reassurance Initiative, or to the $5.2 billion of its OCO request intended to fund base budget requirements, such as readiness and readiness support requirements. Criteria developed in collaboration with DOD and issued by the OMB in September 2010 provide guidance for determining whether funding properly belongs in the base or in the OCO funding request. DOD officials stated that the OMB’s criteria are the principal guidance used to make determinations regarding what should be included in their OCO funding requests. The criteria identify items and activities eligible for OCO funding so long as they are associated with specified geographic areas, such as Afghanistan, Iraq, and Pakistan, in which combat or direct combat support operations are occurring. Other geographic areas not specifically identified in the criteria may be included on a case-by-case basis. Eligible OCO items and activities include, among others, the replacement or repair of major equipment lost in operations, the replacement of ground equipment, equipment modifications, aircraft replacement, the cost of direct combat operations, short-term health care related to combat, and special pay for deployed service members. The criteria also specifically exclude certain activities from OCO funding requests. Some exclusions are expenses related to equipment service-life extension programs, base realignment and closure projects, family support initiatives, personnel costs relating to recruiting and retention, and maintenance of industrial base capacity. The complete list of OCO criteria can be found in appendix I. We recommended in November 2007 that DOD shift certain contingency costs into the annual base budget to allow for prioritization and trade-offs among DOD’s needs and to enhance visibility in defense spending. The department concurred with this recommendation and in February 2009 the OMB, in collaboration with DOD, issued criteria to assist in determining whether funding properly belonged in DOD’s base budget or in its budget for OCO. The criteria were subsequently updated in September 2010 to build on prior experience by clarifying language, eliminating areas of confusion, and providing guidance for activities previously unanticipated. OMB’s criteria were issued when military operations in Iraq and Afghanistan were the principal contingency operations supported by DOD. Since 2010 the scope of activities funded through the OCO has evolved and, as a result, the criteria do not specifically address activities included in DOD’s fiscal year 2017 OCO budget request. Specifically, the criteria do not address operations in new geographic areas such as Syria and Libya, the department’s deterrence and counterterrorism initiatives, or requests for OCO amounts to fund base budget requirements, such as readiness. Operations in New Geographic Areas Since the criteria were issued in 2010, DOD has begun military operations in several countries, such as Syria and Libya, to fight the spread of the Islamic State of Iraq and Syria (ISIS). Neither Syria nor Libya is specifically included in the 2010 criteria as designated geographic areas covered for purposes of OCO funding, although the criteria allow for the addition of other areas on a case-by-case basis. In October 2014, DOD designated military operations against ISIS as Operation Inherent Resolve. As part of the operation, DOD has conducted airstrikes against ISIS forces and provided training, equipment, advice, and assistance to forces on the ground that are partnered with the United States. For fiscal year 2017, DOD requested $9.9 billion in OCO funds for Operation Inherent Resolve and other related missions against ISIS. In August 2016, DOD began Operation Odyssey Lightning, which includes precision airstrikes against ISIS in Libya. For fiscal year 2017, DOD requested $20 million for Operation Odyssey Lightning. According to officials from the Office of the Under Secretary of Defense (Comptroller), OMB annually reviews exceptions to the criteria submitted in DOD’s budget requests and has granted DOD waivers to allow exceptions, such as for operations in countries not included in the criteria to be included in its OCO funding request as a short-term fix until the criteria can be updated. Deterrence and Counterterrorism Initiatives According to officials from the Office of the Under Secretary of Defense (Comptroller), the OMB’s 2010 criteria were not applied to the department’s deterrence and counterterrorism initiatives included in its OCO budget request for fiscal year 2017. For example, DOD’s fiscal year 2017 OCO budget request seeks $3.4 billion for the European Reassurance Initiative, intended to deter Russia and reassure U.S. allies and partners, particularly within Central and Eastern Europe. Specifically, the requested amount would enhance training and exercises, support improvements to key infrastructure, and fund three continuous brigade-sized rotations to train with allies. In addition, DOD’s fiscal year 2017 OCO budget request includes $1 billion for the Counterterrorism Partnership Fund, intended to provide direct counterterrorism support to partner nations and augment U.S. capability to support partners in counterterrorism operations. As described in appendix II to this report, the obligation of appropriations for these initiatives was not included in required monthly reporting on the costs of war. In appendix II, we describe in more detail how DOD reports on the obligation of OCO appropriations, including appropriations for the European Reassurance Initiative and Counterterrorism Partnership Fund. OCO Funding in Support of Base Requirements DOD’s fiscal year 2017 OCO budget request also includes about $5.2 billion in what DOD identifies as Bipartisan Budget Act (BBA) of 2015 Compliance. According to DOD officials, these are base amounts included in DOD’s OCO budget request in order to reach the fiscal year 2017 OCO appropriations level of $58.8 billion, which was specified by the Bipartisan Budget Act of 2015. DOD identified activities supported by the $5.2 billion as including readiness, readiness support requirements, increased counterterrorism activities in Africa, and preferred munitions. These activities are not specifically included in the OMB’s 2010 OCO criteria. GAO has previously reported that Congress made additional OCO funding available for base programs and activities in fiscal years 2009 through 2016. Specifically, Congress made additional funding available to DOD’s O&M base in two areas: OCO funding for programs and activities requested in the base budget itself, and OCO funding for readiness- related efforts. Taking DOD’s fiscal year 2017 OCO budget request as a whole, about $45.1 billion (70 percent) of DOD’s request is for supporting Operation Freedom’s Sentinel and related missions, primarily in Afghanistan, to train, advise, and assist Afghan forces and to conduct counter-terrorism operations against the remnants of Al Qaeda. However, the remaining $19.5 billion (30 percent) of DOD’s fiscal year 2017 request is for activities that may not be specifically addressed by the OMB’s 2010 criteria. Figure 1 shows the percentage, by activity, of DOD’s fiscal year 2017 OCO budget request. Moreover, the proportion of OCO appropriations DOD considers to be non-war increased between fiscal years 2010 and 2015. DOD is required to report operations costs associated with specific contingency operations. The reports, referred to as Cost of War Reports, are produced monthly. Our analysis of past reports found that, while overall OCO appropriations have been trending down since 2010, the proportion of OCO appropriations not associated with specific operations identified in the statutory Cost of War reporting requirement has trended upward over the period. In fiscal year 2010, the Cost of War Report excluded about $6.4 billion of OCO appropriations, or about 4 percent of the overall OCO appropriation. By 2015, the amount excluded was about $7.4 billion, but this represented 12 percent of DOD’s OCO appropriations in fiscal year 2015. This is shown in table 1 below and explained further in appendix II to this report. According to GAO’s Standards for Internal Control in the Federal Government, management should implement control activities through policies and should periodically review those policies for continued relevance if there is a significant change. Congress has also recognized that the OMB criteria are outdated and urged the OMB to update its criteria. Specifically, the Fiscal Year 2015 Joint Explanatory Statement for the National Defense Authorization Act noted that the criteria developed by the OMB for OCO funding requests have not been updated in over 4 years, during which time significant fact-of-life world events have occurred that dictate a need to re-examine and update those criteria to ensure that they remain relevant and adaptable for evaluating DOD budget and reprogramming requests. Congress encouraged DOD to evaluate the OCO criteria on a regular basis to ensure proper delineation of base and OCO budget requests, and urged the OMB to update its OCO criteria in time to support the fiscal year 2016 budget submission. However, according to officials, DOD’s budgets for fiscal years 2016 and 2017 were developed using the existing, but outdated, OCO criteria developed in 2010. Officials from the Office of the Under Secretary of Defense (Comptroller) acknowledged that the OMB criteria need to be updated to address geographic areas where contingency operations are currently ongoing, such as Syria and Libya. However, DOD officials noted that the OMB has deferred the decision to update the criteria until a new administration is in place in 2017. Further, officials from the Office of the Under Secretary of Defense (Comptroller) also told us that the deterrence and counterterrorism initiatives included in DOD’s OCO budget request for fiscal year 2017 were not evaluated against the OMB criteria in light of an Administration decision to include funding for the European Reassurance Initiative and Counterterrorism Partnership Fund in DOD’s OCO budget request beginning in 2015. Therefore, DOD did not apply the criteria. Without the OMB and DOD reevaluating and revising the criteria for determining items and activities that can appropriately be included in DOD’s OCO budget request, decision makers may be hindered in their ability to set priorities and make funding trade-offs. DOD officials told us that the department had developed an initial estimate of costs being funded with OCO appropriations that are likely to endure beyond current operations, but that it has not finalized or reported its estimate outside of the department. According to DOD officials, an internal working group established in 2014 estimated that enduring costs account for between $20 billion and $30 billion per year – as much as 46 percent of DOD’s total OCO budget request for fiscal year 2017. In May and July 2016, the OMB and DOD officials respectively told us that the estimate of DOD’s enduring OCO costs, those costs that would remain after the contingency operations end, and that would need to be transitioned to DOD’s base budget request if OCO funding were no longer available, are in the range of $20 billion to $30 billion per year. According to DOD officials, this estimate was preliminary and was developed by a working group established by DOD in 2014, to include the military services, tasked with identifying DOD’s enduring OCO costs. As part of this effort, DOD officials stated, the working group was asked to identify costs the military services had funded with OCO to maintain full readiness levels, in areas such as depot maintenance and ship operations, and to identify costs expected to continue once combat operations have concluded. Although the officials stated that the estimate came from efforts within the working group, they did not provide any documentation of how the estimate was developed. Service officials indicated that they have continued efforts to determine the magnitude of OCO funds used to support enduring requirements. We discussed with each of the military services what efforts they were taking to identify enduring costs, and both the Army and the Navy provided us evidence that they were beginning to categorize and identify enduring OCO requirements and the associated costs of those requirements. For example, the Navy stated that it was beginning to capture its enduring OCO requirements such as those required to leverage full readiness levels. Additionally, Army officials shared with us that the Army had begun categorizing and tracking in its financial management system its OCO requirements that would likely endure beyond current contingency operations. Army officials estimated that over 40 percent of its fiscal year 2017 OCO funding is needed to support functions they consider to be enduring, including requirements for the European Reassurance Initiative. According to officials with the Office of the Under Secretary of Defense (Comptroller), the initial estimate of enduring costs of between $20 billion and $30 billion did not include the $5.2 billion in OCO funding requested for base requirements. These officials indicated that the department continues to evaluate and revise this estimate, and that it could be closer to the higher end of the range. DOD has acknowledged that some of its OCO costs could be enduring. Although the department has acknowledged that it has OCO costs that will continue once its current combat operations cease, it has not finalized and reported an estimate of its enduring OCO costs to Congress. DOD continues to evaluate OCO requirements and its future impact to the out- year budget. However, the department is not developing long-term OCO requirements as part of the budget and programming process (e.g., Future Year Defense Program). We have previously identified multiple issues associated with the use of OCO funds and efforts to transition enduring OCO costs to the base budget. In June 2014 we found that U.S. Central Command, two of its service component commands, and its theater special operations command headquarters primarily used OCO appropriations to operate their headquarters, although some of the costs were determined to be enduring and were expected to continue after the end of contingency operations. We recommended that DOD develop guidance for transitioning enduring costs funded by OCO appropriations to DOD’s base budget request. DOD partially agreed, stating that while the timeline for transitioning enduring costs to the base budget was critical, the process could not be accomplished as a one-time event due to the evolution of threats and the impact of budget laws. Congress has also expressed interest in knowing the total cost of enduring activities. Specifically, the Senate Appropriations Committee’s report accompanying a bill for DOD’s fiscal year 2015 appropriations stated that the committee does not have an understanding of enduring activities funded by the OCO budget or a clear path forward in migrating enduring resources to the base budget. The committee further noted that there is a potential for risk entailed in continuing to fund non- contingency-related activities through the OCO budget. In its fiscal year 2016 budget request, DOD reported that the Administration intended to propose a plan to transition its enduring OCO costs to the base budget. According to information included in DOD’s budget, as the U.S. combat mission ended in Afghanistan, it was time to reconsider the appropriate financing mechanism for costs of overseas operations that were enduring. The plan envisioned by the Administration would transition all enduring costs currently funded in the OCO budget to the base budget beginning in 2017 and ending by 2020. However, it was also asserted that the transition would not be possible if the sequester- level discretionary spending caps were to remain in place. According to DOD officials, the plan was not submitted, since the fiscal year 2017 budget was developed so as to be consistent with the Bipartisan Budget Act of 2015, which increased the amount of enduring costs funded in OCO. Both GAO and other federal standards emphasize that agencies should provide complete and reliable information on the costs of programs to make decisions and that they should communicate information externally. Specifically, Standards for Internal Control in the Federal Government emphasizes using complete information to make decisions and then to communicate such information externally. The FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended, also requires agencies to provide reliable information on the full costs of their federal programs aimed at assisting congressional and executive decision makers in allocating federal resources and making decisions to improve operating economy and efficiency. According to DOD officials, although DOD developed an initial estimate of enduring costs, DOD has not finalized and reported its estimate of enduring costs externally because current statutory spending caps limit its ability to increase base budget funding. Without the finalized estimates, it remains difficult to determine which enduring costs are supported with OCO funds. Further, without a complete and reliable estimate of DOD’s enduring OCO costs, neither DOD nor congressional decision makers will have a complete picture of the department’s future funding needs. Intended to be short-term emergency funding for contingency operations, OCO funding has evolved to become an established and significant part of DOD’s budget. However, the underlying criteria for OCO funding requests have not kept pace with this evolution. The OMB 2010 criteria, developed in concert with DOD, were issued as a means to determine whether funding properly belongs in DOD’s base budget or, alternatively, in its budget for OCO. Now 6 years later, the criteria are not reflective of DOD’s current operations, which include Libya and Syria. Moreover, activities such as deterrence and counterterrorism initiatives, which are not directly related to ongoing military operations, are also being funded with OCO amounts. Continued reliance on outdated criteria that do not reflect the current policy for how OCO funds are to be used will only further reduce budget clarity and erode the credibility of DOD’s OCO budget request. Further, the lack of a complete and reliable estimate of enduring costs makes it difficult to ensure that Congress has a complete picture of the department’s future funding requirements. Such an estimate would also assist in planning for a transition to budgets that do not rely on OCO to cover non-war- related costs. Without a reliable estimate of enduring costs, decision makers will not have information needed to make informed choices and trade-offs in budget formulation and decision- making. To provide additional information for congressional decision makers regarding DOD’s budget, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller), in consultation with the OMB, to reevaluate and revise the criteria for determining what can be included in DOD’s OCO budget requests to reflect current OCO- related activities and relevant budget policy directing in which budget requests OCO funds may be included. To assist decision makers in formulating DOD’s future budgets, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to develop a complete and reliable estimate of DOD’s enduring OCO costs and to report these costs in concert with the department’s future budget requests, and to use the estimate as a foundation for any future efforts to transition enduring costs to DOD’s base budget. We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix IV, DOD concurred with our first recommendation that it, in consultation with the Office of Management and Budget, reevaluate and revise the criteria for determining what can be included in DOD’s OCO budget requests. DOD commented that it plans to propose revised criteria to OMB that will accommodate the current and evolving threats worldwide, as well as reflect any changes to OCO policy adopted by the new administration. DOD partially concurred with our second recommendation that it develop a complete and reliable estimate of its enduring OCO costs, report those costs in concert with DOD’s future budget requests, and use the estimate as a foundation for future efforts to transition enduring OCO costs to the base budget. The department commented that developing reliable estimates of enduring OCO costs is an important first step to any future effort to transition enduring OCO costs to the base budget and commented that in the context of such an effort, it would consider developing and reporting formal estimates of those costs. However, DOD stated that until there is relief from the budgetary caps established by the Budget Control Act of 2011, DOD will need OCO to finance counterterrorism operations such as Operation Freedom Sentinel and Operation Inherent Resolve. While DOD concurs that developing reliable estimates of enduring OCO costs is an important first step in any future effort to transition these costs to the base budget, DOD offered no plans to take action to address this recommendation. We continue to believe that developing and reporting formal estimates of enduring costs, particularly costs that are not specifically addressed by OMB’s 2010 criteria, such as OCO funding used to support base requirements, and funding for the European Reassurance Initiative and Counterterrorism Partnership Fund is important to provide Congress with a complete picture of DOD’s long term budget needs for use in future budget formulation. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Defense and appropriate 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 (404) 679-1816 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. Appendix I: Office of Management and Budget’s Criteria for Overseas Contingency Operations (OCO) Funding Requests, Issued in September 2010 Replacement of losses that have occurred but only for items not already programmed for replacement in the Future Years Defense Plan (FYDP) — no accelerations. Accelerations can be made in the base budget. Replacement or repair to original capability (to upgraded capability if that is currently available) of equipment returning from theater. The replacement may be a similar end item if the original item is no longer in production. Incremental cost of non-war related upgrades, if made, should be included in the base. Purchase of specialized, theater-specific equipment. Funding must be obligated within 12 months. Combat losses and washouts (returning equipment that is not economical to repair); replacement of equipment given to coalition partners, if consistent with approved policy; in-theater stocks above customary equipping levels on a case-by-case basis. Equipment modifications (enhancements) Operationally-required modifications to equipment used in theater or in direct support of combat operations, for which funding can be obligated in 12 months, and that is not already programmed in FYDP. Replenishment of munitions expended in combat operations in theater. Training ammunition for theater-unique training events is allowed. Forecasted expenditures are not allowed. Case-by-case assessment for munitions where existing stocks are insufficient to sustain theater combat operations. Combat losses, defined as losses by accident or by enemy action that occur in the theater of operations. Facilities and infrastructure in the theater of operations in direct support of combat operations. The level of construction should be the minimum to meet operational requirements. At non-enduring locations, facilities and infrastructure for temporary use are covered. At enduring locations, construction requirements must be tied to surge operations or major changes in operational requirements and will be considered on a case-by-case basis. Projects required for combat operations in these specific theaters that can be delivered in 12 months. Definition of Criteria Direct War costs: transport of personnel, equipment, and supplies to, from and within the theater of operations; deployment specific training and preparation for units and personnel (military and civilian) to assume their directed missions as defined in the orders for deployment into the theater of operations; Within the theater, the incremental costs above the funding programmed in the base budget to: support commanders in the conduct of their directed missions (to include Emergency Response Programs); build and maintain temporary facilities; provide food, fuel, supplies, contracted services and other support; and, cover the operational costs of coalition partners supporting US military missions, as mutually agreed. Indirect War Costs: Indirect war costs incurred outside the theater of operations will be evaluated on a case-by-case basis. Short-term care directly related to combat. Infrastructure that is only to be used during the current conflict. Incremental special pays and allowances for Service members and civilians deployed to a combat zone; incremental pay, special pays and allowances for Reserve Component personnel mobilized to support war missions. Operations and equipment that meet the criteria in this guidance. Resetting in-theater stocks of supplies and equipment to pre-war levels - Excludes costs for reconfiguring prepositioned sets or for maintaining them. Training, equipping, and sustaining Iraqi and Afghan military and police forces. War fuel costs, and funding to ensure that logistical support to combat operations is not degraded due to cash losses in DoD’s baseline fuel program. Would fund enough of any base fuel shortfall attributable to fuel price increases to maintain sufficient on-hand cash for the Defense Working Capital Funds to cover seven days disbursements. (This would enable the Fund to partially cover losses attributable to fuel cost increases.) Training vehicles, aircraft, ammunition, and simulators. Exception: training base stocks of specialized, theater-specific equipment that is required to support combat operations in the theater of operations, and support to deployment-specific training described above. Equipment Service Life Extension Programs (SLEPs) Acceleration of SLEPs already in the FYDP. BRAC projects. Family support initiatives to include the construction of childcare facilities; funding private-public partnerships to expand military families’ access to childcare; and support for service members’ spouses professional development. Programs to maintain industrial base capacity (e.g. “war-stoppers”). Definition of Criteria Recruiting and retention bonuses to maintain end-strength. Basic Pay and the Basic allowances for Housing and Subsistence for permanently authorized end strength. Individual augmentees will be decided on a case-by-case basis. Support for the personnel, operations, or the construction or maintenance of facilities, at U.S. Offices of Security Cooperation in theater Items proposed for increases in reprogrammings or as payback for prior reprogrammings must meet the criteria above. DOD reports on the costs of certain contingency operations monthly to Congress through its Cost of War report. According to the Fiscal Year 2016 Instructions for Reporting on the Cost of War issued by the Office of the Under Secretary of Defense (Comptroller), the Cost of War report is intended to provide stakeholders, such as Congress, visibility into the ways in which war-related OCO appropriations are obligated. DOD produces the Cost of War reports to address a congressional requirement to report on obligations and disbursements related to select operations identified by Congress, such as Operation Freedom’s Sentinel (primarily in Afghanistan) and Operation Inherent Resolve (primarily in Iraq and Syria). DOD also reports on additional operations based on annual guidance from the Office of the Under Secretary of Defense (Comptroller) that instructs the components on which contingency operations they are to report against. In addition to Operations Freedom’s Sentinel and Inherent Resolve, the instructions for fiscal year 2016 also included Operation Enduring Freedom, Operation Noble Eagle, and post- Operation New Dawn Iraq activities. DOD reports on obligations associated with these operations based on guidance within DOD 7000.14-R, Financial Management Regulation, volume 12, chapter 23, (Sept. 2007) which generally defines what is considered a contingency cost and establishes requirements for how the department is to report on those costs. According to DOD’s September 2015 Cost of War report , of the $1.56 trillion in OCO funds appropriated from fiscal years 2001 through 2015, DOD considers about $1.41 trillion as war funds, with the remainder deemed as either unrelated to ongoing contingency operations—a category that DOD refers to as “non-war”—or for classified purposes. For fiscal years 2010 through 2015, DOD’s Cost of War reports have included data on about 94 percent of its OCO appropriations. In addition to obligations associated with OCO-designated appropriations, the Cost of War report includes obligations of base funds if they are considered to be war-related, as well as war-related obligations of funds that are transferred into OCO accounts, according to DOD officials and guidance. Obligations associated with non-war OCO appropriations are not included in DOD’s Cost of War reporting. For example, for fiscal year 2015, $7.4 billion in non-war OCO appropriations were not included in the Cost of War reports. The appropriations excluded include the following: $5.1 billion in funds requested by DOD for base needs and provided for in DOD’s OCO appropriation, as well as other baseline programs funded in OCO by Congress; $1.3 billion for the Counterterrorism Partnership Fund; and $984 million for the European Reassurance Initiative. While obligations associated with these non-war appropriations are not included in the Cost of War report, DOD does report these obligations in response to congressional mandates and requests. For example, for fiscal year 2015, DOD separately reported obligations associated with about $3.3 billion in OCO appropriations—including obligations associated with the Counterterrorism Partnership Fund, European Reassurance Initiative, and military readiness funding included in DOD’s OCO appropriation. DOD did not separately report on obligations associated with about $4.2 billion in OCO appropriations (see table 3). In addition, officials in the Office of the Under Secretary of Defense (Comptroller) said that DOD includes all OCO obligations in several reports on budget execution, including DOD’s internal reports, reports to the OMB, and budget justification materials prepared for Congress. In our August 2016 report on DOD’s operation and maintenance appropriations and September 2016 report on its bulk fuel spending, we found that DOD reported a combination of base and OCO obligations in its budget justification materials and execution reports, but did not separately report its base and OCO obligations. We recommended that DOD separately report base and OCO obligations in its budget justification materials and execution reports or in another reporting mechanism. DOD did not concur with the recommendations. In its comments on our reports, DOD stated that many legacy financial systems currently cannot distinguish between base and OCO obligations easily, though DOD would be able to separately report base and OCO obligations across all appropriations once all DOD components have converted from their legacy financial systems. We have previously found DOD Cost of War data to be of limited reliability and have made recommendations that DOD improve the reliability of financial information in its Cost of War reports. While DOD has taken steps to improve its cost of war reporting, challenges remain in ensuring the accuracy and reliability of the reported costs. For example, in June 2016, the DOD Inspector General found that the Air Force had underreported $237.9 million in obligations associated with Operation Inherent Resolve because the service did not have adequate controls over the processing and reporting of its costs. The obligations underreported included those associated with flying hours; command, control, communications, computer, and intelligence; and general support and administrative equipment. The DOD Inspector General recommended that the Air Force develop and implement standard operating procedures, including operation-specific guidance, to ensure that personnel enter necessary costs into the system used to produce the Cost of War report. The DOD Inspector General further recommended that the Defense Financial Accounting Service and the Air Force update business rules to ensure that Operation Inherent Resolve costs are accurately reported. DOD concurred with these recommendations. In October 2016, DOD officials stated that the Defense Financial Accounting Service and the Air Force had taken steps to address these recommendations. Specifically, DOD stated that formal documentation of new standard operating procedures will be completed by January 2017, and that the business rules for reporting the costs of Operation Inherent Resolve have been updated. To assess the extent to which the Office of Management and Budget’s (OMB) 2010 criteria address the activities included in DOD’s OCO budget request, we discussed with each of the military services the processes used for building their budget requests, including any guidance used in determining what should be included in each respective OCO budget request. Additionally, we examined guidance used by the military services and compared the guidance with DOD’s fiscal year 2017 budget request for OCO to determine whether activities currently funded by OCO are addressed by the guidance. We also reviewed criteria issued by the OMB as well as budget guidance issued by the Office of the Under Secretary of Defense (Comptroller) and the military services to determine what, if any, direction was issued regarding funding with OCO items not directly tied to contingency operations. We also discussed with officials from the Office of the Under Secretary of Defense (Comptroller) whether the OMB’s 2010 OCO guidance was applied in determining whether to fund activities included in DOD’s fiscal year 2017 OCO budget request. In addition, we compared the content and timeliness of DOD’s and the OMB’s guidance to the guidance in the Standards for Internal Control in the Federal Government that relates to implementing control activities through policies and to reviewing policies periodically for continued relevance. Further, we discussed with officials from the OMB and the Under Secretary of Defense (Comptroller) the steps they take to ensure that the OCO budget request is consistent with DOD’s and the OMB’s OCO guidance, as well as any plans to update it. To assess whether DOD has developed and reported an estimate of the costs being funded with OCO appropriations that are likely to endure beyond current contingency operations, we reviewed DOD’s budget submissions and met with staff from the OMB, the Office of the Under Secretary of Defense (Comptroller), and each of the military services to discuss steps taken to develop and report to Congress or other stakeholders an estimate of enduring OCO costs. We also reviewed information provided by the Army and Navy regarding those OCO costs they deemed to be enduring. In addition, we compared DOD’s policies and other guidance documents and officials’ related actions to requirements in the FASAB Handbook of Federal Accounting Standards and Other Pronouncements, as Amended, which requires agencies to provide reliable and timely information on the full costs of their federal programs aimed at assisting congressional and executive decision makers in allocating federal resources and making decisions to improve operating economy and efficiency. Further, we compared DOD’s policies and actions to the Standards for Internal Control in the Federal Government, which emphasizes using complete information to make decisions and then to communicate such information externally. We conducted this performance audit from January 2016 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. In addition to the contact named above, Martin De Alteriis, Rich Geiger, Assistant Director; Amie Lesser, Felicia Lopez, Carol Petersen, Richard Powelson, Daniel Ramsey, Sharon Reid, Susan Tindall, John Van Shaik, and Cheryl Weissman made key contributions to this report. | Since 2001 Congress has provided over $1.6 trillion in appropriations to fund OCO. For fiscal year 2017, DOD requested $64.6 billion in funding for OCO. While DOD's OCO budget request has included amounts for contingency operations primarily in Iraq and Afghanistan, more recently the request has also included other activities, such as efforts to deter Russia and reassure U.S. allies and partners. DOD acknowledges that many OCO costs are likely to endure after contingency operations cease. GAO was asked to review DOD's use of OCO funds. This review assesses (1) the extent to which OMB's 2010 criteria address the activities included in DOD's OCO budget request; and (2) whether DOD has developed and reported an estimate of the costs being funded with OCO appropriations that are likely to endure beyond current contingency operations. GAO analyzed OMB's criteria for determining whether costs belonged in the OCO budget and reviewed DOD-provided information on its enduring OCO costs. In 2010 the Office of Management and Budget (OMB), in collaboration with the Department of Defense (DOD), issued criteria for deciding whether items properly belong in the base budget or in the overseas contingency operations (OCO) funding request, but the criteria are outdated and do not address the full scope of activities included in DOD's fiscal year 2017 OCO budget request. For example, they do not address geographic areas such as Syria and Libya, where DOD has begun military operations; DOD's deterrence and counterterrorism initiatives; or requests for OCO funding to support requirements not related to ongoing contingency operations. Further, the amount of OCO appropriations DOD considers as non-war increased from about 4 percent in fiscal year 2010 to 12 percent in fiscal year 2015. DOD officials agree that updated guidance is needed but note that the Office of Management and Budget has deferred the decision to update the criteria until a new administration is in place in 2017. Without reevaluating and revising the criteria, decision makers may be hindered in their ability to set priorities and make funding trade-offs. DOD officials told GAO that the department had developed an initial estimate of costs being funded with OCO appropriations that are likely to endure beyond current operations, but has not finalized or reported its estimate outside of the department. In May and July 2016, OMB and DOD officials said the estimate of enduring costs was between $20 billion and $30 billion—as much as 46 percent of DOD's total OCO budget request for fiscal year 2017—and indicated that DOD continues to evaluate and revise this estimate, which might be closer to the higher end of that range. GAO recommended in 2014 that DOD develop guidance for transitioning enduring costs funded by OCO appropriations to DOD's base budget. According to DOD officials, DOD has not finalized and reported its estimate of enduring costs because current statutory spending caps limit its ability to increase base budget funding. Without a reliable estimate of DOD's enduring OCO costs, decision makers will not have a complete picture of the department's future funding needs or be able to make informed choices and trade-offs in budget formulation and decision making. GAO recommends that DOD, in collaboration with OMB, reevaluate and revise the criteria for determining what can be included in DOD's OCO budget requests; and that DOD develop a complete and reliable estimate of enduring OCO costs to report in future budget requests. DOD concurred with our first recommendation and plans to propose revised OCO criteria to OMB. DOD partially concurred with our second recommendation but identified no steps planned to develop and report its enduring OCO costs. |
The bureau performs large surveys and censuses that provide statistics about the American people and the U.S. economy. The business activities of the bureau can be divided into four categories: decennial and other periodic census programs, demographic programs, economic programs, and reimbursable work programs that are conducted mainly for other federal agencies. During fiscal year 2000, the bureau conducted the actual decennial count of U.S. population and housing as of April 1, 2000, which is its largest and most complex activity. The results of the 2000 decennial census are used to apportion seats in the U.S. House of Representatives, draw congressional and state legislative districts, and form the basis for the distribution of an estimated $200 billion annually of federal program funds over the next decade to state and local governments. Since the 1970 census, the bureau has used essentially the same methodology to count the vast majority of the American population during the decennial census. The bureau develops an address list of the nation’s households and mails census forms (questionnaires) to those households asking the occupants to mail back the completed forms. The bureau hires temporary census takers, known as enumerators, by the hundreds of thousands to gather the requested information for each nonresponding household. Over time, because of social and attitudinal changes, the public became less willing to participate in the decennial census. By 1990, these problems escalated to the point where the most expensive census up to that time produced less accurate results than the preceding census. Consequently, the bureau’s plan for the 2000 census included the above elements but also included several important innovations to the census process designed to improve census accuracy. For example, prior to the 2000 census, local and tribal government officials were given expanded opportunities to review the bureau’s address list and identify missing addresses for inclusion in the census. The bureau also implemented the New Construction Program, which invited local governments to submit addresses for housing units that had been built subsequent to the completion of the address list in January 2000. In addition, the 2000 census questionnaires were available upon request in six languages, and households were given expanded opportunities to respond to the 2000 census by telephone or via the Internet. Also, for the 2000 census, the bureau initiated the largest promotion and outreach effort in its history for a decennial census and conducted the first-ever paid advertising campaign. As indicated in table 1, the increase in decennial census full-cycle costs in recent decades has been dramatic. Expressed in dollars of fiscal year 2000 purchasing power, the full-cycle costs of the decennial census rose from $920 million for the 1970 census to a current estimate of about $6.5 billionfor the 2000 census, for an increase of about 600-percent after adjusting for inflation. The Gross Domestic Product (GDP) price index was used to adjust for inflation for the 1970, 1980, 1990, and 2000 censuses, while projections for years 2001 through 2003 were adjusted using factors from the Congressional Budget Office’s Economic and Budget Outlook, January 2001. Since census costs depend primarily on the expense of delivering a mail questionnaire to a housing unit or having an enumerator visit a housing unit, it is more realistic to relate cost growth to the rise in the number of housing units rather to population growth. Even when housing units are vacant and contain no household, there is a cost to ascertaining that fact. Therefore, the number of housing units is the relevant unit to consider for cost analysis. A housing unit may be a house, an apartment, a mobile home, a group of rooms, or a single room that is occupied (or, if vacant, is intended for occupancy) as separate living quarters. Separate living quarters are those in which the occupants live separately from any other individuals in the building and which have direct access from outside the building or through a common hall. For vacant units, the criteria of separateness and direct access are applied to the intended occupants whenever possible. If that information cannot be obtained, the criteria are applied to the previous occupants. Both occupied and vacant housing units are included in the housing unit inventory. Boats, recreational vehicles, vans, tents, and the like are housing units only if they are occupied as someone’s usual place of residence. Vacant mobile homes are included provided they are intended for occupancy on the site where they stand. Vacant mobile homes on dealers’ lots, at factories, or in storage yards are excluded from the housing inventory. Also excluded from the housing inventory are quarters being used entirely for nonresidential purposes, such as stores or offices, or quarters used for the storage of business supplies or inventory, machinery, or agricultural products. The estimated full-cycle costs of the 2000 census do not take into account all costs of the decennial census. For example, as of September 30, 2000, about $85 million of costs for estimated claims for unemployment for temporary workers are not included in the cost per housing unit figures in this report. Any unemployment claims paid are absorbed by the Federal Employees Compensation Account in the Unemployment Trust Fund, administered by the Department of Labor, without reimbursement by the bureau. As shown in figure 1, the cost per housing unit in constant fiscal year 2000 dollars grew from $13 in 1970 to $56 in 2000, a 330-percent increase. In constant fiscal year 2000 dollars, the estimated full-cycle cost of the 2000 decennial census of about $6.5 billion is nearly double the $3.3 billion cost of the 1990 decennial census. When full-cycle cost is divided by the number of American households of 117.3 million in 2000 and 104.0 million in 1990, the cost per housing unit of the 2000 census of $56 increased 75- percent compared to the 1990 census cost of $32 per housing unit. Table 2 shows the cost increases in eight broad “frameworks” of effort used by the bureau in its financial management reports for the 2000 census. The $24 cost per housing unit increase was primarily the result of increased costs in four of the eight frameworks: (1) $16 for expanded field data collection methods, (2) $3 for the extensive use of technology and contractor support, referred to as automated data processing and telecommunications support, (3) $2 for more enhanced methods for data content and products, and (4) $2 for increases in marketing, communication, and partnership programs. Finally, other areas such as the compilation of a complete and accurate address list and the testing of the census design contributed the remaining $1 of the $24 increase in the 2000 census compared to the 1990 census. Framework 3, Field Data Collection and Support Systems, was the most expensive and the largest component of census costs, contributing about $16 or two-thirds of the $24 increase in per housing unit cost of the 2000 census. Field data collection is labor-intensive and includes operations such as nonresponse follow-up, which entails temporary workers, known as enumerators, visiting millions of households that did not return census questionnaires by mail or otherwise respond. As indicated in table 2, the cost for this framework for the 1990 census was about $1.7 billion, which accounted for half of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework more than doubled to about $3.8 billion or $32 of the total $56 per housing unit cost. The $16 increase for the 2000 census occurred due to (1) expanded data collection operations, (2) lower productivity for enumerators who conducted the nonresponse follow-up operation, and (3) higher logistic support costs. First, according to the bureau, expanded data collection operations contributed about $14 of the $16 increase in field data collection costs. For example, for the 2000 census, the bureau expanded coverage improvement programs, which were designed to improve census coverage and accuracy. For the 2000 census, the coverage improvement program included for the first time the enumeration of addresses from the update/leave operation and new construction follow-up. Also, another example of expanded operations for the 2000 census was the telephone questionnaire assistance center. For the 1990 census, the telephone questionnaire assistance was conducted by bureau staff members, who handled over 2 million calls and worked in six processing centers. For the 2000 census, the telephone questionnaire assistance center was operated by contractors, who handled about 6 million calls and operated from 22 nationwide call centers. We could not analyze each data collection operation and compare the 2000 census to the 1990 census, except for the nonresponse follow-up operation discussed below, due to incomplete or missing cost and performance data for the 1990 census. Second, lower enumerator productivity for the nonresponse follow-up operation in the 2000 census compared to the 1990 census contributed about $1 of the $16 increase in costs in the field data collection area. According to the bureau, enumerator productivity to visit nonresponding households and complete questionnaires in the 1990 census was 1.56 cases per hour but dropped by one-third to 1.04 cases per hour in the 2000 census. Productivity is calculated by dividing the total workload (the number of housing units) by the total number of production hours worked. For the 1990 census, the bureau had a workload of over 39 million nonresponding housing units as compared to a workload of about 42 million nonresponding housing units in the 2000 census for a 7-percent increase. About 25 million production hours for the 1990 census increased to about 40 million production hours for the 2000 census for a 60-percent increase. However, according to the bureau officials, the higher production hours for the 2000 census were due to more quality assurance procedures, such as crew leader edits and enhanced office checks, plus more re-interview checks. Information on enumerator productivity rates by type of local census office, the bureau’s methodology for refining the productivity data, and factors that could improve the collection and analysis of productivity data in the future are highlighted in our October report. Third, higher logistical support costs for increases in the number and size of local census offices, increases in equipment, and increases in temporary support office workers in the 2000 census compared to the 1990 census contributed less than $1 of the $16 increase in the field data collection area. For the 1990 census, there were 458 district offices, which were increased by 62 to a total of 520 local census offices for the 2000 census. According to the bureau, the additional 62 local census offices were necessary to support the increase in workload for the 2000 census. This 14-percent increase in the number of offices resulted in cost increases for items such as space rental, utilities, equipment, and supply costs. Also, according to the bureau, the local census offices in 2000 were larger with more equipment, such as mapping equipment and telecommunications, when compared to those in 1990. In addition, the bureau asserts that the 2000 census had a higher number of temporary office workers in the local census offices that were used to support all activities of the 2000 census, such as address list development. Again, we were unable to independently analyze the bureau assertions due to the lack of or incomplete cost data for the 1990 census. Framework 5, Automated Data Processing and Telecommunications Support, was the second largest category of costs for both the 1990 and the 2000 censuses and contributed about $3 of the $24 per housing unit cost increase for the 2000 census. As indicated in table 2, the cost for this framework for the 1990 census was about $487 million or almost $5 of the total $32 per housing unit cost. However, for the 2000 census, the cost for this framework increased about 80-percent to $877 million or about $8 of the total $56 per housing unit cost. This $3 increase was due to the development and staffing of a new data capture system for the 2000 census using new automatic document scanning technology, which was supported by contractors. This contrasted with the 1990 census, for which bureau personnel developed and conducted data capture technology operations in-house and hand keyed more census questionnaire information. During the 1990 census, the bureau developed and built a data capture system in-house called FACT90. This system consisted of high-speed cameras to film each form, microfilm processors to develop and process the film, and a film optical sensing device to capture check box responses from the forms for computer input. Computer terminals were used to enter all handwritten data from the paper forms. Automation was limited to the multiple-choice questions and the bureau keyed 100-percent of the reported write-in fields. Also, name keying was limited primarily to multi- unit surnames for person number one on the questionnaire. Although the bureau had seven data capture centers in 1990, final data capture processing was not completed until September 1991. For the 2000 decennial census, the bureau relied extensively on contractors to develop a data capture system that used the latest commercial technology, incorporated a number of internal controls to improve the accuracy of data processed, and was more timely in completing census operations. The bureau did not have the expertise to develop the complex new technology in-house. The technology included automated equipment to sort questionnaires by categories and optical character recognition readers to scan approximately 75-percent of handwritten questions without need for further human intervention. In addition, optical mark recognition equipment captured 100-percent of the check box questions on both the long and short form questionnaires. Internal controls included manual review of a small number of data fields that contained multiple responses for accuracy as part of the keying operation before data were transmitted for processing. In addition, response data were verified and a file was returned to check questionnaires using a positive checkout system, and there was 100- percent full name keying of all persons in the household to assist the bureau in a review for duplicate counts. The four data capture centers with the new technology allowed for the processing of census data to be completed by the end of 2000. Framework 2, Data Content and Products, was the third largest category of costs for the 2000 census and contributed over $2 of the $24 per housing unit cost increase for the 2000 census. This area included questionnaire design of long and short forms, a multiple mailing strategy, and printing and postage costs. As indicated in table 2, the cost for this framework for the 1990 census was about $272 million, or less than $3 of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework more than doubled to $579 million, or almost $5 of the total $56 per housing unit cost. The $2 cost increase of the 2000 census was due to the design of a more user-friendly questionnaire, the availability of a census questionnaire in other languages, a multiple mailing strategy with higher printing and postage costs, and the development of a new data retrieval system to disseminate census 2000 data. For the 1990 census, questionnaires were “computer-friendly” to assist the bureau in processing the forms more easily, but some households found them difficult to understand and complete. For the 2000 census, the bureau contracted with commercial designers to produce questionnaires that were simpler and easier to fill out or “respondent-friendly,” thus making them more likely to be completed and returned. Questionnaires for the 1990 census were only available in English and Spanish, while for the 2000 census, questionnaires were also available in Chinese, Korean, Vietnamese, and Tagalog. The availability of the additional language forms in 2000 and the redesign of the census questionnaire also increased printing costs over the 1990 census. In addition, for the 1990 census, the bureau mailed the census questionnaires and a postnotice card. For the 2000 census, the bureau developed a multiple mail strategy to inform households about the census. First, a prenotice card was sent out to alert households of the census and its benefits with an offer to send a questionnaire in languages other than English upon request. The census questionnaire then was mailed noting that “responses were required by law.” Finally, a postnotice card was sent to households thanking those who participated and reminding others to complete the forms if they had not already done so. For the 1990 census, about 180 million items were printed using third-class postage on all mailings at a cost of about $17 million. For the 2000 census, printing volume almost doubled to about 340 million items, including additional language forms, and all mailings used first-class postage at a cost of about $117 million. Also, according to the bureau, for the 1990 census, data was disseminated using CD-ROM and printed copy. For the 2000 census, the bureau expanded its efforts through a new data retrieval system called the American FactFinder to disseminate census data. This system is available to the widest possible array of users through the Internet, Intranets, and all available intermediaries, including the nearly 1,800 State Data Centers and affiliates; the 1,400 Federal Depository libraries; and other libraries, universities, and private organizations. Framework 8, Marketing, Communication, and Partnerships, was the fourth largest category of increased cost for the 2000 census, and this area contributed about $2 of the $24 per housing unit cost increase for the 2000 census. This area included costs for advertising and promotion and partnerships with state, local, and tribal governments, as well as community groups. As indicated in table 2, the cost for this framework for the 1990 census was about $91 million, or less than $1 of the total $32 per housing unit cost. However, for the 2000 census, costs for this framework quadrupled to $374 million, or over $3 of the total $56 per housing unit cost. The $2 cost increase for the 2000 census was the result of expanded efforts to promote a higher level of responsiveness, particularly for those segments of the population traditionally most difficult to enumerate. These efforts included a paid advertising campaign and the involvement of community partnerships. For the 1990 census, the bureau marketing effort was limited and it was considerably expanded for the 2000 census. This included a multifaceted effort to remind the general population about the census, educate members of the public who did not understand the purpose of the census and its significance to their communities, and motivate Americans to complete their census questionnaires. The main components of the bureau’s Partnership and Marketing Program for the 2000 census were the following. The bureau used its first-ever paid advertising campaign to generate awareness about the 2000 census via print, broadcast, and out-of-home advertising. For the 1990 census, an advertising campaign was conducted with free advertising of the Ad Council, a nonprofit organization responsible for administering public service advertising campaigns. Since the advertising was free to fill available air space, the bureau had no control over the time of day that its advertising was broadcast, which included many early morning hours to very small viewing audiences. For the 2000 decennial census, the bureau expanded its marketing program to a national audience during prime viewing times and hired a contractor to design and conduct a professional advertising campaign at a cost of about $1 per housing unit. The bureau established partnerships with businesses, nongovernmental organizations, and government entities to help deliver the census message and obtain a more complete and accurate population count. This activity was considered important because local organizations knew their conditions and circumstances better than the bureau. This effort resulted in bureau partnerships with about 140,000 state, local, and tribal governments and community groups that added about $1 to the per housing unit cost to the 2000 census. A recent GAO report contains further information and best practices on the bureau’s partnership program. The remaining frameworks 1, 4, 6, and 7 contributed the remaining $1 of the $24 per housing unit cost increase for the 2000 census when compared to the 1990 census. As indicated in table 2, the costs for these four frameworks for the 1990 census totaled about $745 million or about $7 of the total $32 per housing unit cost. For the 2000 census, costs for these four frameworks increased about 23-percent to about $920 million or about $8 of the total $56 per housing unit cost. The $1 cost increase for the 2000 census was due to increased bureau efforts to compile a complete and accurate address list and to plan, evaluate, and test aspects of the census design, including dress rehearsals. In commenting on a draft of this report, the Department of Commerce, U.S. Census Bureau, concurred with the underlying data as presented in this report and provided its perspective on four matters, which we address below. First, the bureau stated repeatedly that Census 2000 was enormously successful and it was disappointed we made no effort to assess the costs of the 2000 census with respect to the high quality of the data produced in the face of significant challenges. In this regard, the objectives of this review did not include assessing the quality of the 2000 census. Our objectives were to (1) update full-cycle costs to reflect the most current information and (2) analyze bureau data to determine the causes of the significant increase in cost per housing unit for the 2000 census when compared to the cost for the 1990 census. Further, the bureau is still assessing the quality of the 2000 census in its postenumeration review through fiscal year 2003. As stated in the introduction to this report, this product is one of several we will be issuing in the coming months on lessons learned from the 2000 census. As was done after the 1990 census, we are currently reviewing key operations of the 2000 census. Second, the bureau stated that we reported the cost increases without providing appropriate explanation for them. We disagree. Throughout this review, we repeatedly asked the bureau for explanations and supporting documentation for the reasons for the cost increases. To the extent data and explanations were provided for the cost increases, we discussed them in this report. However, in many instances, particularly with respect to the 1990 census, the bureau was unable to provide us explanations or documentation at the activity and project level. Our report clearly states that cost information provided by the bureau for the 1990 census was limited. Third, the bureau pointed out that any analysis of cost increases must take into account the fact that the bureau was asked to develop, and to begin to implement, two different operational designs. Our September 1999 reportprovided information on the Supreme Court decision that prohibited the bureau from carrying out its plans to use statistical methods. As mentioned in that report, the bureau did not begin detailed budgeting for a nonsampling-based census until after the Supreme Court ruling in January 1999. Our work associated with this review showed that the majority of the cost increases for the 2000 census were not in the planning of two operational designs but in the execution of the traditional census. Specifically, we found no evidence that the bureau’s planning for a “dual- track” census was a significant driver of cost increases of the 2000 census compared to the 1990 census. Finally, the bureau noted that it was not appropriate to discuss the cost increases without acknowledging the substantial achievement in developing and implementing extensive new census operations. As stated previously, the objectives of this review did not include evaluating the quality of new programs implemented as part of Census 2000. Throughout the report, we mentioned several important innovations to the census process and related costs, including expanded partnership agreements, the New Construction program, the availability of the census questionnaire in multiple languages, and expanded mass media efforts including the first- ever paid advertising campaign. Also, we have a separate effort under way to analyze variances from the bureau’s fiscal year 2000 budget and the reasons that certain obligations and expenditures were different than planned. The complete text of the response to our draft report from the Department of Commerce, U.S. Census Bureau, is presented in appendix II. We are sending copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs, and the Chairman and Ranking Minority Member, House Committee on Government Reform and Oversight. We are also sending copies to the Acting Director of the U.S. Census Bureau, the Secretary of Commerce, the Director of the Office of Management and Budget, the Secretary of the Treasury, and other interested parties. This report will also be available on GAO’s home page at http://www.gao.gov. If you or your staffs have any questions on this report, please contact me at (202) 512-9095 or by e-mail at [email protected] or Roger R. Stoltz, Assistant Director, at (202) 512-9408 or by e-mail at [email protected]. Key contributors to this report were Cindy Brown Barnes and Linda Brigham. The objectives of this report were to (1) update full-cycle costs and (2) analyze bureau data to determine the causes of the significant increase in cost per housing unit for the 2000 census when compared to the cost for the 1990 census. We did not assess the quality of the 2000 census in this report. To fulfill these objectives, we obtained and analyzed financial data from the U.S. Census Bureau to develop full-cycle costs of the 1970, 1980, 1990, and 2000 decennial censuses and converted all amounts to constant fiscal year 2000 dollars in order to eliminate the effects of inflation over time. We then identified components of full-cycle costs to the extent the bureau was able to provide the data and calculated cost per housing unit. For the 2000 census, we obtained cost and full-time equivalent employment information for budget and actual data from unaudited bureau financial management reports. This information was available in eight broad “frameworks” of effort that the bureau further divided into 23 activities and, within these activities, further divided into 119 projects. However, the 1990 census information was originally presented in 13 frameworks. We requested and the bureau provided reclassified cost data on the 1990 census in these eight frameworks to help facilitate comparisons between the 1990 and 2000 censuses. For the 1990 census, the bureau provided very limited cost data by activity and project, so we decided not to attempt detailed cost comparisons at that level of detail. We therefore focused on identifying activities or projects for the 2000 census that, according to the bureau, either did not exist or had very low costs in the 1990 census. We also used other bureau information, such as pay rates, employment statistics, and the number of temporary offices, to supplement our analysis as needed. We conducted interviews with senior bureau officials and others who provided us with oral and written evidence. This included an overview of 2000 census operations with comparisons to 1990 census operations, reasons for the increase in the cost per housing unit, and cost studies and analyses from the bureau and other independent organizations. We reviewed and analyzed this information as well as our past reports on decennial census operations. We performed our work in Washington, D.C., and at bureau headquarters in Suitland, Maryland. Our work was performed from June through August 2001 in accordance with U.S. generally accepted government auditing standards, except that we did not audit and therefore give no assurance as to the reliability of cost information provided by the bureau. On November 7, 2001, we received comments from the Department of Commerce, U.S. Census Bureau, on a draft of this report. The bureau’s comments are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix II. The following are GAO’s comments on the letter dated November 7, 2001, from the Department of Commerce, U.S. Census Bureau. 1. See the “Agency Comments and Our Evaluation” section of this report. 2. The full-cycle cost of the 2000 census was nearly double the full-cycle cost of the 1990 census. On a cost-per-housing-unit basis, the increase was 75 percent, which is accurately stated in the text of our report. We have modified the heading referred to in the bureau’s comments to reflect that the 75-percent increase was significant. Also, we disagree with the bureau’s assertion that the increased cost per housing unit observed in the 2000 census must be discussed in the context of the bureau’s ability to reverse a decades-long trend in declining response rates, which reflects an increase in cooperation from the public. We have modified the report to reflect that preliminary data on the postcensus mail return rate, a more precise indicator of public cooperation than the initial mail response rate, declined from 74 percent for the 1990 census to 72 percent for the 2000 census. 3. The changes in field operation staffing described by the bureau in its comments on field data collection activities for the 2000 census, as well as other changes, may have had a significant impact on the quality of the 2000 census results. However, as stated in our report, we did not assess the quality of the 2000 census. Also, we did not have sufficient information to adjust the cost per housing unit in the 2000 census for such changes in quality. In addition, as stated in footnote 3, we adjusted all costs in the report to constant fiscal year 2000 dollars using the Gross Domestic Product price index. This index reflects changes in the compensation paid to all federal workers, which increased from 1990 to 2000 at about the same rate as the wages paid for field operation staff. Thus, these wage increases cannot be viewed as a major reason for the increase in the cost per housing unit for the 2000 census. 4. Our report does not imply that much of the increased costs attributed to the bureau’s technological innovations occurred because of increased reliance on private contractors. Further, the scope of our work did not include determining whether the use of contractors was appropriate for these activities. We reiterate that this report responds to our congressional clients’ request for information on the costs of the 2000 census and does not and was not intended to provide qualitative information on the results of the census. We are not suggesting that the bureau refrain from using external contractors to assist in exploring the possibility of expanding software development activities to in- house operations, particularly as these activities become more complex. The concern discussed in our October 2000 report was the lack of effective and mature software and system development processes, not whether such activities were done by contractors or in- house. 5. This report provided information on the significant cost drivers for the 2000 census as compared to the 1990 census, in accordance with our requesters’ needs. As stated in the “Agency Comments and Our Evaluation” section of this report, we are conducting a review of key operations of the 2000 census. Thus, the scope of this report did not include an assessment of the effect of the redesign of the questionnaire and the availability of questionnaires and language assistance guides in many languages. Likewise, while the report refers to the increased cost of marketing, communication, and partnership programs, the link between response rates and these programs was not within the scope of our review. 6. We agree that estimates for worker’s compensation claims and litigation are included in the $6.5 billion of full-cycle cost to the extent that these costs are reflected in the fiscal year 2002 and 2003 budgets and have modified the report accordingly. | The estimated $6.5 billion full-cycle cost of the 2000 decennial census is nearly double that of the 1990 census. When the full-cycle cost is divided by the number of American households, the cost per housing unit of the 2000 census was $56 compared to $32 per housing unit for the 1990 census. The primary reasons for the cost increases include the following: (1) in the 1990 census, field data collection cost was $16 per housing unit, while in the 2000 census it was $32 per housing unit; (2) in the 1990 census, technology costs were $5 per housing unit compared to $8 per housing unit for the 2000 census; and (3) the data content and products activity cost $3 per housing unit in 1990 and $5 per housing unit in 2000. |
The Small Business Reauthorization Act of 1997 sets a governmentwide goal for small business participation of not less than 23 percent of the total value of all prime contract awards––contracts that are awarded directly by an agency––for each fiscal year. This act also sets goals for participation by specific types of small businesses (see table 1). The statutorily mandated, governmentwide prime and subcontracting goal for SDVOSBs is 3 percent of all federal contract dollars. There is no governmentwide numerical goal for VOSBs. The 2006 Act provided VA with unique authority to award contracts to VOSBs and SDVOSBs on a priority basis to increase contracting opportunities for these businesses. This authority, referred to in this report as the “goals and preferences authority,” applies only to VA. Among other things, the 2006 Act requires VA to establish annual contracting goals for VOSBs and SDVOSBs not less than the governmentwide goal and to give preference to these businesses when awarding contracts. In FY07, VA set prime contracting goals of 7 percent for VOSBs and 3 percent for SDVOSBs. VA increased these goals for FY08 and FY09, to 10 percent for VOSBs and 7 percent for SDVOSBs. The law also requires VA to maintain a database of verified VOSBs and SDVOSBs and to confirm subcontract awards that it counts toward its small business goals. While the Federal Acquisition Regulation (FAR) is the overall governmentwide regulation governing agency acquisitions, the Veterans Affairs Acquisition Regulation (VAAR) governs acquisitions made under the 2006 Act. Under the VAAR, preference for awarding contracts must be made in the following order of priority: (1) SDVOSBs, (2) VOSBs, (3) HUBZones or 8(a) businesses, and (4) any other small business contracting preference. VA’s Office of Small and Disadvantaged Business Utilization (OSDBU), in conjunction with its Office of Acquisition and Logistics (OAL), is responsible for the development of policies and procedures to implement and execute the contracting goals and preferences under the 2006 Act. Additionally, OSDBU serves as VA’s advocate for small business concerns; provides outreach and liaison support to businesses (large and small) and other members of the private sector for acquisition-related issues; and is responsible for monitoring VA’s implementation of socioeconomic procurement programs, such as encouraging contracting with women- owned small businesses (WOSB) and HUBZone businesses. OSDBU is responsible for the development of VA policies and programs related to small business concerns, including the following: educating and training VA staff, including advising contracting officials on procurement strategies to ensure equitable opportunities for small business concerns; negotiating prime and subcontracting goals; and training, counseling, and assisting small businesses in their understanding of federal and agency procurement procedures, including advising businesses on marketing their products and services to VA and other federal agencies. The Center for Veterans Enterprise (CVE), within OSDBU, seeks to help veterans interested in forming or expanding their own small businesses. CVE also helps VA contracting offices identify veteran-owned small businesses and works with SBA’s Veterans Business Development Officers and Small Business Development Centers on veterans’ business financing, management, and technical assistance needs. Additionally, CVE is responsible for implementing VA’s verification program and maintains the database, known as VetBiz.gov, of verified businesses required by the 2006 Act. VetBiz.gov allows business owners to register and apply online for verification to CVE and also functions as a searchable database for contracting officers and the public. Once CVE approves a business, the business name appears with a verified logo within the database (see app. II for more information). Once verified, a firm retains that status for 1 year. VA exceeded its VOSB and SDVOSB contracting goals since FY07 and made significant use of its veteran preferences authorities but faces challenges in continuing to meet its other small business contracting goals and monitoring interagency agreements. For example, VA’s continued success in contracting with VOSBs and SDVOSBs has coincided with difficulties in meeting other small business goals, such as WOSB and HUBZone goals. Beginning January 1, 2009, agreements into which VA enters with federal agencies to acquire goods or services on VA’s behalf must include language requiring the agencies to comply, to the maximum extent feasible, with VA’s VOSB and SDVOSB contracting goals and preferences when acquiring goods or services. We found that one interagency agreement into which VA entered after January 1, 2009, did not contain the required language. VA does not have an effective process in place to ensure that all interagency agreements include the required language. Without an effective process to review interagency agreements for the required language, VA may not fully comply with the requirements of the 2006 Act and cannot be assured that the agencies in its interagency agreements are aware of the need to make maximum feasible efforts to contract with VOSBs and SDVOSBs. For FY07, VA established a contracting goal for VOSBs at 7 percent––that is, VA’s goal was to award 7 percent of its total procurement dollars to VOSBs. In FY07, VA exceeded this goal and awarded 10.4 percent of its contracting dollars to VOSBs (see fig. 1). VA subsequently increased its VOSB contracting goals to 10 percent for FY08 and FY09 and exceeded those goals as well––awarding 14.7 percent of contracting dollars to VOSBs in FY08 and 19.7 percent in FY09. For FY07, VA established a contracting goal for SDVOSBs equivalent to the governmentwide goal of 3 percent and exceeded that goal by awarding 7.1 percent of its contracting dollars to SDVOSBs (see fig. 2). VA subsequently increased this goal to 7 percent for FY08 and FY09 and exceeded the goal in those years as well. Specifically, VA awarded 11.8 and 16.7 percent of its contracting dollars to SDVOSBs in FY08 and FY09, respectively. In nominal dollar terms, VA’s contracting awards to VOSBs increased from $1.2 billion in FY07 to $2.8 billion in FY09, while at the same time, SDVOSB contracting increased from $832 million to $2.4 billion (see table 2). The increase of awards to VOSBs and SDVOSBs largely was associated with the agency’s greater use of the goals and preferences authorities established by the 2006 Act. For example, veteran set-aside and sole- source awards represented 39 percent of VA’s total VOSB contracting dollars in FY07. However, in FY09, VA’s use of these veteran preferences authorities increased to 59 percent of all VOSB contracting dollars. In nominal dollar terms, VA’s use of these veteran preferences authorities increased by $1.2 billion over the past 3 years (see fig. 3). VA’s use of set-aside and sole-source awards for SDVOSBs contributed to an even greater extent to the increase in awards to these businesses from FY07 through FY09. For each of these years, more than 90 percent of contracts to SDVOSBs were awarded through set-aside and sole-source mechanisms (see fig. 4). Additionally, as of February 2010, almost all contracting officers (93 percent) had received training on the goals and preferences authorities. According to VA officials and documents, the training includes guidance on VA’s final rule implementing the 2006 Act; the contracting order of priority; set-aside and sole-source procedures; market research procedures for VOSB and SDVOSB businesses; and guidelines applying to subcontracting, joint ventures, and interagency acquisition agreements. OAL continued training contracting officers in March 2010. In contrast, VA’s use of general contracting authorities––that is, governmentwide contract mechanisms to provide a simplified process for acquiring goods––for VOSBs (including SDVOSBs) consistently decreased from FY07 through FY09. For example, VA’s use of its other contracting authorities decreased from 52 percent of all VOSB (including SDVOSB) contracts in FY07 to 38 percent in FY09. In FY09, VA awarded $1.1 billion in contracting dollars to VOSBs without the use of any set-aside or sole- source mechanisms. In these cases, the majority of these awards were made using governmentwide contracts, such as the Federal Supply Schedule (FSS), and governmentwide agency contracts. See appendix III for more detailed information on the contracting dollars and percentages that VA awarded to VOSBs in FY07 through FY09. According to SBA’s Goaling Program, a small business can qualify for one or more small business categories, and an agency may take credit for a contract awarded under multiple goaling categories. For example, if a small business is owned and controlled by a service-disabled woman veteran, the agency may take credit for awarding a contract to this business under the VOSB, SDVOSB, and WOSB goaling categories. In addition, all awards made to SDVOSBs also count toward VOSBs goal achievement. In FY09, of the $2.8 billion awarded to VOSBs, the majority (63 percent) applied to both VOSBs and SDVOSBs and no other goaling category (see fig. 5). Furthermore, of the $1.7 billion awarded through the use of veteran preferences authorities (VOSB and SDVOSB set-aside and sole-source) in FY09, an even greater majority (77 percent) applied solely to the VOSB and SDVOSB goaling categories (see fig. 5). Although VA exceeded its contracting goals for VOSBs and SDVOSBs in FY07 through FY09, it did not meet its goals in other small business categories for that period. For example, VA’s contracting with WOSBs and HUBZone businesses decreased since the implementation of the 2006 Act (see fig. 6). More specifically, VA contracting with WOSBs decreased from $584 million in FY07 to $488 million in FY09. Additionally, VA contracting with HUBZone businesses decreased from $388 million in FY07 to $305 million in FY09. Furthermore, for the past 2 years VA failed to meet its 5 percent goal for WOSBs (see fig. 7). In FY08, VA’s total contracting dollars with WOSBs was 4 percent, and, in FY09, it was 3.4 percent. Additionally, VA failed to meet its 3 percent goal for contracting with HUBZone businesses for the past 2 years. For example, VA awarded 2.8 percent of its contracting dollars to HUBZone businesses in FY08, and awarded 2.1 percent in FY09. VA officials acknowledged that the implementation of the contracting priority required by the 2006 Act has led to a decrease in awards to WOSB and HUBZone businesses. As we have previously stated, VA’s regulations implementing the 2006 Act require contracting officers to award contracts according to the following order of priority: (1) SDVOSBs, (2) VOSBs, (3) HUBZones or 8(a) businesses, and (4) any other small business contracting preference. According to OSDBU officials, if contracting officers can easily identify VOSBs that also qualify as WOSB or HUBZone businesses (because a business can qualify for one or more small business categories), percentages of awards in all goal categories may increase. However, women veterans currently represent 8 percent of the entire veteran population, creating a challenge for VA to achieve the WOSB goal. VA has taken some recent steps to increase contracting opportunities for WOSB and HUBZone businesses. For example, in 2009, VA and SBA formed a working group to develop training sessions, resources, and marketing materials targeted to WOSB and HUBZone firms that also may be VOSBs and SDVOSBs. The marketing and education materials focus on explaining the nature of contracting preferences for VOSBs and SDVOSBs and the benefits of registering and applying for verification through VetBiz.gov. Additionally, OSDBU will continue to host monthly meetings in which VA vendors learn about FSS and how the vendors may be integrated into the system. Finally, according to VA, OSDBU has updated the agency’s Web site to provide assistance for contracting officers to help identify small businesses that fall into the various small business categories when awarding FSS contracts. Additionally, CVE has updated the VetBiz.gov database so that contracting officers can more readily locate VOSBs and SDVOSBs that also fall into the other small business categories. However, it remains to be seen whether VA’s recent efforts will be successful in increasing contracting opportunities for other small business categories. The Veterans’ Benefits Improvement Act of 2008 (Pub. L. No. 110-389 or the 2008 Act) amended the 2006 Act’s provisions to require that any agreements into which VA enters with other government entities to acquire goods or services on VA’s behalf on or after January 1, 2009, require the agencies to comply, to the maximum extent feasible, with VA’s contracting goals and preferences for VOSBs and SDVOSBs. Since January 1, 2009, VA has entered into six interagency agreements (see table 3). Additionally, VA has an interagency agreement with the U.S. Army Corps of Engineers, but the agreement was signed in September 2007. Therefore, the provisions of the 2008 Act are not applicable. According to agency officials, VA has agreements in place with additional federal agencies, but all were entered into before January 1, 2009. Therefore, the provisions of the 2008 Act also are not applicable. VA issued guidance to all contracting officers about managing interagency acquisitions in March 2009. However, the agreement with the Department of the Interior (DOI) did not include the required language addressing VA’s contracting goals and preferences until it was amended on March 19, 2010, after we informed the agency that the agreement was not in compliance with Pub. L. No. 110-389. According to VA officials, the agency’s acquisition and contracting attorneys are responsible for reviewing interagency agreements for compliance with these requirements. Additionally, the interagency agreement language comes from Office of Management and Budget (OMB) templates. However, VA does not have an effective process in place to ensure that all interagency agreements include the 2008 Act’s required language and to monitor the extent to which agencies comply with the requirements. For example, agency officials could not tell us whether contracts awarded under these agreements met the SDVOSB and VOSB preferences. Without a plan or oversight activity, such as monitoring, VA cannot be assured that agencies have made maximum feasible efforts to contract with VOSBs or SDVOSBs. VA has made limited progress in implementing a program to verify the veteran status, control, and ownership of businesses. As of April 8, 2010, VA had verified about 2,900 businesses––approximately 14 percent of VOSBs and SDVOSBs in the VetBiz.gov database. While VA has adopted policies and procedures to review businesses and began to implement a risk-based approach to conducting site visits, it has not met the requirement in the 2006 Act that it only use its veteran preferences authorities with verified businesses when awarding these types of contracts. Additionally, our review identified a number of weaknesses in the verification program. For example, files supporting verified businesses contained missing information and explanations of how staff determined that control and ownership requirements had been met has made it difficult to know whether verified businesses are truly owned and controlled by service-disabled veterans or veterans. VA’s procedures call for site visits to further investigate the ownership and control of higher- risk businesses, but the agency has a large and growing backlog of businesses awaiting site visits. VA has denied verification to more than 150 businesses but does not have a process in place to monitor contracting awards to effectively ensure that contracting officers do not use veteran preferences authorities to award contracts to denied businesses. Initial site visit findings also indicated misrepresentation by some business owners, but VA has not developed guidance for staff to follow when misrepresentation may have occurred. The weaknesses in VA’s verification process reduce assurances that verified firms are veteran-owned and -controlled small businesses, and VA does not have an effective process to ensure that contracting officers do not use veteran preferences authorities with denied businesses or to ensure that VA staff take appropriate action against businesses that may be misrepresenting their VOSB or SDVOSB status. In May 2008—approximately 1½ years after Pub. L. No. 109-461 was enacted—VA began verifying businesses and published interim final rules in the Federal Register, which included eligibility requirements and examination procedures, but did not finalize the rules until February 2010 (see fig. 8). According to VA officials, CVE initially modeled its verification program on SBA’s HUBZone program; however, CVE reconsidered verification program procedures after we reported on fraud and weaknesses in the HUBZone program. More recently, in December 2009, the agency (1) finalized changes to the VAAR that included an order of priority (preferences) for contracting officers to follow when awarding contracts and (2) trained contracting officers on the preferences and the VetBiz.gov database from January through March, 2010. Leadership and staff vacancies plus a limited overall number of positions have also contributed to the slow pace of implementation of the verification program. For approximately 1 year, leadership in OSDBU was lacking because the former Executive Director retired, and the position remained vacant from January 2009 until January 2010. Furthermore, one of two leadership positions directly below the Executive Director has been vacant since October 2008, and the other position has been filled temporarily by an Acting Director. The agency also faced delays in obtaining contracting support, which slowed implementation of the verification program. More than 1 year after the agency began verifying businesses, a contractor began conducting site visits (which further investigate control and ownership of businesses as part of the verification process). As of April 2010, CVE had 6.5 full-time-equivalent position vacancies, and VA officials told us existing staff have increased duties and responsibilities that contributed to slowed implementation. The slowness in implementing the verification program appears to have contributed to VA’s inability to meet the requirement in the 2006 Act that it only use its veteran preferences authorities to contract with verified businesses. Currently, contracting officers can use the veteran preferences authorities with both self-certified and verified businesses listed in the VetBiz.gov database. However, in its December 2009 rule, VA committed to only awarding contracts using the veteran preferences authorities to verified businesses starting on January 1, 2012. According to our analysis of FPDS-NG data, in FY09, the majority of contracting awards (75 percent) made under veteran preferences went to unverified businesses. In March 2010, the recently appointed Executive Director of OSDBU acknowledged in a congressional hearing the large undertaking and some challenges with starting a new program like the verification program. As of April 8, 2010, VA had verified about 2,900 businesses––approximately 14 percent of VOSBs and SDVOSBs in the VetBiz.gov database. VA has been processing an additional 4,701 applications, but the number of incoming applications continues to grow (see fig. 9). As of March 2010, CVE estimated that it had received more than 10,000 applications for verification since it started verifying businesses in May 2008. According to the 2006 Act, VA must maintain a database of verified businesses and, in doing so, must verify the veteran or service-disability status, control, and ownership of each business. The rules that VA developed pursuant to this requirement require VOSBs and SDVOSBs to register in VetBiz.gov to be eligible to receive contracts awarded using veteran preferences authorities. The small businesses must be owned and controlled by eligible parties, and the business must qualify as “sm under federal size standards. According to VA’s rules, an applicant must meet the following five eligibility requirements for verification: (1) be all” owned and controlled by a veteran or service-disabled veteran for a VOSB or SDVOSB, respectively; (2) demonstrate good character (any small business that has been debarred or suspended is ineligible); (3) make no false statements (any small business that knowingly submits false information is ineligible); (4) have no federal financial obligations (any small business that has failed to pay significant financial obligations to the federal government is ineligible); and (5) not have been found ineligible due to an SBA protest decision. VA has a two-step process to make the eligibility determinations for verification. Under the first step, CVE staff review veteran status and, if applicable, service-disability status and publicly available, primarily self- reported information about control and ownership for all businesses that apply for verification (see fig. 10). Business owners submit an application (VA Form 0877), which asks for basic information regarding the ownership of the company seeking verification, through VetBiz.gov and, upon request, must provide supporting documents to CVE. When applicants submit their VA Form 0877, they also must be able to provide, upon request, other items for review, such as financial statements, tax returns, articles of incorporation or organization, lease and loan agreements, payroll records, and bank account signature cards. Typically, these items are reviewed at the business during the second step of the review process—site visits, which can be announced or unannounced—but CVE staff may also request that the applicant send copies of other items for review during the first step. Apart from site visits, the CVE review is centralized––all staff and files are located in Washington, D.C. Under the second step, reviews or site visits are conducted to further investigate control and ownership for select high-risk businesses. In September 2008, VA adopted a risk-based approach to conducting site visits by implementing risk guidelines to determine which businesses would merit site visits. Staff are required to conduct a risk assessment for each business and assign a level of risk ranging from 1 to 4––with 1 being a high-risk business and 4 being a low-risk business. When VA staff conduct a risk assessment, they are to follow the agency’s risk guidelines which include criteria such as previous government contracting dollars awarded, business license status, annual revenue, and percentage of veteran-ownership. For example, if a business has previous VA contracts totaling more than $5 million, staff must assign that business a risk le 1 (high). Or, if a business is missing an active or business license in goodstanding, staff must assign a risk level of 2 (elevated). VA then uses these risk assessments to identify businesses for site visits. According to VA, it intends to examine all businesses assigned a high- or elevated-risk level during a site visit or other means, such as extensive document review and telephone interviews with the businesses’ key personnel. VA plans to refine its verification processes to address recommendations from a contractor’s review of the program and best practices identified in federal, state, or private-sector programs. In July 2009, VA hired an outside contractor to assess the verification program’s processes, benchmark VA’s program to other similar programs, and provide recommendations to VA on how to improve the program. VA received the contractor’s report and recommendations in November 2009. The contractor recommended that VA require business owners to submit key documents as part of the application for verification––such as business and professional licenses, copies of previous tax records, and lease or operating agreements. (VA currently requires businesses to have these documents on file for a possible review.) The contractor further recommended that VA upgrade its data system to expand its functionality to allow business owners to submit the documentation electronically and store electronic copies of the information. For example, the contractor recommended that VA adopt case-management software to better manage the flow of applications and interface with the VetBiz.gov database. According to the contractor’s analysis of CVE’s workforce and the growing application volume, CVE would need an additional 13 full-time positions to conduct verifications–– even after it made necessary improvements to reduce processing times for applications. VA officials told us that they plan to implement the contractor’s recommendations to require business owners to submit documentation as part of their initial application and to upgrade their data systems. (We further discuss data systems issues later in this report.) However, VA did not have a plan or specific time frames for implementing a thorough and effective verification program, including filling vacant staff positions, providing concrete steps and milestone dates for addressing the contractor’s recommendations, and hiring additional positions to conduct verifications. A plan, including specific time frames for completing improvements, would help VA meet the requirements in the 2006 Act that it maintain a database of verified businesses, and that VA contracting officers only use the veteran preferences authorities to award contracts to verified businesses. Based on our review of a random sample of the files for 112 businesses that VA had verified by the end of FY09, an estimated 48 percent of the files lacked the required information or documentation that CVE staff followed key verification procedures. Specifically, 20 percent were missing some type of required information, such as evidence that veteran status had been checked or that a quality review had taken place; 39 percent lacked information about how staff justified determinations that control and ownership requirements were met; and 14 percent were missing evidence that either a risk assessment had taken place or the risk assessment that occurred did not follow the agency’s risk guidelines. The overall estimated 20 percent of cases missing some type of required information included files missing evidence that veteran status was checked, eligibility to receive federal government contracts was checked, application forms were complete and signed, or a quality review had taken place. According to CVE’s verification procedures, staff should check the Veteran Benefits Administration’s Beneficiary Identification Records Locator Subsystem (BIRLS) to determine veteran and service-disability status and record that BIRLS was checked in their internal database. Although CVE staff must check BIRLS for each applicant, we found about 16 percent of files lacked information on whether staff had checked the system to determine veteran or service-disability eligibility. Additionally, we found 15 percent of files lacked information on whether CVE staff had checked the Excluded Parties List System (EPLS)––which is used to determine whether the business owner is eligible to receive federal contracts. Also, 3 percent of the files lacked a completed or signed verification application (VA Form 0877), and 5 percent lacked documentation that a quality review had taken place. According to the verification procedures, staff must check each VA Form 0877 for completeness at the beginning of the process, and each file should undergo a quality review at the end of the process. Additionally, our file review found that in an estimated 39 percent of cases, staff obtained information from a public database but failed to record in the file what information they had reviewed to determine whether control and ownership requirements had been met. According to CVE’s verification procedures, staff are to review publicly available, primarily self-reported information about control and ownership for each business. For example, staff are to check for previous federal contracts by reviewing information available on USAspending.gov, check for certifications by reviewing the Online Representations and Certifications Application (ORCA), and review company history through Dun & Bradstreet reports. In addition, staff are to review information about each business in the following databases: VetBiz.gov, Central Contractor Registration (CCR), and Dynamic Small Business Search (DSBS)––all of which contain information self-reported by business owners. According to the verification procedures, staff are required to record business status or discrepancies about information obtained through each public database searched. Finally, based on our file review sample, for an estimated 14 percent of cases, the files were missing evidence that a risk assessment had taken place, or staff incorrectly assigned a risk level lower than warranted. For example, 4 percent of cases in this group were missing risk levels, and 8 percent of cases incorrectly were assigned a low- or moderate-risk level—they had missing business licenses, which according to the risk guidelines warranted assigning an elevated-risk level. According to VA, staff received on-the-job training about the risk guidelines and assigned risk levels are checked for accuracy during the quality review, but VA officials also have observed incorrectly assigned risk levels. VA officials told us that the staff have been learning how to better assign the risk levels, and errors have been reduced since the agency hired a full-time staff person as a risk manager in February 2009. Incorrectly assigning risk levels reduces the chance that the agency is accurately identifying businesses for site visits, which, in turn, may lead to some businesses not receiving a site visit when it otherwise would be warranted. We found that data system limitations appear to be contributing factors to weaknesses identified in our review of files. For example, data entry into CVE’s internal database is largely done manually, which can result in missing information or data entry errors. Furthermore, CVE’s internal database does not contain controls to ensure that only complete applications that have received a quality review move forward. Internal control standards for federal agencies require that agencies effectively use information technology in a useful, reliable, and continuous way. According to agency officials, two efforts are under way to enhance CVE’s data systems. First, CVE plans to enhance its data systems to automatically check BIRLS for veteran status and EPLS for good character, and to store the information obtained. According to CVE, these changes will require outside contractor assistance. On March 18, 2010, VA released a solicitation for a contract that closed on April 16, 2010. Once a contract is awarded, CVE staff told us that the upgrades will be ready to implement in about 12 months. Second, CVE plans to adopt case- management software—as recommended in the contractor’s report—to help manage its verification program files. According to VA officials, CVE is considering a software application currently used by another VA department. The new system will allow CVE to better track new and renewal verification applications and manage the corresponding case files. Furthermore, the new software will ensure that quality reviews take place by not allowing an application to move forward if it contains any missing information. However, as we have previously discussed, VA does not have specific time frames for putting the case-management system in place. Furthermore, CVE’s verification procedures do not provide guidance for staff to follow in the event that they determine information is missing or discrepancies exist after reviewing public databases. Staff do not have specific guidance to follow about the circumstances under which they might need to request additional information directly from business owners. Based on our file review, we found in 79 percent of cases, staff relied solely on information from the public databases but asked for documentation from a business owner in the remaining cases. In these examples, we found staff requested copies of active business licenses, articles of incorporation, operating agreements, stock certificates, or tax documents for further review. The verification procedures instruct staff to “request a copy of all required documents needed to make a sound decision” but do not provide examples of conditions under which staff should request documents as evidence to support control or ownership determinations. Furthermore, the procedures do not require staff to document their assessments of whether eligibility requirements had been met. Internal control standards for federal agencies require that agencies collect and maintain documentation to confirm information in support of their programs. According to VA officials, staff verbally discuss assessments during a daily meeting but do not document these discussions. According to our file review, in the 21 percent of cases in which staff did request information because they may have found a discrepancy in the publicly available information, staff made the request directly to the business owners, instead of using third-party sources to validate information. Publicly available, primarily self-reported information may not be reliable to determine whether control and ownership requirements have been met. In October 2009, our investigators reported on the governmentwide SDVOSB procurement program (administered by SBA, along with federal procuring activities) and found fraud and abuse among some SDVOSBs. For example, in 10 case studies, we showed that SDVOSBs fraudulently received sole-source and set-aside contracts––and that 5 of the 10 businesses receiving VA contracts were found ineligible because of issues with management and control. While CVE’s process to review publicly available, primarily self-reported information may be consistent with SBA’s process for the governmentwide SDVOSB program, these 5 cases provide evidence that self-reported information may not always be reliable for determining control of a business. Without timely improvements to CVE’s data systems and controls in place to ensure the completeness and accuracy of information, the verification program remains at higher risk for error, lacks quality control, and makes it difficult to know whether eligibility requirements were met. Furthermore, the verification procedures do not include guidance that would help staff to assess control and ownership, particularly in examples of missing information or discrepancies among public databases or within self-reported information. Without enhancements to its verification procedures that include clear guidance for staff to follow when reviewing applications and require an assessment of each eligibility requirement, it is difficult to know whether eligibility requirements have been met and whether verified businesses legitimately qualified as VOSBs or SDVOSBs. VA started verifying businesses in May 2008 but did not start conducting site visits until October 2009. As of April 8, 2010, VA had used contractors to conduct 71 site visits but an additional 654 high- and elevated-risk businesses awaited visits. Because of this delay, VA currently has a large backlog of businesses awaiting site visits and some higher-risk businesses have been verified months before their site visit occurred or were scheduled to occur. According to VA officials, the agency plans to use contractors to conduct an additional 200 site visits between May and October, 2010. However, the current backlog will grow over future months. According to site visit reports, approximately 40 percent of the visits resulted in evidence that control or ownership requirements had not been met, but, as of April 2010, CVE had not canceled any business’ verification status. The verification program rules contain procedures for cancellation of verified status. Also, according to VA officials, CVE will follow the cancellation procedures for any business for which the site visit findings contradict the original verification determination. Because some businesses are verified months before their site visits occurred and findings were developed, it is difficult to know whether the businesses actually met control and ownership requirements when they were verified. By not incorporating site visit findings in a timely manner and canceling verification status as necessary, some businesses receive an unwarranted verified status and may receive veteran preferences contracts, thereby taking contracting opportunities away from businesses that, in fact, are owned and controlled by veterans or service-disabled veterans. We also found that businesses received veteran preferences contracts after they had been denied verification. According to VA data, 154 businesses had been denied verification as of March 4, 2010. According to our analysis of these data, the key reasons for denial of applications included business owners failed to submit the required documentation (44 percent), control requirements were not met (30 percent), ownership requirements were not met (12 percent), and other eligibility requirements were not met (14 percent). As we have previously stated in this report, the 2006 Act provided VA with unique authority to award veteran preferences contracts, and, under the VAAR, contracting officers must only use these preferences with firms listed in the VetBiz.gov database (from Jan. 1, 2012, only with verified businesses). However, according to our analysis of FPDS-NG data, we found that 11 (of 154) denied businesses had received veteran preferences contracts. According to these data, VA contracting officers had awarded contracts totaling almost $4 million using the veteran preferences authorities––after CVE had denied these businesses verification. According to VA officials, denied businesses should be removed from the VetBiz.gov database, and contracting officers are required to check the database before awarding a contract to ensure that the business is listed as either verified or self-certified. However, according to VA officials, contracting officers may not be diligently checking the VetBiz.gov database before using the veteran preferences authorities to award contracts. According to VA officials, contracting officers received guidance in June 2007 and received training on the 2006 Act’s authorities between January and March, 2010. While contracting officers have been trained in the veteran preferences authorities and are required to check the VetBiz.gov database prior to making an award, they still have incorrectly used veteran preferences authorities with denied businesses. According to VA, there is no function within the agency’s electronic contract management system to stop a contracting officer from awarding veteran preferences contracts to denied businesses. Without a more effective system in place to ensure that contracting officers only use veteran preferences authorities with verified or self-certified businesses, VA will continue to make awards to ineligible businesses (those denied verification), thereby taking contracting opportunities away from eligible businesses. As we have previously stated, approximately 40 percent of businesses that received site visits did not meet ownership or control eligibility requirements and may have misrepresented themselves. Contractors that performed the site visits were required to submit reports on the results to VA within 7 business days of the site visits. According to these reports, evidence of misrepresentation dates to October 2009, but VA had not taken actions against these businesses as of April 9, 2010. According to VA’s Office of Inspector General, it has received one referral (on Apr. 5, 2010) as a result of the verification program. Staff have made no requests for debarment as a result of verification program determinations as of April 9, 2010. Under the 2006 Act, any “business concern that is determined by the Secretary to have misrepresented the status of that concern as a small business concern owned and controlled by veterans or as a small business concern owned and controlled by service-disabled veterans … shall be debarred from contracting with the Department for a reasonable period of time.” The VAAR states that VA may debar businesses that have misrepresented themselves for up to 5 years. Additionally, under the verification program rules, whenever CVE determines that a business owner submitted false information, the matter will be referred to the Office of Inspector General for review, and CVE will request that debarment proceedings be initiated. However, beyond the directive to staff to make a referral and request debarment proceeding, VA does not have detailed guidance in place (either in the verification program procedures or the site visit protocol) that would instruct staff under which circumstances to make a referral or a debarment request. Such guidance would help to ensure that VA complies with this provision of the 2006 Act. Without detailed guidance in place to help staff determine whether businesses have misrepresented themselves, enforcement actions for misrepresentation will not occur and businesses will continue to abuse the program. VA has developed a mechanism to review prime contractors’ subcontracts with VOSBs and SDVOSBs, but the agency has not yet implemented it. VA currently focuses its oversight of subcontracting activities on prime contractors with subcontracting plans, mainly by reviewing their electronic reports of subcontracting activity. Large businesses with federal contracts of $550,000 or more ($1 million for construction) generally must have subcontracting plans that include goals for subcontracting with VOSBs, SDVOSBs, and other types of small businesses. The 2006 Act requires that VA “establish a review mechanism to ensure that, in the case of a subcontract of a Department contract that is counted for purposes of meeting a goal established pursuant to this section, the subcontract was actually awarded to a business concern that may be counted for purposes of meeting that goal.” For FY07, VA set agencywide goals for all subcontracts awarded of 7 percent for VOSBs and 3 percent for SDVOSBs; for FY08 and FY09, VA set goals of 10 percent for VOSBs and 7 percent for SDVOSBs. According to SBA data, VA has not met its own goals for subcontracts awarded to VOSBs and SDVOSBs since FY07 (see table 4). VOSB and SDVOSB subcontractor participation did not exceed 1 percent of all subcontracts awarded in FY08 and FY09. In July 2009, VA’s top leadership acknowledged that the agency had fallen far short of its subcontracting goals and publicly committed to take more aggressive measures to improve its subcontracting record with VOSBs and SDVOSBs. VA has created a form—VA Form 0896a—that it plans to use to collect subcontracting information from its prime contractors. OMB approved the form on January 15, 2010. Initially, VA plans to use a hard-copy version of VA Form 0896a and ultimately collect data from prime contractors through the Internet. At the close of each fiscal year, VA staff will provide the form to prime contractors with approved subcontracting plans. Once prime contractors complete and return the form, VA staff will then review the form and compare it with the information reported by prime contractors in their subcontracting plans. VA staff also will contact the subcontractors listed on the form to confirm that the subcontracting activity occurred as well as confirm the dollar amount expended. VA staff then will determine whether discrepancies exist and the reasons for the discrepancies. Specifically, VA will attempt to determine instances in which valid reasons for a discrepancy exist versus instances in which prime contractors may not have made a good-faith effort to comply with their subcontracting plans. VA plans to centralize the subcontractor review function in its OSDBU. Although contractors self-reported information into the SBA-maintained Electronic Subcontracting Reporting System prior to development of this subcontracting review mechanism, VA had not collected or confirmed the accuracy of information on the specific dollar amount or percentage of the contract value attributable to individual subcontractors. Finally, VA’s OSDBU plans to develop standard operating procedures by September 2010 for its staff to ensure consistent implementation of the review mechanism. According to VA, no additional regulatory action is required to implement VA Form 0896a and the review process. According to VA, the use of the form will improve the subcontractor data that the agency uses to calculate its goal accomplishments. VA also expects to see increases in performance toward subcontracting goal attainment as a result of improved data collection. Additionally, VA will count subcontracting accomplishments only with verified businesses starting on January 1, 2012. As of March 26, 2010, VA planned to use VA Form 0896a on a sampling of contracts resulting from solicitations issued after January 7, 2010. According to VA, SBA will have to certify FY10 subcontracting data before OSDBU performs an analysis of information for contracts resulting from these solicitations. In previous years, SBA’s data certification had taken several months or up to a year to be available. VA officials have raised concerns that certain challenges may slow implementation of the review mechanism. These challenges include the limited staff resources that OSDBU has to implement the program. VA estimated that more than 300 prime contractors may be required to supply data, which OSDBU must analyze as we have previously described. In FY09, VA reported that it had approved 198 new subcontracting plans. However, VA hired one full-time employee to help one existing staff person working on this program. According to an agency official, OSDBU will determine after implementation of the new form whether additional personnel will be required. Furthermore, VA has expressed concerns that prime contractors and subcontractors initially may resist providing, or may not realize they have to provide, information. According to VA officials, they have not pretested the review mechanism with prime contractors but plan outreach to prime contractors and subcontractors about the new program. VA also plans to motivate prime contractors to complete the form and increase subcontracting efforts with VOSBs and SDVOSBs by adopting a new evaluation factor in addition to those factors VA currently uses to award contracts. For example, VA’s procurement staff plans to use prime contractors’ records in meeting goals detailed in subcontracting plans when awarding future VA contracts. Finally, OSDBU plans to use the data collected to annually provide findings to VA leadership. Because VA has not yet implemented the review mechanism, it is too early to assess its effectiveness. More than 3 years after it was enacted, VA has not fully implemented significant requirements of the 2006 Act. The 2006 Act provided VA with unique authority to award contracts to VOSBs and SDVOSBs on a priority basis to increase contracting opportunities for these businesses. In this regard, VA has been highly successful. Since FY07, VA has established and exceeded its contracting goals for VOSBs and SDVOSBs, primarily by using authorities established under the 2006 Act. However, the agency faces continuing challenges, and diminished achievement, in meeting other small business goals. VA also faces challenges in monitoring interagency agreements to ensure that other agencies are making efforts to achieve its contracting goals, to the maximum extent feasible, as required by an amendment to the 2006 Act’s provisions. VA does not have an effective process in place to ensure that all interagency agreements include the mandated language addressing VA’s contracting goals and preferences or to monitor the extent to which agencies comply with the requirements. By putting such a process in place, VA could help ensure that statutory requirements are met and that the contracting activities of other agencies also meet VA’s goals and preferences for VOSBs and SDVOSBs, to the maximum extent feasible. The agency has been slow to implement a comprehensive program to verify the veteran status, ownership, and control of small businesses and maintain a database of such businesses, also required by the 2006 Act. Verification is a vital control to ensure that only eligible veteran-owned businesses benefit from the preferential contracting authorities. VA has faced several challenges in implementing its verification program, including a lack of leadership and a limited number of staff positions with which to conduct verifications. VA plans to implement recommendations that an outside contractor made to improve the program and its data systems. However, we identified several weaknesses in the verification program, and the agency has been slow to fill staff vacancies and enhance its technology. By expeditiously filling its vacant leadership and staff positions within OSDBU, VA could better ensure that the verification program will operate effectively and planned improvements will be achieved. Many of the weaknesses in the files we reviewed appeared to be the result of limitations in the software and the associated extensive reliance on manual data entry. VA has not yet put software improvements in place. Other weaknesses stemmed from gaps in the verification guidance and procedures. For example, VA does not have guidance requiring staff to document their assessment that each eligibility requirement had been met or explaining under what circumstances to request documentation from business owners or instances in which third- party data may be necessary to validate self-reported information. By developing a plan to address leadership and staff vacancies, hire additional staff as necessary, achieve timely implementation of enhancements to data systems, revise procedures to include additional guidance for staff, and provide training to staff on the revised procedures, VA could make the verification process more effective. Timely improvements in these areas also would likely help the agency reduce backlogs––which have continued to grow. VA also faces other challenges with respect to ensuring that veteran preferences authorities are only used to award contracts to eligible businesses (those that have not been denied verification) and taking action against businesses that have misrepresented themselves during the verification process. According to the 2006 Act, VA must use the veteran preferences authorities only with verified businesses. However, VA contracting officers used the authorities to award contracts––totaling almost $4 million––to 11 businesses that had been denied verification. According to VA officials, contracting officers received training on the veteran preferences authorities, but the agency does not have an effective process in place to ensure that the authorities are used correctly. Without such a system, VA lacks assurance that it will not continue to make awards to ineligible businesses (those denied verification), thereby taking contracting opportunities away from eligible businesses. Moreover, findings from the initial site visits indicated a high rate of misrepresentation by VOSBs and SDVOSBs, coupled with a lack of detailed guidance about how to handle such cases (which would be the precursor to any investigations and enforcement actions), further suggest that the agency will be challenged to conduct effective oversight in a program vulnerable to fraud. Specifically, 40 percent of site visits resulted in evidence that control and ownership requirements had not been met. An effective process to make determinations and referrals that may result in enforcement actions against businesses misrepresenting themselves is of vital importance for the integrity of the program. Thus, to conduct an effective verification program, VA’s processes would need to include not only robust reviews to ensure that only eligible businesses are verified and therefore benefit from contracting preferences, but also clear and detailed guidance to ensure that ineligible businesses do not benefit from contracting preferences by taking the appropriate enforcement actions. Finally, the 2006 Act requires VA to establish subcontracting goals for VOSBs and SDVOSBs and to develop a mechanism to review prime contractors’ subcontracts with these businesses. While the agency has developed a mechanism, it has not yet implemented it. VA’s subcontracting accomplishments also have fallen short of goals for the past 3 years. The agency has acknowledged the shortcomings in this area and agency leadership has publicly committed to take measures to improve VA’s subcontracting record. VA intends to start using the review mechanism in FY10 and expects to see increases in performance toward subcontracting goal attainment as a result. However, it is too early to assess the effectiveness of VA’s subcontracting efforts. To facilitate the Department of Veterans Affairs’ progress in meeting and complying with the requirements of the 2006 Act, we recommend that the Secretary of Veterans Affairs take the following four actions: To ensure compliance with the 2006 Act, as its provisions were amended by the 2008 Act (Pub. L. No. 110-389), VA should develop an effective process to ensure that agreements it enters into with other federal agencies for contracting on its behalf to acquire goods or services include the required language and monitor other agencies’ contracting performance under those agreements. To help address the requirement in the 2006 Act to maintain a database of verified veteran-owned businesses, VA should develop and implement a plan that ensures a more thorough and effective verification program. Specifically, the plan should address actions and milestone dates for achieving the following: promptly filling vacant positions within OSDBU, including the two leadership positions, and hiring additional staff positions as necessary; improving its verification processes and procedures to ensure greater completeness, accuracy, and consistency in verification reviews, including updating data systems to reduce the amount of manual data entry by staff and revising the verification procedures to include additional guidance for staff on maintaining the appropriate documentation, requesting documentation from business owners or third parties under specific circumstances, and conducting an assessment that addresses each eligibility requirement; and conducting timely site visits at businesses identified as higher risk and taking actions based on site visit findings, including taking prompt action to cancel business’ verification status as necessary. To better ensure that VA meets the requirement to use veteran preferences authorities with verified businesses only, as required by the 2006 Act, VA should develop a more effective system to ensure that contracting officers do not use veteran preferences authorities to award contracts to businesses that have been denied verification, and provide additional guidance and training to contracting officers as necessary. To ensure that VA takes enforcement actions against businesses that have misrepresented themselves, as required by the 2006 Act, VA should develop detailed guidance that would instruct staff under which circumstances to make a referral or a debarment request as a result of the verification program. We requested the Department of Veterans Affairs’ comments on a draft of this report, and the Chief of Staff from VA’s Office of the Secretary provided written comments that are presented in appendix IV. VA also provided a technical comment that we incorporated in this report where appropriate. VA agreed with the four recommendations and provided information about steps that VA has already taken and some additional actions that are under way. For example, VA stated that it provided training from January through March, 2010, to all of its acquisition professionals regarding the language that must be included in all interagency agreements entered into on VA’s behalf. VA also indicated that it has made progress in filling vacant OSDBU positions, including filling all leadership positions as of April 12, 2010, and that all remaining vacant positions will be filled and staff will be on board no later than the end of July 2010. VA stated that its OSDBU anticipates requesting a significant number of additional full-time-equivalent authorizations in the near future to support the verification program. Additionally, VA stated that it provided training to contracting officers on the use of veteran preferences authorities from January through March, 2010, and will periodically rebroadcast the training through March 2011. Finally, VA stated that it is currently developing the process and procedures to use when referring businesses for debarment and plans to have this in place by October 31, 2010. We are sending copies of this report to the appropriate congressional committees, the Secretary of the Department of Veterans Affairs and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your offices 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 V. Our report objectives were to review (1) the extent to which the Department of Veterans Affairs (VA) met its prime contracting goals for veteran-owned small businesses (VOSB) and service-disabled veteran- owned small businesses (SDVOSB) in fiscal years (FY) 2007, 2008, and 2009, and what, if any, challenges VA faced in meeting these goals; (2) VA’s progress in implementing procedures to verify the ownership, control, and, if applicable, service-disability status of firms in its mandated database of VOSBs and SDVOSBs; and (3) VA’s progress in establishing a review mechanism of prime contractors’ subcontracts with VOSBs and SDVOSBs. To respond to these objectives, we reviewed agency documents related to VA’s implementation of the Veterans Benefits, Health Care, and Information Technology Act of 2006 (Pub. L. No. 109-461, sections 502 and 503), which requires VA to give priority to VOSBs and SDVOSBs when it uses veteran preferences to award contracts. Additionally, we reviewed regulations implementing the act, including the Veterans Affairs Acquisition Regulation, which is the final rule implementing the unique contracting preferences, and the final rule implementing the verification program. We interviewed VA officials within the Office of Acquisition and Logistics (OAL); Office of Small and Disadvantaged Business Utilization (OSDBU); Center for Veterans Enterprise (CVE); and Office of Inspector General (OIG). Finally, we obtained information from OSDBU and CVE about authorized staffing levels and current allocations for staff working on the verification and subcontracting review programs. To determine the extent to which VA met its prime contracting goals for VOSBs and SDVOSBs and to what extent contracts awarded to VOSBs and SDVOSBs were on a set-aside and sole-source basis, we reviewed VA’s agencywide contracting activity for which small businesses were eligible and analyzed SBA’s Goaling Reports for FY06 through FY08. Because SBA’s official Goaling Report was unavailable for FY09, we obtained and analyzed Federal Procurement Data Systems-Next Generation (FPDS-NG) data for VA contracting activities. Additionally, to assess the extent to which VA awarded set-aside and sole-source contracts to verified VOSBs and SDVOSBs, we compared those that were self-certified in FY09 with a list of businesses verified by the end of FY09 (provided by CVE). We compared the list provided by CVE with FPDS-NG data to determine VA’s level of contracting with verified firms. Finally, we conducted reasonableness checks on the FPDS-NG data and identified any missing, erroneous, or outlying data and had an independent analyst review all programming. We also obtained and reviewed VA’s FY09 FPDS-NG Data Quality Report, as submitted to the Office of Management and Budget, which stated that VA’s FPDS-NG data are 86 percent accurate and 95.8 percent complete. Based on this review, we determined the FPDS-NG data to be sufficiently reliable for the purposes of this report. To determine the extent to which VA agreements with other federal agencies has language that referred to VA’s contracting goals and preferences for VOSBs and SDVOSBs as mandated by Pub. L. No. 109-461, and amended by Pub. L. No. 110-389, we interviewed VA officials from OAL to obtain information on any policies, procedures, responsibilities, and oversight efforts in place to monitor compliance with the Pub. L. No. 110-389 requirement. To determine the extent to which these agencies awarded contracts to VOSBs and SDVOSBs, we evaluated FPDS-NG data to obtain information about contracts awarded by federal agencies on VA’s behalf and subject to Pub. L. No. 109-461 provisions. We evaluated the accuracy and completeness of this analysis by obtaining data from VA on contracting dollars awarded to the Department of the Interior, the General Services Administration, the Department of the Navy’s Space and Naval Warfare Systems Center, and the U.S. Army Corps of Engineers. To evaluate the challenges, if any, VA faced in meeting its prime contracting goals for VOSBs and SDVOSBs, we reviewed previous congressional hearing transcripts that discussed VA’s challenges in meeting its contracting goals as well as emerging challenges. We also conducted several interviews with officials from OSDBU and members of veteran service organizations, including representatives from the National Veterans Business Development Corporation, Association for Service Disabled Veterans, Disabled Veteran Americans, American Legion, Veterans of Foreign Wars, Vietnam Veterans of America, and National Veteran-Owned Business Association. To determine VA’s progress in implementing procedures to verify firms in its mandated database, we reviewed the agency’s verification guidelines and risk guidelines as well as procedures for reviewing applications and conducting site visits. Additionally, we conducted a file review of a sample of verified businesses to determine the extent to which VA followed procedures and to identify any deficiencies in the verification process. The study population for our review consisted of all 1,723 businesses that had been verified between May 2008 and the end of FY09 (Sept. 30, 2009). We obtained a list of these businesses from CVE and selected a probability sample of 112 businesses, which would allow us to estimate characteristics of all applications verified by CVE during this period. This sample contained approximately the same proportion of SDVOSBs as did the full study population. We conducted the file review at CVE’s offices in Washington, D.C., during the week of November 16, 2009, and reviewed both electronic and paper files. 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 internal (plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. All percentage estimates from our sample have 95 percent confidence intervals within plus or minus 10 percentage points of the estimate. We created a data collection instrument based on requirements from CVE’s verification procedures, pretested the instrument on sample businesses, and then reviewed each business’ file according to the finalized instrument. For example, for each business, we reviewed the following: the verification application (VA Form 0877), quality control form (Control Folder Signature Sheet), the business’ entry within the agency’s internal Microsoft Access database (veteran status and eligibility to receive contracts from the federal government), notes about public databases checked for control and ownership information (Control Folder Review Sheet), screenshots of information obtained from public databases searched, and the approval letter. To determine risk levels assigned to each business, CVE provided a comprehensive list of all verified businesses and their assigned risk level. We used this list to obtain risk levels for the 112 businesses in our random sample. Our random sample produced estimates with margins of error of 9 percentage points or less at the 95 percent confidence level. Based on findings from our file review sample, we calculated percentage estimates with 95 percent confidence intervals within plus or minus 10 percentage points of the estimated percentage. The results of our sample are generalizable to the entire population of applications verified by the end of FY09. We performed the appropriate data reliability procedures for our sample. For example, to ensure consistency in how the data collection instrument was completed, we randomly selected 30 percent of files (34 out of 112) for which a second independent analyst peer reviewed the information collected. We determined, based on this 30 percent random sample, that there were very few discrepancies in how the data collection instrument was completed, and that the data were sufficient for the purposes of this report. To determine why CVE denied applications, we obtained information on the number of businesses denied verification and the reasons for denial. CVE provided us with information for each application denied between May 2008 and March 4, 2010, which we summarized in this report. We also compared the denied businesses to FPDS-NG data to determine whether any denied business had received a VOSB or SDVOSB set-aside in FY09 or in FY10 (through Mar. 23, 2010) from VA after it had been denied verification by CVE. We also obtained 10 (of 45) site visit reports from CVE that contractors had prepared. We reviewed the 10 reports to determine whether any businesses failed to meet eligibility requirements based on evidence prepared by the contractor that conducted the site visit. Finally, we requested information and interviewed agency officials from OAL, CVE, and VA’s OIG to discuss any processes and procedures in place to determine whether businesses had misrepresented themselves or to refer businesses for a investigation or debarment. To determine the extent to which VA met its own subcontracting goals for VOSBs and SDVOSBs and the governmentwide statutory goal for SDVOSBs, we reviewed data from SBA Goaling Reports and the Electronic Subcontracting Reporting System for FY07 through FY09. We reviewed Pub. L. No. 109-461, section 502, to identify the statutorily mandated requirement that VA set its own goals for VOSB and SDVOSB subcontracting activities, and to identify the requirement that VA confirm reported subcontracting activity. We conducted interviews with OSDBU to assess VA’s progress in establishing a review mechanism of prime contractors’ subcontracts with SDVOSBs and other VOSBs. Finally, we obtained and reviewed VA Form 0896a––which is the form that VA intends to use to implement its subcontracting review mechanism. We conducted this performance audit from October 2007 through 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. The VetBiz.gov database allows business owners to submit applictions for verification and is also a searchable database for contracting officers and the public (see fig. 11). Businesses that have been verified appear with a verified logo (see fig. 12). In addition to the individual named above, Harry Medina, Assistant Director; Paola Bobadilla; Julianne Dieterich; Beth Ann Faraguna; Julia Kennon; John Ledford; Jonathan Meyer; Amanda Miller; Marc Molino; Mark Ramage; Barbara Roesmann; Kathryn Supinski; Paul Thompson; Julie Trinder; and William Woods made significant contributions to this report. | The Veterans Benefits, Health Care, and Information Technology Act of 2006 (the 2006 Act) requires the Department of Veterans Affairs (VA) to give priority to veteran-owned and service-disabled veteran-owned small businesses (VOSB and SDVOSB) when awarding contracts to small businesses. The 2006 Act also requires GAO to conduct a 3-year study of VA's implementation of the act. GAO evaluated (1) the extent to which VA met its prime contracting goals for VOSBs and SDVOSBs in fiscal years 2007-2009; (2) VA's progress in implementing procedures to verify the ownership, control, and status of VOSBs and SDVOSBs in its mandated database; and (3) VA's progress in establishing a review mechanism of prime contractors' subcontracts with VOSBs and SDVOSBs. GAO obtained and analyzed data on VA's prime and subcontracting accomplishments, and reviewed a sample of verified businesses to identify any deficiencies in VA's verification program. While VA exceeded its contracting goals with VOSBs and SDVOSBs for the past 3 years, it faces challenges in continuing to meet its other small business contracting goals and monitoring agreements with other agencies that conduct contract activity on VA's behalf. While VA was able to exceed its contracting goals for VOSBs and SDVOSBs, its contracting with women-owned small businesses and HUBZone firms fell short of its goals during this period. In addition, GAO's review of interagency agreements found that VA lacked an effective process to ensure that interagency agreements include required language that the other agency comply, to the maximum extent feasible, with VA's contracting goals and preferences for VOSBs and SDVOSBsand to monitor the extent to which agencies comply with the requirements. VA has made limited progress in implementing an effective verification program. While the 2006 Act requires VA to use the veteran preferences authorities only to award contracts to verified businesses, VA's regulation does not require that this take place until January 1, 2012. In fiscal year 2009, 25 percent of the contracts awarded using veteran preferences authorities went to verified businesses. To date, VA has verified about 2,900 businesses--approximately 14 percent of businesses in its mandated database of VOSBs and SDVOSBs. Among the weaknesses GAO identified in VA's verification program were files missing required information and explanations of how staff determined that control and ownership requirements had been met. In addition, VA's procedures call for site visits to further investigate the ownership and control of higher-risk businesses, but the agency has a large and growing backlog of businesses awaiting site visits. Furthermore, VA contracting officers awarded contracts to businesses that had been denied verification. Finally, although site visit reports indicate a high rate of misrepresentation, VA has not developed guidance for referring cases of misrepresentation for investigation and enforcement action. Such businesses would be subject to debarment under the 2006 Act. To ensure a thorough and effective verification program, VA needs robust procedures for reviewing businesses, an effective system to ensure that contracting officers do not use veteran preferences authorities with denied businesses, and clear guidance for referring businesses potentially abusing the program. VA has developed a mechanism to review prime contractors' subcontracts with VOSBs and SDVOSBs, but the agency has not yet implemented it. For the past 3 years, VA fell substantially short of achieving subcontracting goals for VOSBs and SDVOSBs. The agency acknowledged shortcomings in this area and intends to use a review mechanism to confirm all subcontracting activities by prime contractors with approved subcontracting plans for a sampling of contracts awarded in fiscal year 2010. VA expects increased performance for subcontracting goal attainment as a result. It is too soon to assess the effectiveness of VA's subcontracting efforts. |
Diabetes, a chronic disease, was the sixth leading cause of death in the United States in 2000, contributing to the loss of more than 200,000 lives, according to CDC. Type 1 diabetes, in which the body fails to produce insulin, is usually diagnosed in children and young adults. Type 2 diabetes, in which the body fails to use insulin properly, is associated with aging, a family history of diabetes, physical inactivity, and obesity and accounts for 90 to 95 percent of all diabetes cases. Although type 2 diabetes occurs most often among adults, it is increasingly being diagnosed in children and adolescents. One study found that, on average in 2002, individuals with diabetes incurred about $13,243 in health care expenditures, compared with about $2,560 in expenditures for individuals without diabetes. These estimates include costs attributed to complications of diabetes, such as cardiovascular disease, neurological symptoms, and kidney disease. Federal health agencies and national organizations concerned with diabetes patient care have identified a number of services and supplies that individuals with diabetes often need to help manage their disease. Table 1 lists services considered important for diabetes patient care by the American Association of Diabetes Educators; the American Dietetic Association; and the National Diabetes Quality Improvement Alliance (Alliance), a consortium of 13 private-sector organizations and government agencies, including the American Diabetes Association (ADA), CDC, and the Centers for Medicare & Medicaid Services. In addition to such services, according to federal agencies and organizations concerned with diabetes patient care, individuals with diabetes often need certain supplies to manage their disease. Needed supplies may include blood glucose monitors, glucose control solutions (used to check the accuracy of testing equipment and test strips), test strips, lancets and lancet devices (used to prick the skin for a blood sample to self-test blood glucose levels), insulin (when necessary), insulin pumps (to administer insulin), disposable needles and syringes (also to administer insulin), alcohol swabs, and therapeutic shoes (for individuals with severe diabetic foot disease). Health coverage may be provided through the purchase of insurance policies that are subject to state laws and regulations or through means other than insurance. Health coverage provided through the purchase of insurance in a given state, whether purchased by individuals or by employers, is subject to insurance requirements in that state, including requirements to cover specified illnesses, services, or supplies. For example, states often require coverage of cancer-screening services such as mammography or tests for colorectal cancer. These state requirements are in addition to coverage requirements established by federal law. In 2001, two-thirds of Americans younger than 65 (the age at which people generally become eligible for Medicare), received health coverage through their own employer or that of a family member. Large private employers often self-fund their health plans, and coverage provided by these plans is not subject to state insurance regulation, although it is generally subject to federal requirements. Health coverage provided by the federal government is also not subject to state insurance regulation. For FEHBP, OPM is responsible for contracting with private health insurance carriers to offer health benefit plans to federal employees. By federal law, the terms of any FEHBP contract negotiated by OPM that relate to coverage or benefits preempt any inconsistent state or local law or regulation. OPM routinely preempts state requirements to ensure a consistent set of benefits among nationwide FEHBP plans, according to an OPM official. In 2004, 47 states had laws or regulations related to coverage of diabetes services or supplies, although specific requirements varied by state (see fig. 1 and app. II). Forty-five states required insurance policies to cover specific services or supplies for diabetes. Two more states, Mississippi and Missouri, required “mandated offerings”; that is, these states required insurance policies to provide coverage for diabetes at the option of purchasers. Some states’ requirements applied only in narrow circumstances. For example, Arizona and Wisconsin required coverage of diabetes supplies only when a health insurance policy covered the treatment of diabetes. The services most frequently specified in state requirements were diabetes education and medical nutrition therapy: 45 states required that insurance policies cover diabetes education, and 27 states required coverage of medical nutrition therapy. State requirements may have focused more often on these two services in part because national organizations concerned with diabetes patient care—including ADA, the American Dietetic Association, and the American Association of Diabetes Educators—have supported “model” legislation centered on these two services. According to ADA and the American Dietetic Association, the organizations focused on these two services in particular because others, such as eye and foot exams, were thought to be covered by most policies as general medical services. The model legislation also includes coverage of “diabetes equipment and supplies,” and 47 states required such coverage. Twenty-eight states identified which supplies must be covered, although their specific requirements varied. Some states had specific requirements regarding the coverage of certain services, such as diabetes education. Forty-two states specified at least some criteria for the training or education that health care professionals must have to provide diabetes education. These criteria varied widely from state to state. To provide diabetes education in Louisiana, for example, health professionals must have demonstrated expertise in diabetes and must have completed an educational program in compliance with the National Standards for Diabetes Self-Management Education established by ADA. In contrast, several states required educators to be licensed professionals with expertise in diabetes but did not define the term expertise. Eight states referred to ADA’s national standards in setting their requirements for diabetes education programs. Some of these states required programs to be consistent with these standards, while others mentioned them as an example of acceptable standards. Among the 47 states whose laws or regulations required coverage of diabetes supplies, specific coverage requirements varied. For example, 19 states did not specify which supplies must be covered; instead, these states typically required coverage of all medically necessary equipment and supplies prescribed by a physician. The remaining 28 states specified covered supplies, either in laws or regulations, but the number of supplies varied among the states. For example, Michigan had requirements related to insulin, blood glucose monitors, test strips, lancets, lancet devices, syringes, and insulin pumps. In contrast, Mississippi required coverage of equipment and supplies, including supplies used in connection with blood glucose monitoring and insulin administration, but did not specify which supplies. Some states that listed covered supplies also prescribed procedures for adding new supplies to the list. For example, in New Jersey, the Commissioner for Insurance, in consultation with the Commissioner of Health, may update the list of supplies. While nearly all states have required some coverage of diabetes services or supplies in the insurance policies they regulate, some states have authorized a class of health insurance policies that are not bound by many of the state coverage requirements, which may include those for coverage of diabetes services and supplies. Known as “flexible health benefit” or “limited-benefit” policies, and typically marketed to small employers or individuals, such policies may, through lower premiums, reduce the cost of coverage. At least two states, Louisiana and Arkansas, have authorized limited-benefit policies that are not bound by requirements related to diabetes services and supplies. Louisiana has authorized such policies for individuals not otherwise able to obtain health coverage and for small employers (3–35 employees), and Arkansas has authorized them for all groups, regardless of size. ADA is concerned that limited-benefit policies may not provide sufficient coverage of the services and supplies that individuals with diabetes need to manage their condition. The 3 largest plans participating in FEHBP—Blue Cross and Blue Shield, Mail Handlers, and Government Employees Hospital Association, Inc.— and the 13 large-employer self-funded plans we contacted covered most of the diabetes services and supplies we reviewed. All 16 plans covered at least 7 of the 10 diabetes services, as well as at least five of nine diabetes supplies. Few of the plans we contacted placed limits on coverage for diabetes services and supplies. The three largest FEHBP plans covered at least 8 of the 10 diabetes services we reviewed (see table 2). Both diabetes education and medical nutrition therapy were covered by two of the three plans, although one plan placed conditions on these services: diabetes education was covered when provided at a hospital and medical nutrition therapy when provided by a physician. The three plans stated that coverage requirements for diabetes services and supplies applied only in cases of medical necessity. The plans generally did not, however, set monetary limits on their coverage for diabetes services. One exception was smoking cessation therapy, for which one plan set $100 lifetime limits per enrollee for both counseling and drug therapy. Another plan set $100 lifetime limits per enrollee for smoking cessation counseling. The three FEHBP plans all covered at least seven of nine diabetes supplies, including blood glucose monitors, glucose control solutions, test strips, lancets and lancet devices, insulin, insulin pumps, and disposable needles and syringes. One plan did not cover alcohol swabs, and two plans did not cover therapeutic shoes. One plan limited its coverage of supplies; specifically, this plan set lifetime durable medical equipment limits of $10,000 per person for specific supplies, including blood glucose monitors and insulin pumps. Each of the 13 large employers’ self-funded health plans we reviewed covered at least 7 of 10 diabetes services, specifically, blood glucose, lipid, and urine tests; eye and foot exams; blood pressure management, and influenza vaccinations. The remaining 3 services were covered by at least 9 plans (see fig. 2). Among these plans, we found limits on coverage only for smoking cessation therapy. One plan, for example, had a lifetime maximum of three drug therapy treatments for smoking cessation, and another plan had a maximum of two smoking-cessation programs per lifetime for each enrollee for both counseling and drug therapy. In a few cases, the plans specified certain conditions for coverage. For example, among the 11 plans offering coverage of diabetes education, 4 did so only if an employee with diabetes was enrolled in the plan’s diabetes management program. Three of the 10 plans offering coverage of medical nutrition therapy did so only as part of their diabetes management program. Of the 9 plans covering smoking cessation therapy, 5 restricted coverage to drug therapy and did not cover smoking cessation counseling. Most of the self-funded plans stipulated that diabetes services and supplies were covered only when medically necessary. In addition, 7 plans required waiting periods ranging from 30 days to 6 months after an employee was hired before health coverage began. One plan did not cover preexisting conditions—either an injury or illness—occurring during the 90 days before a newly hired employee began the waiting period. All 13 self-funded plans covered at least five of nine diabetes supplies, including insulin, insulin pumps, disposable needles and syringes, test strips, and lancets and lancet devices, and all but 1 covered blood glucose monitors (see fig. 3). Only 1 of the 13 plans reported having limits on the quantity of supplies covered, covering one blood glucose monitor per year. Two of the 13 plans reported placing conditions on their coverage of supplies. For example, 1 plan told us that it allowed up to a 90-day supply of items for each claim, and another plan covered therapeutic shoes when prescribed by a physician and purchased through an authorized supplier. Data from CDC’s 2003 nationwide survey showed that individuals with diabetes received some but not all diabetes services, and those who had health coverage were more likely to have received services than those who did not. The proportion of individuals with diabetes receiving diabetes services varied widely by type of service and among states. Another CDC survey, which included a physical examination of participants, indicated that many individuals with diabetes did not have their diabetes-related conditions adequately controlled. National data show that individuals with diabetes ages 18 and older receive many but not all diabetes services. In a nationwide telephone survey conducted in 2003, the majority of individuals with diabetes reported receiving at least one of six identified diabetes services for which national data were available. Substantially fewer individuals reported receiving within the past 12 months the five services recommended that individuals with diabetes receive at least once a year. Although the receipt of services varied by service, half or more of the individuals with diabetes reported receiving each given service. For example, an estimated 88 percent had received a test for blood glucose within the past 12 months, and an estimated 52 percent had received diabetes education. A much smaller proportion, 33 percent, had received the five services recommended that individuals with diabetes receive at least once a year— specifically, a blood glucose test, a cholesterol test, an eye exam, a foot exam, and an influenza vaccination (see fig. 4). CDC’s survey also indicated that an estimated 82 percent of individuals with diabetes were taking insulin or diabetes medication to control their blood glucose. Otherwise, use of diabetes supplies was not captured in CDC’s survey. According to CDC’s 2003 survey, in comparison with individuals with diabetes who lacked health coverage, a larger proportion who had health coverage reported receiving one or more services. For example, an estimated 90 percent of individuals with diabetes who had health coverage at the time of the survey had received a blood glucose test, compared with 71 percent of those who reported not having such coverage (see fig. 5). Moreover, the estimated proportion of individuals with diabetes who received all of the five diabetes services was more than twice as high for those who had coverage than for those who did not. For example, although an estimated 35 percent of those with health coverage had received a blood glucose test, a cholesterol test, eye exam, foot exam, and influenza vaccination, just 14 percent of those without health coverage received the same set of services. CDC’s 2003 survey showed substantial variation among states in the receipt of diabetes services. Depending on the service, the estimated state- by-state percentages of individuals with diabetes who reported receiving services varied widely. For example, the estimated state-by-state percentages of individuals with diabetes who reported receiving an eye exam ranged from 55 to 84 percent (see table 3). Despite this state-by-state variation, the same services were generally the most received across all states. In most states, for example, more individuals received blood glucose and cholesterol tests than received foot exams or diabetes education. For 1999–2002, data from CDC’s NHANES—a nationally representative survey that involves a physical examination to assess each participant’s health—indicated that many individuals with diabetes ages 18 and older did not have adequate control of related conditions that could lead to health complications. Experts say that controlling blood glucose and cholesterol levels lowers the risk of nerve damage, vision disorders, and cardiovascular disease; detecting renal disease early decreases the risk of kidney failure. Yet data from CDC’s NHANES showed that about 19 percent of examined participants with diabetes had poor control of their blood glucose, and about half of them had cholesterol levels putting them at increased risk for cardiovascular disease. In addition, about 40 percent were at increased risk of renal disease, as evidenced by a positive test for abnormal levels of a protein in their urine. The data also showed that about 38 percent of individuals with diabetes who did not have health coverage had glucose levels indicative of poor control, compared with about 16 percent of those who had health coverage. We provided a draft of this report to CDC for comment. The agency provided us with technical comments, which we incorporated into the report as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to interested congressional committees and members and make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7118. Another contact and key contributors to this report are listed in appendix III. To assess health care coverage and receipt of diabetes services and supplies, we obtained information from federal health agencies and national organizations concerned with diabetes patient care and identified 10 services and nine supplies that individuals with diabetes often need. To determine the extent to which states require coverage of diabetes services and supplies for the health insurance policies they regulate, we examined state laws and regulations from September 2004 through December 2004 related to diabetes and the extent to which they required coverage of specific services and supplies. We also reviewed information prepared by the American Diabetes Association (ADA) and the American Dietetic Association and interviewed officials there, as well as from states and the National Conference of State Legislatures. In addition, we reviewed state requirements for limited-benefit policies—which are not required to comply with coverage requirements usually applicable to health insurance—in Louisiana, Arkansas, and Colorado. To examine the extent to which the largest plans participating in the Federal Employees Health Benefits Program (FEHBP) and the largest self- funded employer plans cover diabetes services and supplies, we obtained information from the three largest national FEHBP plans—Blue Cross and Blue Shield, Mail Handlers, and Government Employees Hospital Association, Inc.—which together covered approximately 5.3 million people in 2003, or about 65 percent of employees, retirees, and their dependents covered by FEHBP plans. We also contacted a random sample of 15 of the 50 largest Fortune 500 companies, ranked by the number of employees, regarding their plans’ coverage of diabetes services and supplies in 2004 and received responses from 13 of them. Together these 13 large companies, which had self-funded health plans, employed about 2.4 million people in 2003. Because employers may offer their employees more than one health plan option, we asked employers to provide coverage information related to the health plan that had the largest enrollment. We relied on the information as reported by officials of the health plans reviewed and did not independently verify their responses. Because of our sampling approach, we cannot generalize our findings to all FEHBP plans or to all large employers. Although we received responses from most (16 of 18) of the FEHBP plans and employers we contacted, our results may still reflect some selection bias, in that employers offering more benefits might have been more likely to respond than those offering fewer benefits. To assess information on the extent to which individuals with diabetes receive diabetes services and use supplies, we analyzed data for individuals ages 18 and older provided by the Centers for Disease Control and Prevention (CDC) from two nationwide surveys: the Behavioral Risk Factor Surveillance System (BRFSS) for 2003 and the National Health and Nutrition Examination Survey (NHANES) for 1999–2002: BRFSS is a nationwide telephone survey conducted every year by state health departments, with technical and methodological assistance provided by CDC. A “cross-sectional” or point-in-time survey, BRFSS samples the civilian noninstitutionalized population of adults ages 18 and older in the United States, including the 50 states and the District of Columbia; all data from BRFSS are self-reported. The survey’s purpose, methods, and data analyses are available at http://www.cdc.gov/brfss. We used data from CDC gathered during 2003 about services individuals with diabetes reported receiving within the 12 months preceding the survey, which represented the most recent information available. BRFSS 2003 included a representative sample of 19,162 participants with diabetes. In addition to questions from the core sections of the survey, we used questions from a diabetes-specific section, which included data from 46 states in 2003, to collect data on disease management practices from respondents with diabetes. NHANES is a nationally representative survey, whose data are collected every year and released every 2 years by CDC, that samples the civilian noninstitutionalized U.S. population. It is a two-part survey, consisting of an in-home interview plus a health examination in a mobile examination center. Its purpose, methods, and data analyses are available at http://www.cdc.gov/nchs/nhanes.htm. We used NHANES data from 1999–2002—the most recent information available—for adults ages 18 and older, which included a representative sample of 904 participants with diabetes. We relied on NHANES results from the physical examinations, which included laboratory tests, for specific test values for individuals who had reported a prior diagnosis of diabetes, including tests for blood glucose, cholesterol, and kidney disease. We examined data provided to us by CDC from each survey separately. When possible, the data were stratified by health coverage status (respondents who reported having health coverage and those who reported not having it). For both surveys, we used data only from respondents who reported receiving a diagnosis of diabetes before the survey period. Most of CDC’s estimates from BRFSS were stratified by state, although we could not develop state-level estimates by health coverage; NHANES estimates were limited to the national level. We analyzed a total of 10 indicators for diabetes services and supplies from both surveys (see table 4). We assessed the reliability of the NHANES and BRFSS data provided by CDC by (1) reviewing existing information about the data and the methods used to collect them and (2) interviewing and working with agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. Our review had several data limitations. First, BRFSS data were self-reported for each service we reviewed, and both BRFSS and NHANES used self-reported diagnoses of diabetes from participants, a practice that can result in recall bias. Second, BRFSS is a telephone survey, which limits data collection to individuals who have telephones. Third, both surveys are cross-sectional; that is, they provide information at one point in time. For example, although health coverage was assessed at the time the surveys were conducted, we could not determine whether participants’ coverage changed over the survey year. Lisa A. Lusk, Jennifer Major, Adrienne Griffin, Craig Winslow, and Ellen W. Chu made key contributions to this report. | Diabetes, which afflicts millions of Americans, is a manageable disease whose effects can be mitigated with proper care, regularly received. Experts recommend certain services and supplies for managing diabetes. Because these can be costly, concerns exist about whether individuals with diabetes have access to and receive what they need. Little is known, however, about health plan coverage of diabetes services and supplies. GAO reviewed the extent to which (1) states require insurance policies to cover diabetes services and supplies, (2) health coverage not subject to state requirements includes diabetes services and supplies, and (3) individuals with diabetes ages 18 and older receive services and supplies. GAO analyzed all 50 states' and the District of Columbia's laws and regulations pertaining to diabetes coverage. GAO also obtained from selected health plans providing coverage not subject to state requirements--13 large-employer plans and 3 plans in the Federal Employees Health Benefits Program (FEHBP)--information on coverage of 10 services and nine supplies identified as important for individuals with diabetes. In addition, GAO obtained national data from the Centers for Disease Control and Prevention (CDC) on individuals' receipt of diabetes services and supplies. GAO received technical comments from CDC and incorporated them in the report as appropriate. In 2004, 47 states, including the District of Columbia, had laws or regulations related to coverage of diabetes services or supplies, although specific requirements varied by state. Services for which states most often required coverage were diabetes education (45 states) and medical nutrition therapy (27 states). All 47 required coverage of diabetes supplies, although some states were more specific than others about which supplies must be covered. Health plans GAO contacted that provide coverage not subject to state insurance requirements--those offered by 13 large Fortune 500 companies and the 3 largest health plans in FEHBP--covered most of the services and supplies recommended for individuals with diabetes, generally without limits on the coverage. Each plan covered at least 7 of 10 diabetes services, such as an annual blood glucose test, cholesterol and blood pressure monitoring, and influenza vaccinations, as well as at least five of nine diabetes supplies, such as insulin and insulin-administering supplies. According to a 2003 CDC nationwide survey, the majority of individuals with diabetes reported receiving at least one diabetes service within the past 12 months. Significantly fewer individuals, however, reported receiving five services that individuals with diabetes are recommended to receive at least once a year. For example, an estimated 88 percent reported receiving a test for blood glucose, whereas an estimated 33 percent had received the five recommended services: blood glucose and cholesterol tests, eye and foot exams, and an influenza vaccination. Receipt of diabetes services and supplies varied by service, state, and whether an individual had health coverage. For example, 71 percent of individuals with diabetes who had health coverage at the time of the survey received eye exams, compared with 46 percent of individuals with diabetes who lacked coverage. |
A mission of USCIS is to provide timely and accurate information and services to immigrant and nonimmigrant aliens as well as to federal employees who make informed decisions about, for example, granting citizenship and approving immigration benefits. To perform this mission, staff dispersed among approximately 89 of USCIS’s field offices require, among other things, access to an alien applicant’s case history information. Currently, this information resides primarily in the paper-based A-Files. To improve the reliability and currency of the A-Files, as well as their accessibility to geographically and organizationally dispersed users, USCIS intends to automate the A-Files, beginning with scanning certain forms contained in the A-Files and storing the resulting electronic images. While these automation efforts were to be part of their IT Transformation Program, both A-Files automation and the IT Transformation Program were recently incorporated into an agencywide organizational and business transformation effort referred to as the USCIS Transformation Strategy. A-Files are a critical component of the USCIS mission of ensuring the integrity of the immigration system. These files are used by USCIS staff to make immigration and citizenship decisions. Maintaining the currency of these files and distributing them in a timely manner has been a long- standing challenge. An A-File is the set of records USCIS maintains on certain individuals to document their interaction with USCIS in actions prescribed by the Immigration and Nationality Act and other regulations. The single most important set of records kept by USCIS are A-Files. An A-File contains between one and hundreds of pages of documents and forms, such as submitted benefits and naturalization forms, photographs, fingerprints, and correspondence from family members or third-party sponsors. According to USCIS, A-File information is used to grant or deny immigration-related benefits, capture subsequent status changes, prosecute individuals who violate immigration law, document chain of custody for enforcement, control and account for records in compliance with the code of federal certify the existence or nonexistence of records. USCIS estimates that it currently has more than 55 million of these paper- based files, each of which is to be maintained for a 75-year period. Generally, USCIS processes for adjudicating alien benefit requests vary by type of application or form, and may involve creating, searching, transporting, obtaining, examining, updating, or storing the A-File. Figure 1 is an example of one such process: the Family-Based Adjustment of Status, also referred to as the Application to Register Permanent Residence, or Form I-485. The process of submitting this form involves both manual and automated steps. As illustrated in figure 1, the alien submits the I-485, along with the required fee and supporting information, to a USCIS “lock box” in Chicago that is operated by the Department of the Treasury on behalf of USCIS. Treasury then captures the form electronically and creates an extract file containing selected I-485 data elements that it sends in an electronic format to the USCIS National Benefits Center (NBC), along with the original paper form and supporting information. NBC prepares a daily upload file of all cases that need biometric appointments. This information is used to schedule an interview and direct the applicant to the Application Support Center, where biometrics, such as fingerprints, will be captured. NBC obtains the paper application and the selected electronic data elements, and inputs the data elements into the Computer Linked Application Management System 3 (CLAIMS 3). In addition, NBC searches a USCIS electronic index system, known as the Central Index System (CIS), to determine whether an A-File already exists for the individual. If an A-File does not exist, one is created. If one does exist, NBC determines its location by accessing an additional system called the National File Tracking System (NFTS), which tracks the physical location of the A-File. When NBC obtains the requested A-File, it merges the Form I-485 into the A-File. NBC then performs an initial name check using the Interagency Border Inspection System and the Federal Bureau of Investigation (FBI) National Name Check Program, and updates the A-File with the results. While NBC is processing the application, the Application Support Center is collecting the applicant’s biometrics and sending the data electronically to the FBI, where a criminal background check is performed on the applicant. When the FBI has completed the background check, it sends the results to NBC, which then prints the results and adds them to the A-File. When the A-File contains the I-485 application, biometrics, and background check results, it is transported to the USCIS local office closest to the applicant for a ruling on the applicant’s request. The local office reviews the file, interviews the applicant, and makes a decision on the permanent residence request. The A-File is then transported to the National Records Center in Missouri for storage (see fig. 2). According to a recent report by the DHS Inspector General (IG), this paper- based process is costly. For example, the estimated costs for copiers and copy paper for one USCIS service center is more than $400,000 per year. Further, according to senior USCIS officials, the agency spends approximately $13 million each year transporting A-Files within USCIS and to other bureaus and agencies. Besides USCIS’s need for A-Files, DHS’s Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), and U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) need access to either the data in the A-Files or the A-Files themselves, as do agencies external to DHS, including the FBI, the Department of State, and state and local governments. For example, USCIS officials told us that the FBI uses A-Files data in performing law enforcement activities. In addition, USCIS documentation shows that ICE uses A-Files as the principle source of information for prosecuting aliens who have committed crimes and for immigration removal proceedings; CBP uses A-Files when it interviews and arrests aliens; and the Department of State uses data within the A-Files when issuing visas to alien visitors. According to USCIS officials, obtaining access to these A-Files has been a long-standing problem. The limitations in the USCIS IT and data-sharing environments are not confined to the A-Files. According to a recent report by the DHS IG, USCIS uses duplicative, nonintegrated, and inefficient data systems that have limited information sharing, resulting in data integrity and reliability problems. For example, adjudicators may need to access more than a dozen systems using between 5 and 17 passwords, and may have to restart these systems multiple times to process a given application. In addition, the IG reported that the networks and hardware platforms across USCIS offices are outdated and inconsistent. The IG also reported that past problems in this IT environment have led to small, disparate business process re-engineering initiatives that were narrowly focused and were not sufficiently coordinated across the organization to enable standardized processes. To address these limitations, USCIS began an IT Transformation Program in March 2005 that was led by the agency’s Office of the Chief Information Officer (OCIO) and was intended to move USCIS progressively toward a paperless environment that facilitates information sharing. In January 2006, USCIS reported that this IT transformation effort was being subsumed into a new, long-term organizational and business transformation effort, referred to as the USCIS Transformation Strategy. Under this strategy, according to USCIS officials, long-term solutions to its A-Files automation needs will be pursued within the context of business process re- engineering. In the interim, however, USCIS still intends to reduce the volume of paper associated with its existing A-Files through a program called the Integrated Digitization Document Management Program (IDDMP). According to USCIS, the goals of the IDDMP are to comply with laws governing electronic information storage and access reduce the backlog of immigration benefit requests, ensure timely access to files, and reduce paper-based file storage and transportation costs; and respond to a statement in The 9/11 Commission Report that all points in the border system—from consular offices to immigration services offices—will need appropriate electronic access to an applicant’s file. To accomplish these objectives, IDDMP is to convert paper forms and documents in existing A-Files to electronic images and manage the retrieval, movement, retention, and disposition of these images. The program is not intended to change existing USCIS core business processes, but rather to merely reduce the amount of paper associated with these business processes and improve user access to these scanned forms and documents. The program is estimated to cost about $190 million over 8 years, which includes planning, acquisition of hardware and software products and services, and operations and maintenance. As part of the IDDMP, USCIS initiated a digitization and storage pilot to scan approximately 1 million A-Files that include adjudicated I-485 forms and supporting documents (each containing about 100 pages). The purpose of the pilot is to validate that the digital format satisfies user needs, to identify network storage requirements, and to provide insight into potential scanning and storage problems. According to USCIS program officials, the pilot involves five separate contracts, three of which are primarily funded from $20 million that Congress had designated for “the historical records project to convert immigration records into an electronic, digitally-accessible format.” The other contracts were awarded using other USCIS funding. Officials told us that they needed to move quickly to obligate these funds before they were due to expire at the end of September 2005, so they awarded four of the contracts in September 2005. A description of each of the contracts follows. Records digitization facility. According to program officials, this contract is intended to set up a facility for scanning the piloted number of A-Files and for scanning future A-Files. The contract is to cover preparing the documents for scanning, scanning the documents, and performing quality assurance checks on the captured images. It also is to cover indexing the scanned images using the meta-data standards defined in the requirements definition contract portion of the digitization pilot and temporarily storing the images in a staging server until they are accessed under the enterprise document management service contract. According to officials, this contract was originally awarded in September 2005, and a protest was filed in October 2005. During the course of the protest, the agency took corrective action, which included re-evaluation of the proposal; the protest was dismissed, the original award was vacated, and a new award is expected in March 2006. The estimated value of the new contract is $14 million. Enterprise document management service. This contract, awarded in September 2005, is to gather technical requirements for the design and implementation of a system to electronically manage the scanned images created by the records digitization process. In addition, the contractor is to design and implement a system capable of ensuring image and data quality and compliance with the DHS document management standard. It also includes development of a Web infrastructure and implementation of user interface software components. The value of this contract is about $2.3 million. Storage facility infrastructure. Under this contract, awarded in September 2005, the contractor is to provide hardware, software, and a wide area network for the digitization and storage process. The value of this contract is about $7.2 million. Records business process re-engineering. This contract, which was awarded in September 2005, includes determining how I-485 A-Files are currently used for adjudicating permanent residence requests and documenting the process for compilation, movement, digitization, and lockdown of I-485 A-Files. The contractor is also to determine how to effectively relocate the I-485 forms to the records digitization facility. The estimated value of this contract is $487,400. Requirements definition. This contract, which was awarded in October 2005 using fiscal year 2006 funds, covers gathering and documenting non- USCIS stakeholder digitization and document management requirements, including the meta-data requirements for indexing the scanned documents. As of December 2005, the first draft of requirements had been reviewed by USCIS and some of the external stakeholders, including ICE, CBP, and the Department of State. The contractor’s next steps are to refine the requirements and develop, among other things, the plans of action and a concept of operations for the digitization and document management processes. The value of this contract is about $451,000. It is not yet possible to determine the effectiveness of USCIS’s management of its long-term A-Files automation effort because this effort is not yet under way. However, USCIS currently has a near-term A-Files automation effort under way (IDDMP) that it is not effectively managing. Specifically, USCIS has not developed a program management plan to guide program execution and provide the basis for reliable cost and schedule estimates, and it does not have a plan for evaluating its IDDMP concept of operations pilot test of a document scanning capability. According to USCIS officials, these plans do not exist because the program is just getting started. Nevertheless, five contracts have either been awarded or are to be awarded under this program, a pilot test is under way, and significant program costs are anticipated. Without effective planning, IDDMP is at risk of falling short of expectations and its funding requests cannot be justified. As we have previously reported, technology alone cannot be relied on to solve long-standing and fundamental business problems, such as USCIS’s dependence on paper-laden A-Files. Instead, our work has shown that such organizational and business transformation requires a number of key, interdependent elements working collectively to effect meaningful and long-lasting institutional change and mission improvement. These elements begin with strong, sustained executive leadership to direct and oversee organizational reforms. Other elements include a comprehensive and integrated business transformation plan, strategic management of human capital, effective processes and related tools (such as an enterprise architecture to provide a business and technology blueprint and associated road map), and results-oriented performance measures that link institutional, unit, and individual personnel goals, measures, and expectations. Until recently, USCIS had high-level, technology-focused plans for modernizing its information systems environment, including plans for automating its A-Files. These plans were part of the OCIO’s IT Transformation Program, which included four components: (1) establishing and evolving a mature CIO organization; (2) improving the IT infrastructure; (3) implementing an information-based architecture to facilitate information standardization, security, and sharing; and (4) providing new business capabilities. However, agency officials told us in January 2006 that the IT Transformation Program has been reconsidered and will now be incorporated into a broader effort referred to as the USCIS Transformation Strategy. While this broader organizational and business transformation strategy has yet to be formally documented, officials told us that the strategy will, among other things, align IT modernization with broader organizational and business process changes. Restated, the IT modernization will be neither separate from nor the driver of organizational transformation. Rather, it will support and enable organizational transformation. To illustrate, one approach to long-term A- Files automation could potentially involve doing away with both paper forms and electronic images of these forms and instead provide for the electronic capture of data when the applications are filed using Web-based services and management of the captured data via corporate data warehouses to facilitate data access and sharing. USCIS’s more broadly based organizational and business transformation concept, in which IT modernization will be treated as an enabler rather than an independent undertaking or a driver, is more consistent with effective transformation practices employed by successful organizations. However, our experience has shown that successful organizations also perform other key elements related to organizational and business transformation. As we have previously reported, these elements are as follows: Ensure top leadership drives the transformation. Leadership must set the direction, pace, and tone and provide a clear, consistent rationale that brings everyone together behind a single mission. Establish a coherent mission and integrated strategic goals to guide the transformation. Together, these define the culture and serve as a vehicle for employees to unite and rally around. Focus on a key set of principles and priorities at the outset of the transformation. A clear set of principles and priorities serves as a framework to help the organization create a new culture and drive employee behaviors. Set implementation goals and a timeline to build momentum and show progress from day one. Goals and a timeline are essential because the transformation could take years to complete. Dedicate an implementation team to manage the transformation process. A strong and stable team is important to ensure that the transformation receives the attention needed to persevere and be successful. Use the performance management system to define responsibility and assure accountability for change. A “line of sight” shows how team, unit, and individual performance can contribute to overall organizational results. Establish a communication strategy to create shared expectations and report related progress. The strategy must effectively communicate with employees, customers, and stakeholders. Involve employees to obtain their ideas and allow them to participate in the transformation. Employee involvement strengthens the process and allows them to share their experiences and shape policies. Build a world-class organization. Building on a vision of improved performance, the organization adopts the most efficient, effective, and economical personnel, system, and process changes and continually seeks to implement best practices. One such practice is the use of an enterprise architecture. The degree to which USCIS incorporates each of these key elements into its current transformation efforts will help to determine the success of its efforts, including the automation of its A-Files. Industry best practices and information technology program management principles stress the importance of effective planning in the management of programs, such as IDDMP. Inherent in such planning is the development and use of program management plans, which define, among other things, program goals and major milestones, delineate work tasks and products and the associated schedules and resources for achieving them, define management processes and structures (e.g., processes and structures for tracking and overseeing contractors), identify key players and stakeholders and their roles and responsibilities, and specify performance measures and reporting mechanisms. They also require plans for testing and evaluating program products and capabilities, including plans for evaluating the results of pilot-testing efforts. Pilot evaluation plans include goals and objectives, tasks, time frames, resource needs, roles and responsibilities, and evaluation criteria and results measures. Such plans are essential to ensuring, among other things, that programs are executed properly and that funding requests are reliably derived. USCIS has yet to develop either an IDDMP management plan or a pilot evaluation plan. According to USCIS OCIO officials, the IDDMP is only now being initiated, and the program office, including program staff, is not fully in place. Thus, they said it is too early to expect these plans to exist. Nevertheless, USCIS has awarded four contracts and is in the process of awarding a fifth related to the program; these contracts total about $20 million, including an ongoing digitization and storage technology pilot test, and it estimates that it will spend $190 million over an 8-year period on the program. At the same time, officials told us they do not yet know which of the roughly 50 types of forms associated with A-Files will be scanned and stored or the sequence in which form types will be scanned. If all forms are scanned, information provided by USCIS shows that scanning and storage could cost as much as $550 million. The absence of program planning was also noted in a December 2005 workshop by one of the digitization and storage pilot contractors. Discussion points during this workshop included IDDMP’s lack of a clear vision and business objectives, critical gaps in the digitization approach, confusion regarding terminology and roles and responsibilities, and the lack of a management plan. Restated, this means that large sums of resources are being invested, and much larger sums are likely to be invested, on a program that lacks plans for ensuring that the resources are invested effectively and that resource estimates are valid. According to OCIO officials, while the funding estimates are a “guess,” $20 million in funds were designated in fiscal year 2005 for converting historical immigration records into a digitally accessible format, and they needed to move quickly to obligate these funds before they expired at the end of September 2005. These officials also told us that, while they did not have time to fully establish and staff a program office that would have pre- empted the contractor’s concerns, they are now taking steps to deal with the concerns. However, we have yet to receive documentation from USCIS as to the scope and nature of the steps they are taking. Without effective planning, including a clearly defined program scope, IDDMP is at risk of falling short of expectations and its future funding needs are not adequately justified. While it is too early to determine how effectively USCIS is managing its long-term A-Files automation effort, USCIS’s recent decision to reconsider its long-term IT modernization plans—including the role of IT in the agency’s broader organizational and business transformation efforts—was both warranted and appropriate. As USCIS defines and pursues these strategic transformation efforts, it is important that the agency adequately incorporate the keys to successful organizational transformation discussed in this report. With respect to management of its near-term A-Files automation efforts, key IDDMP planning activities are not being performed effectively. Given the contractual commitments being made on IDDMP, as well as the potential for the cost of this program to reach well into the hundreds of millions of dollars, it is critical that USCIS expeditiously develop an effective program management plan and pilot evaluation plan to guide the execution of the program and the pilot test, respectively. Without these plans, IDDMP is at risk of not meeting expectations and its funding needs are not adequately justified. To better ensure the success of USCIS’s long-term transformation efforts, to include A-Files automation, we recommend that the Secretary of Homeland Security direct the Director of USCIS to implement the following two recommendations: 1. Ensure that the key elements to successful organizational and business transformation cited in this report are employed. 2. Ensure that both a program management plan and a pilot evaluation plan are expeditiously developed and approved for IDDMP, along with a reliable estimate of funding requirements. In commenting on a draft of this report, the Department of Homeland Security agreed with our recommendations and described actions that are planned and under way to address them. It also provided technical comments that we have incorporated, as appropriate. The department’s comments are reprinted in appendix II. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies to the Secretary of Homeland Security, the Director of the United States Citizenship and Immigration Services, and appropriate congressional committees. We will also make copies available to others on request. In addition, this report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3439 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 objective was to determine whether the United States Citizenship and Immigration Service (USCIS) is effectively managing its alien files (A-Files) automation efforts. To accomplish this objective, we reviewed and analyzed USCIS’s information technology (IT) strategic plan, IT Transformation Program planning documents, and IT Transformation Program mission needs statement, as well as available documentation for the Integrated Digitization Document Management Program (IDDMP). In addition, we reviewed the A-Files budget submission to the Office of Management and Budget, the digitization and storage contractor statements of work, and requirements meeting minutes. Among other things, we interviewed program officials, including the USCIS chief information officer and the IDDMP manager. We also interviewed officials from Immigration and Customs Enforcement and met with officials at the Department of Homeland Security (DHS) Office of Inspector General to discuss program management activities for the IDDMP. We conducted our work at DHS headquarters offices in Washington, D.C., from August 2005 through February 2006 in accordance with generally accepted government auditing standards. In addition to the contact named above, the following staff made key contributions to this report: Michael Marshlick, Assistant Director; Elena Epps; Kate Feild; and Nancy Glover. | The United States Citizenship and Immigration Services (USCIS) relies on about 55 million paper-based files to adjudicate applications for immigration status and other benefits. Ensuring the currency and availability of these manual files, referred to as alien files, or A-Files, is a major challenge. To address this challenge, USCIS has initiated efforts, both long and near term, to automate the A-Files. The long-term effort is now being re-examined within the context of a larger USCIS organizational transformation initiative. In the near term, USCIS has begun a digitization program, which it estimates will cost about $190 million over an 8-year period to electronically scan existing paper files and store and share the scanned images. GAO was asked to determine whether USCIS was effectively managing its A-Files automation efforts. USCIS's effectiveness in managing its long-term effort for automating the A-Files cannot yet be determined because the scope, content, and approach for moving from paper-based to paperless A-Files has yet to be defined. Nevertheless, GAO believes that USCIS's recent decision to re-examine prior agency plans for a strategic A-Files automation solution within the context of an agencywide transformation strategy appropriately recognizes the integral support role that information technology plays in organizational and business transformation. GAO also believes that the success of USCIS's organizational transformation depends on other key supporting practices, such as having a comprehensive and integrated transformation plan (goals and schedules) and results-oriented performance measures. With respect to USCIS's near-term A-Files automation effort, known as the Integrated Digitization Document Management Program (IDDMP), effective planning is not occurring. In particular, USCIS has not developed a plan governing how it will manage this program and its contractors, and it has not developed an evaluation plan for its ongoing digitization concept of operations pilot test, even though it has either awarded or plans to award contracts totaling about $20 million for this pilot. In addition, USCIS officials told us they do not yet know which A-Files immigration forms will be scanned. Without a defined scope and adequate planning, this program is at risk of falling short of expectations. |
GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to report subsequently on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due by March 31 of each year, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance, and reduce costs in the future. NASA’s final performance plan was provided to the Congress on July 17, 2001. NASA’s mission encompasses human exploration and development of space, the advancement and communication of scientific knowledge, and research and development of aeronautical and space technologies. Its activities span a broad range of complex and technical endeavors—from investigating and evaluating the composition and resources of Mars; to working with international partners to complete and operate the International Space Station; to providing satellite and aircraft observations of earth for scientific and weather forecasting purposes; to developing new technologies designed to improve air flight safety. This section discusses our analysis of NASA’s performance goals and measures and strategies the agency has in place, particularly strategic human capital management and information technology, for accomplishing the outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which the agency provides assurance that its reported performance information will be credible. NASA revised its strategic goal and most of its objectives for this key outcome in its fiscal year 2002 performance plan. We based our assessment on the strategic goal to observe, understand, and model the Earth system to learn how it is changing and the consequences of change for life on this planet. The previous goal was to expand scientific knowledge by characterizing the Earth system. NASA’s performance plan does not explain why it adjusted its previous strategic goal and objectives, nor does it explain why it developed newly formulated annual performance goals and supporting indicators for fiscal year 2002. In discussing the reasons for these changes, NASA officials told us that changes in goals and measures were necessitated by the formulation of new strategic science questions for the Earth Science Enterprise and a refocused strategic plan. In our view, providing this explanation in the plan would have been useful. The performance plan includes a chart that displays annual performance goals and associated performance assessments for fiscal years 1999 to 2002, to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. However, explaining changes in goals and measures over time would improve the performance trend analyses, and clarify the reasons for the new measures. On the other hand, by changing its performance goals annually, NASA could hinder its ability to make comparisons between fiscal years and effectively analyze trends in performance. Generally, NASA’s fiscal year 2002 annual performance goals for this outcome appear to be objective and help to measure progress toward achieving it. Specific ways to measure the performance goals are established through two or more indicators that in many cases provide specific, quantifiable values that increase the measurability of the performance goal. An example of such an indicator is: “Increase the coverage of space-based maps of coral reef distribution by 25 percent beyond current estimates using remotely sensed imagery.” NASA added discussions on how each performance goal would benefit the public, as recommended by the NASA Advisory Council in its evaluation of NASA’s fiscal year 2000 performance report. In some cases these discussions clearly articulate the benefit to the public; in other cases they only provide descriptive or background information. For example, one performance goal calls for increasing the understanding of stratospheric ozone changes, as the abundance of ozone-destroying chemicals decreases and new substitutes increases. The public benefit statement, “Reduction in atmospheric ozone amounts leads to an increased flux of ultraviolet radiation at the Earth’s surface, with harmful effects on plant and animal life including human health,” explains the effect of reduced ozone amounts rather than how the goal will benefit the public. NASA indicates that it will consider many of the Earth Science goals as fully met if a specified number of the supporting indicators (such as 3 out of 4) are achieved in fiscal year 2002. NASA officials told us that this approach allows for some flexibility in rating success. Specifically, since research and development by its very nature is unpredictable, these officials believe that, for example, not meeting all indicators still implies significant progress in achieving scientific goals. NASA could fully explain in the plan why it does not believe it has to meet all supporting indicators. This would put its actual performance in the proper perspective. The following is one example of such a goal: “Annual performance goal – Increase understanding of global precipitation, evaporation and how the cycling of water through the Earth system is changing by meeting at least 3 of 4 performance indicators. Combine analysis of global water vapor, precipitation and wind data sets to decipher variations (and possible trends) in the cycling of water through the atmosphere and their relation to sea surface temperature changes. Analyze data from polar and geostationary satellites in a consistent fashion over at least two decades to evaluate whether the detectable moisture fluxes are increasing beyond the expected ranges of natural variability. Determine the time and spatial variability of the occurrence of strong convection regions, precipitation events, and areas of drought to assess whether or not there are discernable global changes in the distribution of moisture availability useful to food and fiber production and management of fresh water resources. Establish passive and active rainfall retrievals of zonal means to establish a calibration point for long-term data records of the World Climate Research Program, Global Precipitation Climatology Project (GPCP).” Concerning interagency and crosscutting activities, we note that within this outcome, NASA does not include annual performance goals and indicators that reflect programs or activities being undertaken with other agencies in fiscal year 2002 for the strategic goal covered by our review, even though NASA’s latest Strategic Plan identifies 16 federal agencies that contribute to this goal. These agencies include the departments of Defense and Commerce, the National Oceanic and Atmospheric Administration, and the Federal Emergency Management Agency. If NASA has planned collaborative efforts related to the performance goals and indicators for this outcome, these are not identified in the performance plan. The performance plan provides an opportunity to evidence coordination among crosscutting programs and reflect the expected contribution of other agencies toward related goals. NASA states that its implementation strategy for Earth Science research programs is focused on a set of strategic science questions directed at understanding how the Earth system is changing and the consequences for life on Earth. The plan indicates that these questions can be addressed effectively with NASA’s capabilities, which include observational programs, research and analysis, modeling, and advanced technology. In general, the plan provides clear and reasonable information technology. One annual performance goal within this outcome is to successfully disseminate Earth Science data to enable NASA’s Earth Science research and applications goals and objectives. To achieve this goal, NASA set several specific performance indicators, such as increasing the number of distinct NASA Earth Observing System Data and Information System (EOSDIS) customers by 20 percent compared to fiscal year 2001; increasing scientific and applications-data products delivered from the Earth Observing System (EOS) Distributed Active Archive Centers (DAAC) by 10 percent compared to fiscal year 2001; and increasing the number of favorable comments from DAAC and other users over fiscal year 2001 and decreasing the total percentage of order errors by 5 percent over fiscal year 2001. These indicators provide specific, quantifiable ways to measure increases in output from NASA’s EOSDIS and DAACs. Based on NASA’s reported success in meeting similar indicators for fiscal year 2000, these indicators appear to be reasonable for fiscal year 2002. In some instances, NASA revised or added strategic goals and objectives, and annual performance goals within this outcome for fiscal year 2002. For example, the agency added (1) a new strategic goal to provide commercial industry with the opportunity to meet NASA’s future launch needs, including human access to space, with new launch vehicles that promise to dramatically reduce cost and improve safety and reliability and (2) a new strategic objective to develop new capabilities for human space flight and commercial applications through partnerships with the private sector. Furthermore, most of the annual performance goals are either new or revised from targets in NASA’s prior year performance plan. Further, NASA does not provide any rationale or reasons for the changes in the plan. NASA officials told us that, generally, the changes were made to (1) improve NASA’s ability to assess progress toward achieving goals and objectives; (2) reflect commitment to safety and privatization efforts; or (3) reflect the broader scope of programs and activities and shifts in Enterprise responsibilities. Again, providing such explanations in the performance plan, in our view, would have been useful. NASA displays its annual performance goals and associated performance assessments for fiscal years 1999 to 2002 to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. As emphasized earlier, changing performance goals annually could hinder NASA’s ability to make comparisons between years and effectively analyze trends in performance. NASA generally presents performance goals that appear to be objective and help to measure progress toward this outcome. The agency also explains how each performance goal will benefit the public. The strategies for achieving the performance goals are generally clear and reasonable. However, there are some exceptions. For example, one performance goal involves developing and testing – on the ground and in space—competing technologies for human missions beyond low earth orbit in cooperation with international partners. One indicator related to this performance goal involves organizing and conducting an “international forum” at which preliminary concepts, plans, and technology options for future human/robotic exploration and development of space would be reviewed. However, the indicator does not address the testing of competing technologies. Also, NASA has a performance goal to engage the commercial community and encourage non-NASA investment in commercial space research by meeting at least three of four performance indicators, but the plan does not state why all of the supporting indicators will not be achieved. Since the selected key outcome of deploying and operating the space station safely and cost effectively is not included in NASA’s fiscal year 2002 performance plan as a specific strategic goal or objective, we based our assessment of it on a related strategic objective in the plan—to operate the space station to advance science, exploration, engineering, and commerce. NASA set four annual performance goals for this outcome for fiscal year 2002. The performance goals are new, but the plan does not provide any rationale for the changes. This is an important omission, because as pointed out earlier, explaining changes in goals and measures over several years would improve performance trend analyses and clarify why such changes were made. In discussing the reasons for these changes, NASA officials told us that for the International Space Station, the fiscal year 2001 goals and objectives relied on milestones that were reported as either complete or incomplete, with no provision for reporting progress toward completion. The improved goals and objectives for fiscal year 2002 are tied to milestones that allow reporting of progress in terms of the percent of the milestones completed. Thus, the new measures will provide greater visibility and improve NASA’s ability to assess progress toward achieving goals and objectives. In our view, providing this explanation in the plan would have enhanced NASA’s discussion on this outcome. Also, similar to the previous outcomes, NASA displays performance goals and associated assessments for fiscal years 1999 to 2002 to help demonstrate cumulative progress towards achievement of strategic goals and objectives and to facilitate performance trend analysis. However, changing performance goals annually could hinder NASA’s ability to make comparisons between fiscal years and effectively analyze trends in performance. Generally, NASA’s four annual performance goals and supporting indicators for the space station outcome appear to be objective and help to measure progress toward this outcome. In addition, the agency explains how the goals will benefit the public, stating how completing them successfully will provide many benefits of space research through new discoveries and improved technological applications in areas such as medicine, industrial processes, and fundamental knowledge. One performance goal addresses space station safety. Specifically, the goal is to demonstrate space station on-orbit vehicle’s operational safety, reliability, and performance. The goal has an indicator that provides for zero safety incidents (such as no on-orbit injuries), which appears reasonable. The other indicator is not articulated understandably, making it difficult to ascertain its relationship to the performance goal or to assess its measurability. (The language is phrased as: “Actual resources available to the payloads measured against the planned payload allocation for power, crew time, and telemetry.”) Also, the plan does not clearly indicate the means or strategies NASA will use to ensure that the safety performance goal is achieved in fiscal year 2002. Similarly, the plan does not provide clear strategies for achieving the remaining three performance goals of (1) demonstrating space station progress and readiness at a level sufficient to show adequate readiness in the assembly schedule, (2) successfully completing 90% of the space station’s planned mission objectives, and (3) demonstrating progress toward space station research hardware development. NASA does not address space station cost control as part of this outcome. However, within its commercialization of space outcome, NASA set a performance goal in fiscal year 2002 to develop and execute a management plan and open future ISS hardware and service procurements to cost-effective innovation through competition, including launch services and a non-governmental organization for space station research. NASA’s indicator for the management plan includes reforms that (1) strengthen its headquarters involvement, (2) increase communications, (3) provide more accurate assessment, and (4) maintain budget accountability. NASA reports that the benefit to the public of the management plan and reforms is to ensure that future space station costs will remain within the President’s fiscal year 2002 budget plan. In our view, NASA’s discussion of the proposed management plan is minimal and lacks specificity. While the management plan will reportedly include ISS budget accountability reforms, NASA does not elaborate on the nature of such reforms or indicate to what extent this plan will address space station cost growth, a long-standing management problem. Furthermore, NASA does not acknowledge anywhere in the performance plan that space station cost control is a major management challenge, although it has done so for some of the other challenges. In past years and as recently as January 2001, we have identified the need to control space station costs as a major management challenge for NASA. We believe that the agency has the opportunity to use the completed management plan to facilitate the development of space station cost control measures in future annual performance plans. The lack of performance measures that address space station cost control is a shortcoming that we have identified in our previous reviews of the agency’s annual performance plans and reports. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NASA’s fiscal year 2002 performance plan in comparison with its fiscal year 2001 performance plan. It also discusses the degree to which the agency’s fiscal year 2002 plan addresses concerns and recommendations by the Congress, GAO, NASA’s OIG, and others. NASA’s fiscal year 2002 performance plan differs in several significant ways from the prior plan. First, NASA portrays its planned efforts to verify and validate performance information more comprehensively than in 2001, providing greater confidence that the performance results will be credible. In our review of NASA’s 2001 plan, we criticized the agency for not explicitly describing those efforts and for not addressing data limitation issues and problems. The 2002 plan includes specific agency data bases and describes methods NASA will rely on to support the credibility of reported performance information. For example, the plan references the NASA Personnel Payroll System, Incident Reporting System, Financial and Contractual Status of Programs System, and NASA Environmental Tracking System as specific data bases that will be used to verify and validate performance data. The plan describes specific processes in place to support performance claims associated with NASA’s Integrated Financial Management System, performance-based contracts, contracts awarded to small and small disadvantaged businesses, and information technology. And it describes a broad array of methods to verify and validate reported performance data such as monthly reports from NASA field centers, Web statistics, count of publications, and NASA’s Education Computer Aided Tracking System. Despite improvements in addressing data verification and validation methods, NASA still does not acknowledge data limitations that could hinder performance measurement. We continue to believe that NASA can further enhance the credibility of its verification and validation procedures and the usefulness of its performance data by disclosing the expected limitations of its performance data in its annual performance plans. A March 2001 NASA Office of Inspector General report identified limitations in NASA’s fiscal year 2000 performance data and indicated that NASA would discuss anticipated data limitations in its performance planning beginning with its fiscal year 2002 final performance plan. However, we reviewed the final version of the plan, and such a discussion is not included. Second, several added features help to enhance the format and/or content of the fiscal year 2002 plan. NASA’s use of “annual performance goals” in the plan characterizes its annual performance measures more clearly than the “annual performance targets,” used in previous plans. The addition of discussions on how annual performance goals benefit the public helps to better understand the linkage between the goal and the expected results, although in some cases additional clarification could even better convey the actual benefit to the public. Value is added to the plan by NASA’s display of annual performance goals and associated performance assessments for fiscal years 1999 to 2002, to help demonstrate cumulative progress towards achievement of strategic goals and objectives and facilitate performance trend analysis. However, changes in performance goals over many years could hinder NASA’s ability to make comparisons between years and effectively analyze trends in performance. Also, this year’s plan includes an agencywide strategic objective to invest in the use of human capital. NASA set two annual performance goals for fiscal year 2002 as progress towards this objective: (1) align management of human resources to best achieve agency strategic goals and (2) attract and retain a workforce that is representative at all levels of America’s diversity. However, there are no human capital initiatives specifically linked to the outcomes or annual performance goals and indicators that link to specific programs, such as the space shuttle program. (See details under management challenges.) Third, NASA could explain in the plan what procedures it has used to characterize its performance goals as fully achieved when it has not met all of the supporting indicators for those goals. This is particularly true for the Earth Science outcome. Providing such an explanation would put the actual performance in the proper perspective. Fourth, similar to the prior plan, the fiscal year 2002 plan still does not provide a clear rationale for how information technology-related strategies and programs will contribute specifically to achievement of NASA’s goals or show any allocation of information technology-related dollars and personnel to performance goals. Goals for managing information technology are generally stated in terms of broad categories for improvement, such as increased capability and efficiency and enhanced security, and include few quantitative measures. One exception is the goal of increasing dissemination of Earth Science data, which is accomplished through EOSDIS. The plan sets several specific goals for increasing the volume and distribution of Earth Science data and products. Lastly, in our review of NASA’s fiscal year 2001 plan, we suggested that NASA document in its annual performance plans and reports, the rationale for establishing new performance targets to clarify the reasons for adding such targets. We had noted that while many of NASA’s annual performance targets were new each year, there was no stated basis for the changes. In its fiscal year 2002 performance plan, NASA has formulated new annual performance goals and has changed many of its strategic goals and objectives without including the reasons for doing so. We continue to believe that providing the rationale for these changes will clarify the reasons for the new goals and measures and augment the value of performance trend analyses. Also, the plan does not indicate whether or not achieving any specific goals would be negatively affected by external factors. However, like the prior plan, the fiscal year 2002 plan states that successful execution of NASA’s strategic goals and objectives depends on receipt of its requested appropriations, as well as provision of funds, materials, or services, that have been committed to the cooperative agreements or partnerships which are referenced in the performance plan. We have identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, NASA’s fiscal year 2002 performance plan contains a strategic objective and annual performance goals and indicators directly related to human capital. Concerning information security, NASA’s performance plan contains a strategic objective, an annual performance goal, and indicators directly related to this management challenge. The plan states that safety and security is one of four areas on which NASA’s information technology planning is focused. The fiscal year 2002 plan is an improvement over the 2001 plan, which did not include quantifiable measures for improving information security. However, the plan’s performance goals do not fully respond to the recommendations we made in 1999 when we reported that the agency lacked an effective agencywide security program. For example, the plan sets a performance indicator of completing 90 percent of information technology security plans for critical systems. However, we recommended that all systems be formally authorized before they became operational and at least every 3 years thereafter. In addition, we have identified three major management challenges facing NASA: (1) correcting contract management weaknesses, (2) controlling International Space Station costs, and (3) effectively implementing the faster-better-cheaper approach to space exploration projects. We found that NASA’s performance plan contains an annual performance goal and indicators directly related to the problem of contract management. It is important to note that until NASA’s Integrated Financial Management System—-which is central to providing effective management and oversight over its procurement dollars—is operational, performance assessments relying on cost data may be incomplete and full costing will be only partially implemented. While NASA’s performance plan contains an annual performance goal and an indicator that indirectly addresses the challenge of controlling space station costs, it does not indicate the extent that NASA will address space station cost growth. As we discussed in our January 2001 report, the International Space Station Program continues to face cost control challenges. As with contract management, until the Integrated Financial Management System is operational, NASA may lack the cost information needed to control space station costs. Further, NASA’s performance plan did not directly address the challenge of effectively implementing the faster-better-cheaper approach to space exploration projects. In January 2001, we also reported that NASA faces significant challenges as it attempts to create highly reliable missions and foster open communications under the budget constraints of the agency’s faster-better-cheaper space exploration strategy. In addition, the real success of this strategy will require a comprehensive integration of lessons learned from failures on an agencywide basis. Until NASA resolves these problems, its financial resources are vulnerable to inefficient use. Appendix I provides detailed information on how NASA addressed these challenges and high-risk areas as identified by GAO and NASA’s Office of Inspector General (OIG). As agreed, our evaluation was generally based on the requirements of GPRA, guidance to agencies from the Office of Management and Budget (OMB) for developing performance plans (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NASA’s operations and programs, our identification of best practices concerning performance planning, and our observations on NASA’s other GPRA-related efforts. We also discussed our review with NASA officials and with officials of NASA’s OIG. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for NASA and do not reflect the outcomes for all of NASA’s programs or activities. The major management challenges confronting NASA, including the governmentwide high-risk areas of strategic human capital management and information security, were identified in our January 2001 performance and accountability series and high risk update, and by NASA’s OIG in December 2000. We conducted our review from August 2001 through October 2001 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to NASA for its review and comment. In written comments on the report, NASA generally agreed with the information presented in the report and noted several improvements it would make. Concerning our suggestion that NASA could fully explain in its performance plan why it believes it is not necessary to achieve all performance indicators to demonstrate annual performance goal achievement, NASA stated that it would provide a statement containing the supporting rationale for this approach in its fiscal year 2003 performance plan. In responding to our observation that the fiscal year 2002 plan lacked sufficient detail on the nature of the ISS’s budget accountability reforms or how the reforms will address longstanding and ongoing management problems, including cost growth, NASA commented that the reforms are contained in its Program Management Action Plan that will be referred to in the fiscal year 2003 performance plan. We note that the ISS Program is being restructured in response to a potential cost growth of $4.8 billion. The restructuring has raised widespread concerns about the potential science benefits to be realized by the United States and international partners. For this reason, we believe it is increasingly important for NASA’s performance plan to provide a clear path showing how NASA intends to implement the needed reforms and how the reforms will add credibility to future ISS budgets and resolve the uncertainties concerning the utility of the ISS. NASA also commented on a statement in our draft report that the agency does not provide a clear rationale for how IT-related strategies and programs will contribute specifically to achievement of its goals or show the allocation of IT-related dollars and personnel to performance goals. According to NASA, the IT service delivery metric in the plan aggregates each major IT service, such as NASA’s Integrated Services Network. Remaining IT investments are embedded in each NASA project and managed as part of the project. While this statement may be true on the individual program level, it does not address GPRA objectives to demonstrate how IT-related strategies and programs contribute specifically to the achievement of agency goals or show the allocation of related resources. Finally, in response to our observation regarding NASA’s lack of explanations in the 2002 plan for annual performance changes, NASA agreed that including such explanations in the plan would be useful and that it would characterize reasons for annual performance changes in its 2003 performance plan. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the NASA Administrator; and the Director, Office of Management and Budget. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-4841. Key contributors to this report were Richard J. Herley, Shirley B. Johnson, Charles W. Malphurs, Christina Chaplain, John de Ferrari, Diane G. Handley, and Fannie M. Bivins. The following table identifies the major management challenges confronting NASA, including the governmentwide high-risk areas of strategic human capital management and information security. The first column of the table lists the management challenges that we and/or NASA’s Office of Inspector General (OIG) have identified. The second column discusses the extent to which NASA’s fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and the OIG identified. Of the agency’s fifteen major management challenges, its performance plan has (1) goals and measures that are directly related to thirteen of the challenges; (2) a goal and measure indirectly applicable to one challenge; and (2) no goals and measures directly related to one of the challenges. Some of the NASA performance plan’s goals and measures we discuss may not track specifically with the key considerations of NASA OIG’s management challenges since the challenges themselves were presented in a broad context. GAO has performed reviews affecting a number of the areas mentioned. This appendix highlights the results of our assessments, where applicable. | GAO reviewed the following key outcomes in National Aeronautics and Space Administration's (NASA) fiscal year 2002 performance plan: expanding scientific knowledge of the Earth's system, expanding the commercial development of space, and deploying and operating the International Space Station. GAO found that NASA has improved its fiscal year 2002 performance plan and responded to recommendations by GAO and others to make its plan more useful--particularly by providing more comprehensive explanations of how it plans to verify and validate performance data and by better explaining how its performance goals will benefit the public. NASA's annual performance goals appear to be objective and should help to measure progress toward the outcomes. However, the plan still does not explain the reasons for changes in performance goals. Not having these explanations could hinder assessments of NASA's performance. |
TCB is usually defined broadly to include all types of development assistance that positively affect a country’s ability to secure benefits from international trade. Such assistance includes addressing the regulatory environment for business, trade, and investment; constraints such as low capacity for production and entrepreneurship; and inadequate physical infrastructure, such as poor transport and storage facilities. (See app. III for a detailed list of TCB category definitions in the U.S. government TCB database.) USAID’s TCB goal is to increase the number of developing countries that are harnessing global economic forces to accelerate growth and increase incomes. A variety of U.S. agencies have a role in providing TCB assistance. In fiscal year 2012, according to the U.S. government TCB database, a total of 19 organizations obligated funding for TCB-related activities. The roles and responsibilities of four key agencies involved are described below: USAID: One of USAID’s core development objectives is to promote sustainable, broad-based economic growth by helping developing countries increase their exports through trade capacity building. As outlined in its March 2003 document, Building Trade Capacity in the Developing World, USAID aims to achieve its TCB goal by supporting participation in trade negotiations, implementation of trade agreements, and economic responsiveness to trade opportunities. USAID plans, funds, and implements TCB activities at both the agency and country levels. According to USAID’s 2003 TCB strategy, USAID should take a primary role in coordinating assistance among agencies engaged in TCB activities. In fiscal year 2012, USAID obligated about $418 million for TCB-related activities worldwide. State: Under its strategic goal of promoting economic growth and prosperity, State has committed to supporting the negotiation and implementation of trade agreements. State’s Trade Policy and Programs staff help countries advance global, regional, and bilateral trade initiatives, including free trade agreements (FTA) and World Trade Organization (WTO) initiatives. In fiscal year 2012, State obligated about $143 million for TCB-related activities worldwide. MCC: As we reported in 2011, MCC conducts TCB-related activities— mostly associated with infrastructure development—that support its broader strategic and agency mission goals. However, MCC does not have a specific TCB mission or strategic plans and goals relating specifically to TCB. In fiscal year 2012, MCC obligated about $351 million for TCB-related activities worldwide. USTR: USTR does not implement or fund any TCB programs but leads trade negotiations that may create demand for TCB assistance or may result in agreements that create opportunities for TCB to improve the ability of the recipient to benefit from its provisions. USTR also plays an advisory role to agencies with programmatic responsibilities, informing those agencies about TCB needs or opportunities related to trade initiatives or negotiations and needs that might emerge related to USTR’s broader responsibilities for U.S. international trade policy. Sixteen other organizations also obligated about $80 million in TCB- related assistance in fiscal year 2012. See figure 1 for illustrative examples of TCB activities that agencies conducted in the countries we visited during our fieldwork. For the two most recent years for which data are available (fiscal years 2011 and 2012), USAID TCB-related obligations totaled more than $1 billion, making USAID the agency that contributed the largest amount during that period. Some obligations reflect agencies’ provision of infrastructure and development projects that had trade-related effects— and were therefore counted as TCB—but were conducted to fulfill broader objectives. For example, while USAID reported more than $1 billion in TCB-related obligations for fiscal years 2011 through 2012, the trade and investment program area of USAID’s budget for those years consisted of a total of about $348 million. Over the past 5 years, USAID, State, and MCC provided a total of about $6.7 billion in TCB-related assistance (see fig. 2). In 2003, USAID issued a formal strategic plan on TCB—Building Trade Capacity in the Developing World—to focus its TCB efforts and guide the selection of new activities. The plan calls for USAID’s TCB projects to support the three priority areas of helping countries participate in trade negotiations, implement trade agreements, and take advantage of trade opportunities. The strategy was developed partly in response to the Doha Development Agenda and U.S. commitments to increase global economic growth through free markets and free trade, according to USAID officials. Among other things, the strategy defines overall TCB priorities and includes discussion of agency-wide and country-level TCB strategies; discusses specific considerations that influence the agency’s TCB approach, including labor and environment issues, and negotiations concerning trade agreements; provides information on TCB categories and definitions and USAID’s discusses coordination with other U.S. agencies on TCB activities, calling for USAID to take a primary role in coordination assistance among all the agencies providing TCB assistance to developing countries. Among the four key agencies that we reviewed, USAID is the only one that has issued a formal strategy focused entirely on TCB. In response to continued congressional interest in oversight, we undertook reviews of U.S. TCB activities and issued reports in 2005 and 2011. In our 2005 report, we recommended that USTR and USAID develop a cost-effective strategy to monitor and measure program results and to evaluate the effectiveness of U.S. TCB assistance. In response, USAID in consultation with USTR developed a multicountry evaluation to measure the effectiveness of U.S. TCB assistance that was issued in November 2010. In our 2011 report, we recommended that the Administrator of USAID publicly report identified limitations and key distinctions in the definitional categories of TCB assistance in the U.S. government TCB database. (For more information about the TCB database and definitional categories, see app. III.) Beginning in 2011, USAID streamlined and clarified the definitions of TCB categories to facilitate reporting and improve transparency. This change was reflected in the “technical notes” section of the TCB database. According to USAID officials, development and implementation of TCB activities in the field are guided more by country-specific strategies that incorporate country needs, circumstances, and priorities than by USAID’s 2003 TCB strategy. This approach is consistent with guidance provided by the TCB strategy, as well. Specifically, USAID’s TCB strategy states that the selection and prioritization of TCB activities at the country level will continue to be determined by missions’ country-specific strategic plans and resources. USAID officials also stated that in countries associated with specific trade negotiations or agreements, TCB activities are also derived from the needs identified through those negotiations or agreements. The main strategy document that guides USAID activities in the field, including TCB activities, is the missions’ Country Development Cooperation Strategy (CDCS), according to USAID officials. USAID policy requires most USAID missions to prepare a CDCS, which is a 5-year strategy that serves as the basis for the mission’s assistance planning, budgeting, and resource allocation and is based on country needs and U.S. priorities. It is developed in consultation with partner country governments and citizens, civil society organizations, the private sector, multilateral organizations, other donors, and other USG agencies. USAID officials at the USAID Mission in Ethiopia stated that the mission’s CDCS is the main strategy guiding their TCB activities. For example, Ethiopia’s CDCS calls for TCB-related activities under its objective of increasing economic growth with resiliency in rural Ethiopia. This objective focuses on strengthening agricultural value chains—the process or activities by which relevant firms add value to a product—by increasing the availability of market-based information, among other things. The objective also focuses on improving private sector competitiveness through efforts such as trade and customs reform. The Agribusiness and Market Development Project is an example of TCB activities in Ethiopia that were guided by this objective. The Agribusiness and Market Development project has activities aimed at improving the global competitiveness of selected value chains for products such as sesame, chickpeas, and coffee, and increasing private sector access to finance and investment. To help identify TCB needs and provide further strategic guidance for their development of specific TCB programs, USAID missions also use ongoing trade negotiations—such as bilateral trade agreements or World Trade Organization (WTO) accession—and commitments made under existing trade agreements. During our fieldwork, USAID officials in both Vietnam and Laos reported that development and implementation of the mission’s TCB activities were guided by needs identified by USAID and the host government during the negotiation and implementation of trade agreements and WTO accession. Specific examples of TCB assistance that was guided by these events are Vietnam’s Support for Trade Acceleration Projects (STAR I and STAR II), which ran from 2001-2010. STAR I and II provided technical assistance to the Vietnamese government to facilitate revision of its commercial laws, legal procedures, transparency, and appeals processes to meet requirements under the U.S. and Vietnam bilateral trade agreement and the WTO. According to USAID officials, a large portion of the agency’s TCB assistance is provided as a component of large development programs with their own strategies, goals, and objectives. These large programs provide TCB as a means to achieving other development objectives, such as food security, adaptation to climate change, or democracy and governance, and are therefore guided by strategies and policies directed at those objectives. We found examples of such programs in the African countries we visited, Tanzania and Ethiopia. USAID’s officials in the East Africa and Tanzania missions reported that most of the TCB-related activities in Tanzania are part of the “Feed the Future” initiative and are therefore guided by USAID’s Feed the Future strategy for the country. An example of such activities is the Staples Value Chain Development project in Tanzania. This project includes activities aimed at improving the competitiveness and productivity of maize and rice value chains in Tanzania, and facilitating improved domestic and regional trade.activity is guided by the Feed the Future Strategy but also clearly facilitates trade and thus has TCB components. A USAID official reported that because TCB assistance is often a component of large development programs, USAID’s total reported TCB assistance deliberately includes a broad range of activities to capture all types of U.S.-provided TCB assistance. The official stated that a large portion of USAID’s total reported TCB assistance is for non-TCB focused development projects that have TCB-related effects. USAID officials reported that in some cases TCB needs to be woven into other development projects as there is no dedicated funding source for TCB activities. For example, USAID mission officials in Ethiopia reported that they work TCB into broader agriculture and other development programs because they have no dedicated funding for specific TCB programs. The 2003 TCB strategy identifies priorities for TCB that USAID officials told us are still relevant but does not reflect changes in the TCB environment that have occurred over the past decade. The strategy, while not directive, is intended to provide guidance, context, and options to help operating units understand their specific roles related to TCB, according to USAID officials. For example, agency-level strategies, such as the TCB strategy, should be incorporated into missions’ CDCS, according to USAID guidance on mission-specific strategies. According to USAID officials, the priorities presented in the TCB strategy—participation in trade negotiations, implementation of trade agreements, and economic responsiveness to opportunities for trade— are still relevant and cover all TCB activities although the strategy has not been updated since 2003. USAID officials also noted that the strategy is supplemented with guidance related to specific TCB activities and trade agreements. However, since the strategy was developed, the TCB environment in which USAID operates has changed significantly. For example, the total number of free trade agreements the United States has entered into has increased from 3 in 2003 to 14 as of May 2014, and the number of trade and investment framework agreements signed by the United States increased from 19 in 2003 to 50 as of May 2014. In addition, according to USAID, most of the developing countries it has worked with have become WTO members. It is generally accepted that strategies should be periodically updated to reflect the current environment. For example, according to USAID’s guidance, its mission country development cooperation strategies are only 5-year strategies. We also note that the Government Performance and Results Act Modernization Act of 2010 requires agencies to update and revise their strategic plans at least every 4 years. In addition, desirable characteristics of a national strategy include discussion of the current operating environment. Moreover, a multicountry evaluation of USAID’s TCB assistance, released in 2010, stated that the usefulness of USAID’s 2003 TCB strategy diminishes as time passes and the base of empirical literature on TCB and U.S. development policy evolves. The evaluation recommended that USAID update the 2003 strategy to reflect the latest developments and findings on trade facilitation and other determinants of developing country export performance. Given the changes that have occurred over the past 11 years, USAID’s 2003 TCB strategy is outdated in several areas. For example, The coordination section of the strategy does not include all agencies now providing TCB assistance. The number of agencies involved in providing TCB increased from 15 in 2003 to 19 in 2012, but the coordination section of the strategy does not reflect that change. For example, the strategy does not discuss how USAID is to coordinate with MCC, the second-largest contributor of TCB assistance in fiscal year 2012, since MCC was established after 2003. Some trade initiatives discussed in the strategy are no longer current. The strategy refers to a number of outdated initiatives, including the proposed Free Trade Area of the Americas, for which negotiations ended in 2005 with no agreement. It also refers to a number of potential trade agreements that have since been completed, including the Dominican Republic-Central American Free Trade Agreement and the U.S.–Morocco Free Trade Area. The strategy does not reflect changes in emphasis placed on TCB priorities. Changes since 2003 in the emphasis, or importance, USAID places on each priority are not reflected in the strategy. For example, USAID reported that it has placed more emphasis recently on trade facilitation initiatives, such as streamlining customs clearance procedures and increasing transparency. USAID has also reported utilizing fewer resources on the priority of participation in trade negotiations in recent years, conducting fewer activities related to WTO accession because many of the developing countries USAID has worked with have become WTO members. The TCB database categories of TCB activities, included as an appendix to the strategy, have changed. The original list of categories of TCB activities provided in the strategy’s appendix no longer match up exactly with the current database categories that USAID uses. USAID streamlined the categories in fiscal year 2011, resulting in fewer overall. The strategy does not incorporate lessons learned from over 10 years of TCB assistance. For example, the strategy does not reflect changes in USAID’s approaches to providing TCB assistance since 2003, and it does not include lessons learned identified in the 2010 multicountry evaluation of TCB assistance. USAID officials in Washington, D.C., told us that although they have had discussions about updating the strategy, they have not updated it because they question the costs and benefits of a new strategy given that trade resources are declining and because the priorities presented in the strategy still remain relevant, in their view. A USAID official reported that the focus in recent years had been on supporting ongoing field programs and that these efforts took precedence over updating the TCB strategy. USAID officials also reported that they believe an update to the existing strategy would have limited impact, largely serving to maintain the status quo, since the priorities have remained the same and all activities still fit under the strategy. However, we previously found that assessing the current environment has a critical impact on the success of strategic planning. Further, even though USAID reports that trade resources are declining, it continues to commit significant resources, obligating over $1 billion for TCB-related activities in fiscal years 2011 and 2012. TCB also contributes to meeting goals outlined in USAID and State’s Joint Strategic Plan. Given the changes in the TCB environment since 2003, updating the strategy to reflect those changes could put USAID missions in a better position to select and implement TCB activities. Moreover, an updated strategy could provide USAID missions with important information on changing priorities and lessons learned from evaluations and other assessments, which could also help guide their investments in TCB activities. The outdated nature of some parts of the strategy and the fact that it was released over 10 years ago may also limit its use. Multiple USAID officials we met with in the field were not aware that the strategy existed and did not use it. The number of agencies involved in TCB, and its crosscutting nature, calls for collaboration and coordination to ensure that TCB assistance is meeting U.S. objectives. A USAID official reported that USAID involved relevant agencies in the development of the 2003 TCB strategy to achieve interagency buy-in. However, several other agencies, primarily MCC, have since begun providing TCB assistance. In the absence of an updated strategy, these agencies may be less aware of USAID’s TCB priorities and may miss opportunities to leverage resources and ensure that their activities complement USAID’s efforts. The 2003 strategy calls for USAID to be the primary coordinator for U.S. government TCB efforts, and we found that USAID headquarters staff participate in coordinating bodies, such as interagency working groups, and maintain ongoing discussions with relevant counterparts to coordinate TCB activities. One coordinating body USAID uses is the Trade Policy Staff Committee (TPSC), a USTR-chaired interagency working group that includes a broad range of stakeholders, meets multiple times a year, and has subcommittees focused on development and TCB. According to a USTR official, the TPSC’s subcommittees provide channels for USAID to identify developing country trade capacity needs and opportunities. For example, USAID participates in the TPSC Development and Trade Capacity subcommittee, which focuses on topics such as WTO policy and agreements. In this forum, USAID may discuss needs associated with WTO accession with USTR and other agencies to see if an acceding developing country needs help understanding or meeting requirements. The subcommittee communicates informally and meets on an ad hoc basis, but USAID relies on it as a vehicle to identify ways agencies can leverage TCB resources, according to officials. The USAID Standards Alliance is an example of project-level coordination. The Alliance involves U.S. government trade and regulatory agencies, as well as the private sector, to address trade barriers. Officially introduced in November 2012, the Standards Alliance is a public-private partnership between USAID and the American National Standards Institute, a private non-profit organization whose membership is made up of businesses, professional societies, trade associations, standards developers, and consumer and labor organizations. The Alliance provides capacity-building assistance to developing countries specifically related to the implementation of the WTO Technical Barriers to Trade Agreement. According to USAID, assistance aims to help developing countries improve the quality and safety of the products they export abroad and increase exports, while reducing costs and bureaucratic hurdles. In addition, Standards Alliance activities are implemented in collaboration with USTR and draw heavily on expertise and technical support from other U.S. agencies including the Department of Commerce/National Institute of Standards and Technology and the Consumer Product Safety Commission. In 2013, USAID worked with the Standards Alliance to conduct workshops in Peru that brought together industry representatives and government officials to discuss U.S. and Peruvian experiences and perspectives related to standardization and regulatory practices. About 130 individuals took part in the event, representing a mix of stakeholders in government, industry, testing and certification bodies, and academia. USAID also reports using other mechanisms, such as shared management structures and cross-agency agreements, to facilitate TCB coordination. For example, the Administrator of USAID sits on the MCC Board of Directors and contributes to the approval of MCC compacts. According to USAID officials, this shared management structure is intended to ensure stakeholder involvement and provides an opportunity to leverage resources on TCB matters. In addition, USAID is represented on the board of the Overseas Private Investment Corporation (OPIC) and contributes to the approval of OPIC deals, which may have TCB-related components. The USAID Office of Development Credit and OPIC also hold quarterly meetings to discuss project plans and other issues of relevance to both units to help ensure relevant skills and expertise are being utilized for TCB and other activities, according to USAID. In addition to shared management structures, a USAID official reported that it has agreements and works with other agencies that play relatively small roles in TCB, such as the Trade and Development Agency and the Departments of Justice and Labor. Involving stakeholders in this way facilitates leveraging TCB resources, according to a USAID official. For example, in Bangladesh, USAID and the Department of Labor are cooperating on implementation of a program to improve labor conditions, promote independent and democratic labor unions, and support labor rights and worker representation. Such activities fall in line with USAID’s TCB objective to address labor issues related to trade and to leverage expertise from across the U.S. government. In addition to using mechanisms that facilitate coordination, officials at USAID, State, and USTR, told us that they discuss TCB matters frequently and on an ad hoc basis, particularly at the staff level. As TCB needs, opportunities, or issues arise, relevant stakeholders communicate informally to coordinate, according to a USTR official. For example, State’s Office of Multilateral Trade Affairs monitors trade-related activities and considers how State could help with TCB. The office coordinates with USAID and USTR counterparts and may suggest TCB opportunities related to free trade agreement (FTA) negotiations or WTO obligations in certain countries, according to a State official. A USTR official also told us that USTR shares its annual TCB priorities with USAID and State using an unofficial document that outlines an inventory of possible efforts. This document provides a notional framework that facilitates informal dialogue and stakeholder involvement. In countries we visited, including Ethiopia, Tanzania, Vietnam, and Laos, we found that USAID uses certain formal mechanisms, such as working groups, and informal dialogue with stakeholders to coordinate TCB. According to officials we met, in most locations, USAID participates in a formal embassy working group that addresses TCB matters and involves a range of stakeholders, sometimes including the Chief of Mission. Specifically, in countries we visited, we found the following: Ethiopia. According to officials we met with, USAID coordinates TCB activities primarily through the Economic Growth and Development working group, which meets monthly. This interagency group, one of five created about a year ago under an ambassadorial directive to address the highest-level embassy priorities, covers TCB matters and related topics, such as WTO accession progress and upcoming visits of U.S. government or private sector personnel. Generally, the Chief of Mission and the USAID Mission Director or their deputies report that they attend the meeting, along with representatives from the Foreign Agricultural Service, USAID, and State. Embassy officials told us that this formal channel, along with frequent informal communication among stakeholders, helps ensure a whole-of- government approach to TCB. Tanzania. According to officials we met with, USAID and its counterparts discuss TCB and development issues at the embassy’s biweekly Governance and Prosperity Working Group. The group includes participants from State, USAID, and MCC, and covers ongoing TCB initiatives and development issues. USAID and relevant agencies also may discuss TCB at the embassy’s Power Africa working group, a regular meeting that focuses on power and energy sector projects, which may have trade-related effects such as improving competitiveness or capacity. Officials told us that informal communication about TCB matters occurs frequently on an ad hoc basis as well, helping to ensure that resources and expertise across agencies are fully leveraged. Vietnam. According to officials we met with, the main mechanism through which TCB is coordinated is the interagency commercial task force, which convenes stakeholders from USAID, State, and other relevant agencies weekly. The embassy Deputy Chief of Mission sets the agenda for the task force and participants provide updates on active projects, issues, and policy considerations related to TCB and commercial activities. According to embassy officials, TCB is a key embassy priority and requires a broad range of engagement with the host government, so coordination is critical. In addition, these officials noted that USAID and its counterparts interact frequently and maintain good working relationships, providing an appropriate environment to enable stakeholders to leverage the range of TCB resources at the embassy. Laos. According to officials we met with, USAID coordinates its TCB activities in Laos from its regional office in Thailand. USAID does not have a mission in Laos, although it does have a USAID representative (a U.S. Personal Services Contractor) located in the U.S. embassy in Laos who helps to coordinate USAID regional and bilateral projects, including TCB activities. According to a USAID official, TCB efforts in Laos are relatively small and focused, so formal coordination structures are not necessary or practical. Instead, this official explained that the USAID representative regularly liaises with the State Economics Officer, who meets with the Ambassador weekly. Although no official working group has been established, the Economic Officer, Ambassador, and USAID representative meet at least quarterly to discuss TCB assistance. These discussions help to ensure conflicts are avoided and resources are used effectively. Because economic development and TCB projects have been key priorities of the embassy in Laos in recent years, USAID communicates frequently with State counterparts in-country, according to an official. In addition, another official told us that USAID and State worked together to develop the Integrated Country Strategy for Laos, helping to ensure that TCB fit into a common set of interagency goals and priorities. At the headquarters level, USAID officials noted that they have introduced a web-based tool and taken various actions, such as committing to regularly identify best practices, based on the multicountry evaluation completed in 2010. In 2013, USAID launched a web-based tool, called “Project Starter,” designed to bring together guidance, templates, examples, and checklists to facilitate monitoring, evaluation, and adaptive learning in TCB activities. From January 1, 2014, through March 31, 2014, the Project Starter website had nearly 4,000 visitors, including a mix of technical, program, and managerial staff from headquarters and the field. In our 2011 report, we found that USAID had commissioned a limited number of evaluations of TCB programs to assess long-term results, in part because of the resources required and the difficulty of evaluating impact in the area of TCB. We recommended that USAID develop a written plan for using the 2010 multicountry evaluation and conduct further evaluations on an ongoing basis. As a result of our recommendation, USAID committed to conduct every 5 years an analysis of evaluations completed by missions, to identify best practices for trade projects. However, USAID has not incorporated lessons learned identified in the 2010 multicountry evaluation into its TCB strategy. USAID officials at headquarters also told us that they provide guidance to field staff to facilitate TCB program management, leveraging best practices and lessons learned from evaluations and experience. For example, subject matter experts at headquarters regularly respond to requests for assistance from field staff on designing or evaluating projects. In addition, headquarters staff helped in the design and award of TCB activities in Jordan, Laos, Ghana, Afghanistan, Tanzania, Nigeria, Pakistan, and USAID regional missions in Thailand and West Africa. These activities account for approximately 60 percent of USAID fiscal year 2013 trade funds, according to USAID. In addition, headquarters officials report they provided support for evaluations, results frameworks, and strategy development, to field staff in Morocco, Liberia, West Bank- Gaza, Kenya, and South Africa. Abroad, USAID field staff have used evaluations and assessments of projects to manage current and future TCB efforts in the countries we visited. During fieldwork, we found that USAID field staff had conducted evaluations and assessments of specific activities and used the information to make changes to ongoing or planned projects as follows: Ethiopia. USAID conducted a cost-benefit analysis of its support for agricultural value chain projects in 2012, designed to improve productivity and efficiency, among other things. USAID officials told us that based on the analysis, they changed the investment allocation while projects were under way to favor those with better potential for results. In addition, USAID’s Ethiopia CDCS calls for elevating the role of evaluations and impact assessments as learning tools throughout the project cycle for continuous updating and promotion of best practices. Officials indicated that the CDCS is the central guiding document for USAID TCB and other activities in-country and that, in accordance with this directive, continuous improvement processes are part of regular operations. Tanzania. In 2011, USAID’s East Africa Trade Hub in Kenya—a regional mission that plays a significant role in managing TCB projects in Tanzania—conducted an assessment of its activities and made changes as a result, according to an official. For example, the assessment recommended that the Trade Hub work with the embassies in the countries it covers, including Tanzania, to develop a shared vision and to facilitate mutually beneficial relationships. According to a USAID official, the Trade Hub responded by taking steps to address this issue. Specifically, the Trade Hub committed to send a person to visit each embassy in the region at least once a year to discuss goals and priorities, and it provided additional country- specific information on its website so stakeholders could see and monitor its activities anytime. The assessment also recommended that the Trade Hub shift to assisting the East Africa Community, a regional economic group that includes Tanzania, and national authorities with the implementation of policies and procedures. As a result, the Trade Hub reallocated some of its TCB resources away from supporting trade-related business development activities to supporting the East Africa Community, its five members, and regional trade associations focused on regional policy implementation, according to a USAID official. Vietnam. USAID conducted a performance evaluation of STAR, its main TCB activity, in 2011. One of the evaluation’s recommendations was that USAID should focus its future efforts on trade facilitation activities, such as improving customs, transportation, and the commercial regulatory environment. According to the evaluation, this would benefit the trading community and help the host government implement and enforce some of the legal and regulatory reforms put in place over recent years with the support of STAR. A USAID official told us that in response to the recommendation, they designed TCB activities to focus on leveraging relationships with the host government’s customs ministry. Specifically, they targeted support toward streamlining customs procedures and regulations with the aim of helping the government and business build on prior reforms. A USAID official also told us that one lesson learned over the years was that involving multiple host government ministries in TCB projects may slow progress. To address this weakness, USAID shifted its approach to focus on a limited number of areas with committed stakeholders while maintaining an ad hoc mechanism for other ministries as needs and opportunities arise. Laos. Because USAID does not have a presence in Laos, officials told us that they regularly monitor TCB activities in Laos from the regional office in Thailand, working in close coordination with the USAID representative in Laos and embassy staff. They also indicated that early TCB work in Laos focused on establishing a basic legal framework to meet WTO requirements, but as a result of monitoring and evaluating progress, USAID shifted the focus of assistance to facilitating implementation of the laws and regulations put in place. A USAID official also told us that this year they are updating a Lao Business and Commercial Law and Institutional Reform assessment that will provide a baseline for the new TCB assistance for Laos. The U.S. government continues to demonstrate a commitment to providing TCB for developing countries, and over the years multiple U.S. agencies have provided this assistance across numerous types of trade and development programs. Given the diffused nature of TCB assistance, Congress has expressed concern about which agency is ultimately accountable for TCB activities. While no single agency is responsible for this type of assistance, USAID has a 2003 TCB strategy that defines overall TCB priorities and discusses coordination with other U.S. agencies. In addition, in fiscal year 2012, USAID provided about $418 million for TCB, the most funding of any U.S. government agency. Therefore, it is important that USAID’s strategy reflect the current TCB environment. USAID officials asserted that the priorities in the strategy are still relevant, but we observed that neither USAID nor other agency officials we met with in the field used, or in some cases even knew about, the strategy. Moreover, we found that the strategy may not be as useful as it could be because it is outdated in several areas. For example, the coordination section of the strategy does not include all agencies now providing TCB assistance, the trade initiatives discussed in the strategy are no longer current, and the categories of TCB activities identified in the strategy have changed. Updating the strategy to reflect the current TCB environment would provide USAID an opportunity to examine its TCB priorities in light of changes to the environment and ensure that the priorities are indeed still relevant. A strategy update would also raise awareness of the agency’s TCB priorities in relevant missions and offices. In the absence of a government-wide TCB strategy, an effort to update the USAID TCB strategy could also bring together other agencies involved in providing TCB assistance, helping to ensure interagency buy- in on current TCB priorities and goals. To help ensure that USAID’s 2003 TCB strategy is as useful as it could be for informing TCB activities, we recommend that the Administrator of USAID update the strategy to reflect the current TCB environment. We requested comments on a draft of this report from the Administrator of USAID, the Secretary of State, the Chief Executive Officer of the Millennium Challenge Corporation, and the U.S. Trade Representative. On July 15, 2014, USAID indicated via e-mail that it agreed with the recommendation and intended to explore options for providing additional guidance to operating units. USAID further indicated that the additional guidance might take the form of drafting a new TCB strategy, updating or amending the old strategy, issuing a separate policy paper, contributing to a broader U.S. government-wide strategy, or some other type of guidance. In its written comments, reproduced in appendix IV, MCC stated that it was in the process of updating the MCC data in the U.S. government TCB database. We did not receive comments from State or USTR. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Administrator of USAID, the Secretary of State, the Chief Executive Officer of the Millennium Challenge Corporation, the U.S. Trade Representative, 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) 512-8612 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. In fiscal years 2011 through 2012, the U.S. Agency for International Development (USAID) and the Department of State (State) together obligated a total of approximately $1.36 billion for trade capacity building (TCB) related activities. Of that amount, USAID obligated approximately $1.1 billion with funds from seven different accounts. State obligated the approximately $262 million remaining, with funds from seven funding accounts. (See table 1 below.) USAID officials noted that there is no dedicated funding account or directive for TCB activities. USAID officials also noted that the majority of the TCB assistance reported in the database are obligations for development projects that had trade-related effects—and were therefore counted as TCB—but were conducted to fulfill other development objectives. Our objectives were to (1) determine the extent to which the U.S. Agency for International Development’s (USAID) 2003 strategy guides USAID’s trade capacity building (TCB) activities; (2) describe methods USAID uses to coordinate TCB efforts with other U.S. government agencies at home and abroad; and (3) describe how, if at all, USAID has used TCB evaluations in its program and project management. For fiscal years 2011 and 2012, we also identified the appropriations accounts from which USAID and State allocated funds for TCB-related activities and the obligations from these accounts for such activities (see app. I). To address these objectives, we built upon information collected for our 2005 and 2011 reports on TCB and analyzed data from the U.S. government TCB database. Data from the TCB database were previously deemed reliable for our 2005 and 2011 reports on TCB. We identified limitations to the TCB database in our 2011 report on TCB, including that the database did not adequately explain significant factors driving changes in the composition of TCB funding over time. For this 2014 report on TCB, we assessed data from fiscal years 2008 through 2012 and determined that the data were sufficiently reliable to identify TCB funding by agency, country, and category. Furthermore, in assessing the data, we interviewed key USAID officials and the contractor responsible for administering the database, and reviewed supporting documentation. We primarily focused on TCB activities that USAID conducted because USAID provided the most funding of all U.S. agencies for TCB activities in 2012. However, we also sought the views of three other entities in our review regarding coordination with USAID on TCB activities: (1) the Department of State (State) because it is committed to supporting the negotiation and implementation of trade agreements and thereby helps countries advance trade initiatives; (2) the Millennium Challenge Corporation (MCC) because it conducts TCB-related activities that support its broader strategic and agency mission goals, although it does not have a specific TCB mission; and (3) the Office of the U.S. Trade Representative (USTR) because of its role in leading trade efforts. In conducting our work, we analyzed strategic, budget, and programmatic documents describing these agencies’ TCB-related funding and activities. We also reviewed the 2010 TCB evaluation, along with evaluations and assessments of TCB projects in the countries we visited. We conducted fieldwork in Vietnam, Laos, Thailand, Ethiopia, Tanzania, and Kenya. We selected these countries because they (1) had a cross-section of projects that would allow us to compare and contrast different types of activities, (2) are at different stages of economic development, (3) are in diverse geographic regions, or (4) had signed an MCC compact and received MCC-related TCB assistance. In each country, we analyzed agencies’ strategy, coordination, and program management efforts. We also interviewed agency officials, host government officials, and contractors implementing TCB activities in the field, and visited TCB project sites. Our findings from these countries are not generalizable to the universe of all USAID TCB activities. To determine the extent to which USAID’s 2003 strategy guides USAID’s TCB activities, we reviewed the strategy and relevant documents and interviewed USAID officials in Washington, D.C.; Ethiopia; Kenya; Laos; Tanzania; Thailand; and Vietnam about what they use to guide TCB activities in their countries. We also interviewed these officials about the agencies’ TCB priorities and the relevance of the strategy to the current environment. We reviewed guidance on strategic planning from several sources, including USAID’s internal policies, the Government Performance and Results Act Modernization Act of 2010, and prior GAO work on strategic planning, for criteria on updating strategies. We did not review USAID’s 2003 TCB strategy using the full set of six characteristics of a national strategy that we identified in prior work; we determined that many of the characteristics may not apply to it because it is only an agency document and not a national strategy. However, in reviewing the strategy we did examine the extent to which it reflected the current TCB environment, because the strategy was developed over 10 years ago. TCB environment refers to the context—including all conditions, entities, events, and surrounding factors—in which agencies providing TCB assistance are operating. To describe methods USAID uses to coordinate TCB efforts with other U.S. government agencies at home and abroad, we interviewed officials from USAID, State, USTR, and MCC, and analyzed relevant documents. During our fieldwork, we also spoke with officials from other agencies, such as the U.S. Department of Agriculture and the Department of Commerce, which in some cases play a role in TCB activities. We used GAO’s prior work on collaboration, which reports on collaboration mechanisms and key practices for consideration, to develop our interview questions for USAID and other agency officials, and to help identify actions USAID has taken. However, we did not formally assess USAID’s TCB coordination with other agencies. To describe how, if at all, USAID has used TCB evaluations in its program and project management, we interviewed officials from USAID and analyzed relevant documents. During our fieldwork, we reviewed evaluations and assessments of projects in the countries we visited. We did not assess the challenges or effectiveness of TCB measurement and evaluation processes in place because we addressed these issues in our 2011 report. We conducted this performance audit from October 2013 to August 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As we previously noted in 2011, the U.S. Agency for International Development (USAID) collects data to identify and quantify the U.S. government’s trade capacity building (TCB) activities in developing countries through an annual survey of agencies on behalf of the Office of the U.S. Trade Representative (USTR), and oversees a contractor that collects and maintains the survey results in the U.S. government’s publicly available online TCB database. The data gathered from this survey are used to inform and respond to inquiries from Congress, the executive branch, the general public, and multilateral organizations such as the World Trade Organization (WTO). USTR officials use the database regularly and, according to these officials, it is a useful tool for identifying U.S. agencies’ TCB activities and funding in a particular country or region, as well as the full extent of assistance the U.S. government provides in that area. In addition to administering this survey, USAID is also tasked with reviewing completed survey forms, and checking for accuracy and consistency in the reporting of funding and their allocation into TCB categories. A variety of U.S. agencies have a role in providing TCB assistance, including the Departments of State, the Army, Labor, the Treasury, and Commerce; the Millennium Challenge Corporation (MCC); and USAID. USAID’s survey asks agencies to place their TCB assistance into a range of categories and estimate funding obligated for each category. The U.S. government TCB database defines the categories as follows: WTO Accession and Compliance: Support for countries to benefit from membership in the WTO, or to understand fully the benefits of membership. Also assistance to help countries in the WTO accession process meet the requirements of accession. In addition, it includes assistance to meet the obligations of the specific WTO agreements, except for Agreements on Sanitary and Phyto-sanitary Measures (SPS), Technical Barriers to Trade (TBT), Intellectual Property Rights (IPR), and Trade-related Procurement. Those four agreements benefit from TCB in their own categories. Sanitary and Phyto-Sanitary Measures: Support for countries to meet SPS standards for trade and to comply with the WTO Agreement on SPS. Technical Barriers to Trade: Support for countries to reduce technical barriers to trade and to comply with the WTO Agreement on TBT. Intellectual Property Rights: Support for countries to observe international standards on intellectual property rights protection and to comply with the WTO Agreement on IPR. Trade-related Procurement: Support for increased trade related to government procurement and to comply with the WTO Agreement on Government Procurement. Trade Facilitation: Generally defined as assistance in lowering the costs of engaging in, or eliminating obstacles to international trade flows. Trade facilitation (for 2011) is a sum of the following four subcategories: Customs Operations: Includes assistance to help countries modernize and improve their customs offices. Trade Promotion: Includes assistance to increase market opportunities for developing country and transition economy producers. Enterprise Development: Includes support to improve the associations and networks in the business sector, as well as to enhance the skills of business people engaged in trade. Also includes assistance to help countries acquire and use information technology to promote trade by creating business networks and disseminating market information. FTAs and Trade Integration: Includes assistance to an FTA, an Trade-related Labor: Assistance to support the enforcement of labor standards and worker rights, development of trade unions and dispute resolution mechanisms, strategies for workforce development and worker training, and the elimination of child labor. Financial Sector: Support for financial sector work, monetary and fiscal policy, exchange rates, commodity markets, and capital markets. Trade-related Infrastructure: Assistance to establish trade-related telecoms, transport, ports, airports, power, water, and industrial zones. Environmental Sector Trade and Standards: Assistance to establish environmental standards or to promote environmental technology. Competition Policy, Business Environment, and Governance: Support for the design and implementation of antitrust laws, as well as of laws and regulations related to investment and investor protections. Includes support for legal and institutional reform to improve governance and make policies more transparent, and assistance to help the different agencies of a host country government function more effectively in the trade policy arena. Trade-related Agriculture: Support for trade-related aspects of the Trade-related Services: Includes support to help developing countries and transition economies increase their flows of trade in services. Services Trade Development is a sum of two subcategories: Trade-related Services (excluding tourism): Assistance to help countries develop trade in services in all sectors other than tourism, including financial services, energy, transportation, and education. Trade-related Tourism: Assistance to help countries expand their international tourism sectors, including eco-tourism. Other Trade Capacity Building: A small number of TCB activities did not fit in any of the above categories, including some activities of a crosscutting nature. These were categorized as “Other Trade Capacity Building.” In addition to the contact listed above, Juan Gobel (Assistant Director), Marc Castellano, Debbie Chung, Martin De Alteriis, Ernie Jackson, Michael Maslowski, and Oziel Trevino made key contributions to this report. | Since at least 2001, the United States has provided TCB assistance to developing countries to help them participate in and benefit from global trade. Multiple agencies provide this assistance, which may include support for World Trade Organization accession, customs procedures improvement, or development of infrastructure such as ports and roads. In this report, GAO focuses primarily on USAID because it provided the most funding for TCB in fiscal year 2012 and has a formal strategy focused entirely on TCB. GAO was asked to review the strategy, which is more than a decade old. GAO was also asked to examine USAID efforts to coordinate TCB activities to ensure that the United States is fulfilling its commitment in the most effective way. In this report, GAO (1) determines the extent to which USAID's 2003 strategy guides USAID's TCB activities and (2) describes methods USAID uses to coordinate TCB efforts with other U.S. government agencies at home and abroad. GAO analyzed agency documents, interviewed relevant officials, and conducted fieldwork in six countries in Africa and Asia, selected for their diverse stages of development and geographic locations. The U.S. Agency for International Development's (USAID) 2003 trade capacity building (TCB) strategy does not directly guide TCB activities, and parts of the strategy no longer reflect the current TCB environment. USAID's TCB activities are primarily guided by country needs and many of these activities are elements of large development projects that have their own objectives. According to USAID, the strategy's priority areas—participation in trade negotiations, implementation of trade agreements, and economic responsiveness to opportunities for trade—remain relevant. However, some parts of the strategy are not current. For example, the strategy does not include discussion of how USAID should coordinate with the Millennium Challenge Corporation (MCC), which did not exist in 2003 and is a major TCB contributor (see figure). USAID officials told GAO that they had not updated the strategy because they questioned the costs and benefits of doing so given that trade resources were declining and they believed the priorities presented in the strategy were still relevant. However, USAID is still committing significant resources to TCB, and TCB contributes to goals outlined in USAID and the Department of State's joint strategic plan. USAID's TCB strategy may not be as useful as it could be for informing TCB activities because parts of it are no longer current. Moreover, directives, such as those in the Government Performance and Results Act Modernization Act of 2010, can serve as guidance for periodic updating of strategic plans. The 2003 strategy calls for USAID to be the primary coordinator for U.S. government TCB efforts, and GAO found that USAID coordinates TCB activities at home and abroad using a range of methods, including structured and informal dialogue between stakeholders. Specifically, USAID staff report that they participate in interagency working groups and maintain ongoing discussions with counterparts from other agencies to coordinate TCB activities. For example, at headquarters USAID participates in the Trade Policy Staff Committee, an interagency working group that includes a range of stakeholders and has subcommittees on development and TCB. In the countries GAO visited, GAO found that USAID missions coordinate TCB through formal mechanisms, such as working groups, as well as informal communication. GAO recommends that the Administrator of USAID update the 2003 TCB strategy to reflect the current TCB environment. USAID agreed with the recommendation. |
The policy of the U.S. government is to have in place a comprehensive and effective program to ensure continuity of essential federal functions under all circumstances. COOP planning is an effort conducted by individual agencies to fulfill that policy and assure that the capability exists to continue essential agency functions across a wide range of potential emergencies. COOP has been closely associated with continuity of government programs, which are meant to ensure the survival of our constitutional form of government. COOP was first conceived during the Cold War to ensure that the U.S. government would be able to continue to function in case of a nuclear war. However, in the wake of the demise of the Soviet Union and the reduced threat of nuclear attack in the early 1990s, COOP planning languished. Following the World Trade Center bombing in 1993 and the Oklahoma City bombing in 1995, COOP as a program was given renewed attention based on the recognition of emerging threats and the need to continue essential functions of the federal government in an all-hazards environment, which includes acts of nature, accidents, technological emergencies, and incidents related to military or terrorist attacks. A series of Presidential Decision Directives (PDD) was issued that began to link programs for terrorism, critical infrastructure protection, and COOP. In addition, as we approached the turn of the century, federal agencies also dealt with the Year 2000 computer problem by developing business continuity and contingency plans to ensure program delivery in the event of a technology failure or malfunction. Federal COOP efforts have evolved by building upon the planning for each of these events that focused on protecting critical infrastructure, both physical systems and cyber-based systems. The events of September 11, 2001, highlighted in dramatic fashion the vulnerabilities agencies face in each of these areas and focused new attention on the effects such events have on agencies’ most important assets—their people, or human capital. FEMA, the General Services Administration (GSA), and OPM are the three agencies that have the most direct impact on individual agency efforts to develop viable COOP capabilities. PDD 67, which outlined individual agency responsibilities for COOP, identified FEMA as the executive agent for federal COOP planning. As executive agent, FEMA has the responsibility for formulating guidance, facilitating interagency coordination, and assessing the status of COOP capability across the federal executive branch. PDD 67 also required GSA to work with FEMA in providing COOP training for federal agencies and to assist agencies in acquiring alternate facilities. In addition, the Federal Management Regulation requires GSA to lead federal Occupant Emergency Program (OEP) efforts, which are short-term emergency response programs that establish procedures for safeguarding lives and property during emergencies in particular facilities. As the President’s agent and advisor for human capital matters, OPM has been actively involved in federal emergency preparedness efforts. OPM has issued a series of emergency preparedness guides for federal managers, employees, and their families; issued a number of memorandums relating to planning, preparedness, and the flexibilities available to agencies in emergency situations; and held emergency planning and preparedness forums to help agencies select emergency personnel. In addition, FEMA, GSA, and OPM collaborate to implement the Federal Workforce Release Decision and Notification Protocol when emergency situations occur in the Washington, D.C., area. The current literature indicates, and experts that we consulted confirmed, that the immediate response to a crisis should give priority to securing the safety of all employees and addressing the needs of employees who perform or directly support essential operations. For example, the standard for emergency management and business continuity, which was developed by the National Fire Protection Association and endorsed by FEMA, recommends that organizations include the following priorities in their continuity program: ensuring the safety and health of employees, establishing critical functions and processes, and identifying essential representatives. Consequently, the experts said that these priorities have received most of the human capital attention in continuity efforts for both the private and public sectors, including federal agencies. Appropriately, organizations focus on minimizing the loss of life and injuries, which is key to all other recovery efforts. Such efforts commonly include first aid training, evacuation plans and drills, and dismissal policies. Organizations also focus on identifying the core group of employees that will establish and maintain essential operations as dictated by an organization’s mission. Organizations, for example, commonly identify leadership structures to manage crisis response. Even so, experts noted that organizations vary widely in their effectiveness in addressing these priorities. The continuity process, however, extends beyond the goals of life safety and the performance of essential operations. The experts identified a number of human capital considerations beyond these goals that are not well addressed. For example, the priorities discussed above do not address human capital considerations for employees who are not involved in providing essential functions. Such employees would be associated with efforts to fully resume all other operations and represent the majority of an organization. The experts identified two principles that should guide actions to more fully address human capital considerations applicable to all continuity planning and implementation efforts. The first is recognizing and remaining sensitive to employees’ personal needs during emergencies when shaping the appropriate organizational expectations of employees. The emergency event that activates continuity plans may also cause emergency events in the personal lives of individual employees. Similar to an organization placing its highest priority on the safety and well-being of its employees, employees may have high-priority responsibilities to others. These personal responsibilities may limit employees’ ability to contribute to mission accomplishment until these other obligations are satisfied. The second principle experts identified is maximizing the contributions of all employees, whether in providing essential operations or resuming full services. This should be done within the limits of an employee’s ability to contribute given the situation, as described in principle one, and within the limits of the organization to use those contributions effectively. According to the experts, the experience of organizations during emergencies has been that employees remain motivated to contribute to organizational results, which is increasingly felt the longer the emergency continues. Enabling employees to contribute promotes more effective delivery of essential operations and more rapid resumption of full operations. In addition, in extreme disruptions of employees’ personal circumstances, providing purposeful activities helps avoid the debilitating affects of a disruption on employees, including job-related anxiety and post–traumatic stress disorder. The experts we interviewed also identified six organizational actions to enhance continuity planning and implementation efforts, listed in figure 1. Each of these actions is described in more detail below. Our past work has shown that the demonstrated commitment of top leaders is perhaps the single most important element of successful change management and transformation efforts. Effective continuity efforts have the visible support and commitment of their organization’s top leadership. According to the experts, traditional continuity planning focuses on the operations side of recovery and often overlooks human capital considerations. As such, it is important for top leadership to ensure that the appropriate balance is achieved in considering physical infrastructure, technology, and human capital. In providing leadership prior to the emergency, leaders demonstrate their commitment to human capital by establishing plans that value the organization’s intention to manage employees with sensitivity to their individual circumstances, recover essential operations on a priority basis, and resume other operations as quickly as possible. Organizational leaders show commitment to continuity planning by allocating resources and setting policies that effectively meet the organization’s continuity needs. The experts told us that committed leaders provide sufficient funding and staff to conduct planning and preparation efforts effectively. While the resources needed vary from location to location within an organization, the experts said that organizations should have enough resources available to develop effective plans, test critical systems, train all staff, and conduct simulation exercises. Committed top leadership also ensures that clear policies and procedures are in place for all aspects of continuity to ensure that quick and effective decisions are made during times of emergencies. Those policies and procedures should be fair, shared with employees and their representatives in advance of an emergency, and able to be consistently applied to all employees. Experts and union leaders we met with agree that the cooperation and input from all components within the organization, including employees and their representatives, is important in developing these policies. Following a disruption to normal operations, top leadership sets the direction and pace of organizational recovery. According to the experts, top leadership sets direction by providing the legitimate and identifiable voice of the organization for employees to rally around during tumultuous times. An expert from Marsh & McLennan Companies, Inc., a company that lost over 350 people in the World Trade Center on September 11, 2001, noted that in the aftermath of an emergency there is a fundamental need for a strong, visible leader to provide constant reassurance. The expert added that “employees need to know that someone is in control, even if the leaders do not know all the answers.” In addition, top leaders set the pace of organizational recovery by providing leadership to both the management team leading recovery of essential operations and the management team leading the resumption of all other operations. As we have previously reported, effective organizations integrate human capital approaches as strategies for accomplishing their mission and programmatic goals. According to the experts, strategic decisions made to improve day-to-day operations, including human capital approaches, and those made to build continuity readiness are not exclusive of one another and may have synergies. For example, early in 2001, GAO made the business decision to supply all of its analysts with laptop computers for financial reasons and to provide employees with flexibility in carrying out their work. That business decision, however, also contributed to our ability to quickly adapt to unforeseeable circumstances in October 2001. In response to the release of anthrax bacteria on Capitol Hill, we opened our doors to the 435 members of the House of Representatives and selected members of their staffs. Over 1,000 GAO employees were immediately able to make use of their laptops to work from alternate locations. Consequently, we minimized the disruption to our operations and assisted the House of Representatives in continuing its operations. To take advantage of such synergies, the experts said that decisions regarding continuity efforts should be integrated with broader business decision making. The integration of continuity planning with broader decision making helps to ensure that the direction of all efforts is consistent and provides mutual benefits. In a limited resource environment, consideration of how continuity investments benefit other program efforts also helps to strengthen the business case for human capital investments that are meant to improve continuity capabilities, day-to-day operations, or both. The importance of communication cannot be overstated. According to the experts, two-way communication with employees, their representatives, and other stakeholders is key to building relationships and partnerships that can facilitate organizational recovery efforts. We have also previously reported that communication is most effective when done early, clearly, often, and is downward, upward, and lateral. According to a senior National Treasury Employees Union (NTEU) official, the union was able to capitalize on ongoing two-way communications with the Internal Revenue Service’s (IRS) regional leadership to provide members with information following the September 11, 2001, attacks. For example, during the recovery efforts, the union provided supplementary channels for communicating with employees, including daily joint messages from the IRS Regional Director and the NTEU Chapter President. In addition, when the local New York office reopened on September 20, 2001, both the NTEU National President and the IRS Commissioner greeted employees at the door. From the union’s perspective, communication efforts such as these helped to provide reassurance and support as well as to maintain employee trust. According to experts, roles, responsibilities, and performance expectations must be communicated to all employees, and their representatives, prior to a disruption to promote the efficient and effective use of all of an organization’s human capital assets. Early communication enables employees to assess and communicate to the organization any personal circumstances that may limit their ability to carry out those roles. The experts and union officials whom we spoke with agreed that in some cases, more formal communication vehicles, such as memorandums of understanding or addenda to collective bargaining agreements, may be necessary to negotiate changes or clarify roles and responsibilities in continuity plans. Because effective emergency two-way communication depends greatly on technology, alternate and redundant communication infrastructures are necessary. In addition to technological vulnerabilities that can render different methods of communication useless, people frequently do not remain tied to the contact number or location listed in emergency records. To address these challenges, Macy’s West, for example, has built an alternate emergency communication system that serves as an employee message retrieval system. The system, which is based outside of the region in case the local phone networks are overloaded, allows (1) the leadership of Macy’s West to leave messages with instructions for employees, (2) family members to leave messages for employees, and (3) employees to leave messages for their loved ones. Our past work has shown that organizations should consider making targeted investments in human capital approaches, such as training and development. According to the experts, training and development programs related to continuity efforts can help to raise awareness among all employees. The Social Security Administration (SSA), for example, has developed a video-training course to provide an overview of COOP, which includes an introduction from the Commissioner explaining why COOP is so important, a discussion of SSA’s critical workloads and how they would be processed during a disruption, and references to federal guides and information. The experts noted that less formal approaches, such as continuity planning awareness weeks, could also help to raise awareness. Our recent work has indicated that training and development programs build skills and competencies that enable employees to fill new roles and work in different ways, which helps to build organizational flexibility. According to experts, the training and development goals for employees assigned to the team that performs essential operations differ from those for the employees assigned to the team that is responsible for resuming all other organizational operations. The goal for the team that performs essential operations is to achieve “critical depth,” which occurs when an adequate number of employees are available to staff each critical function, in the event that a member of the team expected to perform that function is unavailable. Organizations can build critical depth in various ways, including using exercises that simulate an emergency to train backup employees alongside employees who have primary responsibility for an essential operation, or allowing backup employees to perform the operation while the primary employees oversee and critique their performance. In addition, critical depth can be built through succession planning. To be effective for this purpose, however, the scope of succession planning is extended to recognize that there is no time to develop successors in an emergency and incrementally increase levels of authority as an individual matures in a position. Therefore, organizations may have to plan to use predecessors to a position, including retirees, as successors. With regard to the team that is responsible for resuming all other organizational operations, experts said that the training and development goal is to build sufficient breadth to enable members to contribute to resumption efforts in a variety of ways. For example, development programs requiring employees to rotate within an organization to learn a variety of positions, potentially at a variety of locations, contribute to critical breadth. We have previously reported that developmental assignments place employees in new roles or unfamiliar job environments in order to strengthen skills and competencies and broaden their experience. Effective training and development initiatives also help to foster a culture that is characterized by flexible employees who are empowered to make effective decisions independently. According to experts, such a culture is often critical to agency recovery and resumption efforts. Experts from Marsh & McLennan Companies, Inc., reported that effective decision- making abilities could be developed through formal training about the parameters in which employees are empowered to make decisions and on- the-job experiences demonstrating how employees can exercise authority in making decisions that manage, rather than avoid, risk and are focused on achieving results. The events of September 11, 2001, give ample evidence of the dedication and flexibility of federal, state, and local government employees in providing services to the American public. Disruption of normal operations challenges an organization to use this dedication and flexibility to its advantage, especially with regard to employees associated with the resumption of all operations that are not considered essential. According to the experts, organizations may use approaches such as telework and geographic dispersion, which includes regional structure, to increase the ways in which employees may contribute. As OPM guidance has underscored and presenters at a recent conference held by the International Telework Association and Council noted, telework is an important and viable option for federal agencies in COOP planning and implementation efforts, especially as the duration of the emergency event is extended. However, to make effective use of telework, experts told us that organizations should identify those employees who are expected to telework during a disruption and communicate that expectation to them in advance. In addition, organizations should provide teleworkers with adequate support in terms of tools, training, and guidance. Geographic dispersion can also provide a way for employees associated with resumption activities to continue their normal functions albeit at or through other locations. For example, SSA recognizes that its field structure enables the agency to make use of both multiple locations and telework in providing its employees ways to contribute because most field functions can be transferred fairly easily from one location to another in the same region or performed remotely with laptop computers. Based on these efforts, SSA does not envision a scenario in which its field employees would not contribute to their normal functions for more than 72 hours. Employees demonstrate their flexibility by a willingness to contribute to the organization in roles that may be unusual. According to the experts, flexible employees contribute as best they can usually in the following sequence: (1) providing support to the team performing essential operations, if needed; (2) continuing to contribute to their normal mission- related functions; (3) performing an alternate contribution for their organization; or if none of these can be accomplished, (4) volunteering in their communities as a direct form of public service. Federal employees may have additional opportunities to contribute to not only their own agencies’ operations but also other agencies’ operations in serving the American people. In addition, a recent memorandum from OPM recognizes the value of federal employees contributing to the general public through community volunteer service in the range of alternative contributions. Employees associated with providing essential operations may be working under unusual pressures for extended periods of time, and organizations need to consider ways to sustain these efforts. The experts recommend that if the circumstances of the emergency continue long enough to raise concerns about burnout, organizations consider providing opportunities for working in shifts; rotating assignments among team members; providing relief through the use of qualified employees associated with resumption activities; reemploying retirees; or utilizing employees from stakeholder or networked organizations, such as suppliers or contractors. According to the experts, the ability of organizations to match staffing requirements with available skills and abilities could be enhanced through various initiatives, such as job banks, skill profile databases, and pre- arranged partnerships with other organizations or community service organizations. For example, job banks that detail additional jobs that may be required during an emergency but are not considered essential could allow employees to preselect alternate contributions that they would be able to perform. In the federal government, agencies could establish their own job banks; form interagency partnerships that link the potential needs of several agencies; and create a cache for volunteer opportunities, possibly tied to the Citizen Corps. Organizations with databases that collect employee knowledge, skills, and abilities (KSA)—even those KSAs outside the scope of an employee’s normal functions—may complement the job banks by allowing organizations to match available KSAs with the unmet needs of the organization. An evaluation process that explicitly identifies and disseminates lessons learned during disruptions, or simulations of disruptions, promotes learning among all of an organization’s human capital assets and helps to improve organizational performance. An organization that is committed to learning has an inclusive and supportive process and a framework designed prior to a disruption to gather important data. According to experts, organizations committed to learning will ensure that those employees who are key to the recovery and resumption efforts are involved in the formal evaluation process in a timely manner and will seek the input from as many other employees as possible. Such an inclusive environment will enable the organization to discover valuable lessons learned by employees in unusual circumstances. In addition, conducting evaluations in a “no- blame,” nonattribution atmosphere and taking organizational ownership of any problems that might be identified increases the openness with which participants are willing to share their experiences. To encourage such an environment, FEMA officials told us that the agency’s Office of National Security Coordination has recently implemented a reporting system that allows any employee to identify lessons learned anonymously during an emergency, instead of waiting for the formal review process. Our past work has shown that human capital approaches are best designed and implemented based on data-driven decisions. According to experts, having a framework prior to a disruption helps to gather data important to evaluating the effectiveness of human capital approaches during a disruption. Some measures that they suggested include number of employees contributing to mission-related outcomes each day; degree of contribution (e.g., part time or full time); location of employee when contributing (e.g., at alternate facility or home); type of contribution (e.g., performing same function, performing an alternate function within the department, working with another department, or volunteering); or obstacles to contribution (e.g., organizational or personal). Once identified, it is important for the lessons learned during the evaluation to be made explicit and then widely disseminated. According to experts, the manner and formality of documentation and dissemination, however, depend on the situation or needs of the organization (e.g., after- action reports, detailed analyses, executive summaries, video tapes, CDs, or Web-based reports). There are unique opportunities in the federal government for agencies to share explicit lessons learned both internally and with other federal agencies and stakeholders. For example, following the September 11, 2001, attacks, senior Department of Housing and Urban Development officials asked the New York Acting Regional Director to recount her experiences and lessons learned in front of a video camera. The accounts were edited down into a 30-minute video entitled Thinking the Unthinkable: Preparing for Disaster. That video has been used within the department as a training aid and has been shared with over 50 federal agencies with the help of the Washington, D.C.–based interagency COOP Working Group (CWG) and the FEBs in cities across the United States. In Canada, Emergency Management Alberta (EMA) employs a centralized Disruption Incident Reporting System for all government agencies, which is accessible via the Internet, to obtain timely and accurate reporting of all disruptions and “most importantly, ensure lessons learned can be documented for follow-up.” EMA has also created a Lessons Learned Warehouse Web site to share continuity lessons learned in all aspects of crisis management. As we stated earlier, the human capital considerations related to life safety and the needs of personnel performing essential operations have largely been addressed in continuity efforts. In the federal government, FEMA has issued guidance that has addressed these considerations and has recognized the opportunity to more fully address human capital considerations in its guidance. In addition, OPM has issued federal emergency preparedness guidance relevant to COOP that also addresses these considerations and is working with FEMA to more fully address human capital considerations in federal guidance. As executive agent for federal COOP planning, FEMA issued FPC 65 in July 1999 as the primary guidance for agencies developing viable COOP plans. According to FPC 65, the purpose of COOP planning is to facilitate the performance of agency essential functions for up to 30 days during any emergency or situation that may disrupt normal operations. The five objectives of a viable COOP plan listed in FPC 65 are (1) ensuring the continuous performance of an agency’s essential functions during an emergency; (2) protecting essential facilities, equipment, records, and other assets; (3) reducing or mitigating disruptions to operations; (4) reducing loss of life, minimizing damage and losses; and (5) achieving a timely and orderly recovery from an emergency and resumption of full service to customers. The guidance subsequently limits a COOP event to one that significantly affects the facilities of an organization and requires the establishment of essential operations at an alternate location. Therefore, as FEMA recognizes, the guidance does not apply to significant disruptions that leave facilities intact, such as a severe acute respiratory syndrome (SARS) outbreak that could lead a large number of employees to avoid congested areas, including their workplaces. Although a people-only event such as SARS would significantly disrupt normal operations, the current COOP guidance would not apply because facilities would remain available. FPC 65 also indicates that the guidance is for use at all levels and locations of federal agencies. FEMA officials acknowledge, however, that the priority of COOP planning to date has been focused on agency headquarters located in the Washington, D.C., area. Given the purpose of COOP and the nature of its objectives, the human capital considerations FEMA included in the guidance primarily relate to life safety for all employees and addressing the needs of employees performing essential operations. For example, the guidance states that one of the objectives of COOP is “reducing loss of life, minimizing damage and losses.” It also refers to the legal requirement that each agency develop a viable OEP, which is a short-term emergency response program that establishes procedures for safeguarding lives and property during emergencies in particular facilities. FPC 65 more broadly defines life safety by including a statement related to the need to consider the health and emotional well-being of employees on the essential operations team. Also, with respect to employees who perform essential functions, the guidance directs agencies to designate an emergency team, delegate authority, establish orders of succession, develop communication plans, develop training programs, and provide for accountability. FEMA officials we spoke with recognized that there is a need to go beyond the human capital considerations that have already been addressed within federal COOP guidance in order to achieve the full range of COOP objectives. Specifically, FEMA officials agreed that it was particularly important to deal with the human capital considerations inherent to the resumption activities needed to fully recover from an emergency. To that end, FEMA has taken several steps to more fully address these considerations. FEMA has worked with a subcommittee of the interagency CWG—a Washington, D.C.–based group that meets monthly to discuss issues related to COOP—to rewrite the federal COOP guidance. The agency has requested OPM’s assistance in incorporating these considerations into the new federal COOP guidance. FEMA has also worked in cooperation with us as we developed this report. As a result, FEMA officials told us that the draft guidance would include an augmented discussion of human capital considerations. OPM has also recognized the value of human capital in COOP and other emergency preparedness efforts. In a memorandum to the heads of executive departments and agencies, for example, the Director of OPM stated that “the American people expect us to continue essential government services without undue interruption, no matter the contingency, and Federal agencies must have the human resources to accomplish their missions, even under the most extreme of circumstances.” To this end, OPM has established the Emergency Preparedness subcommittee of the Chief Human Capital Officers Council that is tasked with recommending policy changes, legislative changes, or other strategies for moving the issue forward. In addition, OPM has initiated several efforts to help agencies address human capital considerations in emergency preparedness related to life safety and the needs of personnel performing essential operations, as well as to recognize the role that employee organizations and unions could play in supporting those efforts. These initiatives are important first steps; however, they do not fully address human capital considerations related to the resumption of all agency operations that are not considered essential. With regard to providing for the safety of all employees, OPM has issued four preparedness guides to educate federal employees, managers, and their families on how to protect themselves from a potential biological, chemical, or radiological release, whether accidental or intentional. The guides also spell out the responsibilities of the federal government and individual agencies to protect employees in the event of an emergency. In addition to the guides, OPM has addressed safety issues by revising the Washington, D.C., area emergency dismissal protocols for federal employees and contractors, in conjunction with FEMA and GSA; issuing memorandums to all agency heads detailing the “minimum obligations” agencies have to secure the safety of federal workers; issuing two emergency preparedness surveys through which federal agencies could report on their progress in ensuring the safety of their employees; and highlighting the role that Employee Assistance Programs can play in responding to employee needs in emergency situations. Related to providing for the needs of employees performing or supporting essential operations, OPM has led two forums focusing on emergency employee designations and the flexibilities that are available to agencies in emergency situations. OPM has also issued a series of memorandums outlining the existing human resource management flexibilities that agencies might employ in emergency situations. Other human capital flexibilities that are available to agencies in nonemergency situations, such as telecommuting, job sharing, and flexible scheduling, might provide additional assistance during emergency situations and are detailed in OPM’s handbook, Human Resources Flexibilities and Authorities in the Federal Government. (See app. II for a list of human resource flexibilities that agencies may use to respond to emergency situations.) In addition to initiating efforts to address several human capital considerations, OPM has highlighted the need to work with and through employee organizations and unions in developing and executing emergency management strategies. For example, OPM has held meetings with federal labor union leaders and employee associations to discuss relevant employee safety issues and has specifically encouraged agencies to work with and share information on preparedness efforts with applicable employee organizations and unions. Senior union officials whom we spoke with from the American Federation of Government Employees and NTEU agreed that it is important for unions to be involved throughout COOP planning and implementation efforts. These officials also stated that unions could be resources for agencies in communicating with employees, both before and during an emergency, as well as in engaging employees in recovery and resumption efforts. Although FEMA heads the interagency CWG to help coordinate COOP efforts in the Washington, D.C., area, the efforts of this group do not apply to the over 80 percent of federal employees who work outside of this area. While not specifically tasked with coordinating COOP efforts, FEBs are generally responsible for improving coordination among federal activities and programs in major metropolitan areas outside of Washington, D.C. Under the direction of OPM, FEBs support and promote national initiatives of the President and the administration and respond to the local needs of federal agencies and the community. OPM officials have recognized that FEBs can add value to regional emergency preparedness efforts, including COOP, as vehicles for communication, coordination, and capacity building. To make use of these capabilities, OPM has provided FEBs with relevant emergency preparedness materials, encouraged FEBs to focus on preparedness issues in their regions, requested that FEBs test their emergency communication plans, and encouraged FEBs to inform OPM of any emergency-related events affecting federal employees in the regions. The FEBs that we visited are already playing active roles in regional emergency preparedness and COOP efforts. For example, the Chicago FEB has established committees to deal with Disaster Recovery Planning and Emergency Release; surveyed its member agencies to determine the status of COOP planning in the region; sponsored a series of seminars, in conjunction with GSA and FEMA, on topics related to COOP, sheltering in place, and national security; participated in regional exercises, such as TOPOFF 2; and sponsored a COOP exercise to provide agencies with a forum for validating their COOP plans, policies, and procedures. The Cleveland FEB has established an emergency preparedness committee to promote awareness and preparation, developed an Employee Emergency Contingency Handbook that provides basic actions to respond to emergencies that may be encountered by federal employees, and helped to make training available to all federal agencies. The Philadelphia FEB has held several COOP workshops for agencies and regularly shares relevant information with agency officials via e-mail. In addition, these FEBs play a role in developing and activating dismissal and closure procedures for federal agencies located in their particular regions. Although both OPM officials and the FEB officials whom we spoke with recognized that FEBs can add value in coordinating emergency preparedness efforts, including COOP, and that such a role is a natural outgrowth of general FEB activities, a specific role and responsibilities have not been defined. In addition, the current structure in which FEBs operate results in differing capacities of FEBs across the nation. For example, each agency’s participation in FEB activities is voluntary. Consequently, FEBs can only make recommendations to agencies, without the ability to require agency compliance. Also, FEBs rely on host agencies for funding, which results in variable funding and staffing from year to year and across FEBs. OPM has recognized that the roles and capacities of FEBs vary across the nation and has established an internal working group to study the strengths and weaknesses of FEBs and develop recommendations for improving their capacity to coordinate in regions outside of Washington, D.C. According to OPM, such efforts in regard to local emergency preparedness and response will include improving dissemination of information and facilitation of COOP training and tabletop exercises; addressing the implications for strategic human capital management in continuing the operations of the federal government (e.g., alternate work schedules, remote work sites, and telecommuting capabilities); and developing strategies to better leverage the network of FEBs to help departments and agencies implement their initiatives. More fully addressing human capital considerations in emergency preparedness guidance, including COOP, could improve agency response capabilities to large-scale COOP emergencies or situations; could help minimize the impact of more common, yet less catastrophic disruptions (e.g., snowstorms and short-term power outages); and is consistent with building a more flexible workforce, which would enhance ongoing efforts across the federal government to create more responsive human capital management systems. As FEMA works to update its federal COOP guidance and OPM continues to issue emergency preparedness guidance relevant to COOP, several areas require attention to more fully address human capital considerations relevant to COOP. By limiting COOP to situations that necessitate moving to an alternate facility, agencies are left without guidance for situations in which an agency’s physical infrastructure is unharmed, but its employees are unavailable or unable to come to work for an extended period of time. While facilities and technology would not be affected by such situations, the unavailability of people to contribute to mission-related outcomes could cause a significant disruption to normal operations. Emergency guidance, including COOP, generally does not extend beyond consideration of life safety and the needs of employees performing essential operations. Therefore, the guidance excludes most agency employees—those who would be associated with resuming all other operations. FEBs are uniquely situated to improve coordination of emergency preparedness efforts, including COOP, in areas outside of Washington, D.C. However, the context in which FEBs currently operate, including the lack of a clearly defined role in emergency preparedness efforts, including COOP, and varying capacities among FEBs, could lead to inconsistent levels of preparedness across the nation. We recommend that the Secretary of Homeland Security direct the Under Secretary for Emergency Preparedness and Response to take the following two actions: Expand the definition of a COOP event in federal guidance to recognize that severe emergencies requiring COOP implementation can include people-only events. Complete efforts to revise federal COOP guidance to more fully address human capital considerations by incorporating the six organizational actions identified in this report. We recommend that the Director of OPM take the following two actions: Develop and provide additional emergency preparedness guidance to more fully address human capital considerations by incorporating the six organizational actions identified in this report. Determine the desired role for FEBs to play in improving coordination of emergency preparedness efforts, including COOP, and identify and address FEB capacity issues to meet that role. It would be appropriate for FEBs to be formally incorporated into federal emergency preparedness guidance, including COOP guidance, for areas outside of Washington, D.C. We provided the Secretary of Homeland Security and the Director of OPM a draft of this report for review and comment. We received written comments from the Under Secretary of Emergency Preparedness and Response on behalf of FEMA and the Department of Homeland Security, which are reprinted in appendix III. In his comments, the Under Secretary stated that the draft accurately addressed human capital considerations relevant to COOP guidance and coordination and noted that DHS and FEMA will continue to work with OPM and other federal partners to improve the federal government’s COOP plan by incorporating our recommendations in its federal COOP guidance. In addition, he stated that FEMA would expand its efforts with its regional offices and FEBs to improve coordination of COOP programs at the regional level. The Director of OPM also provided written comments, which are reprinted in appendix IV. In her comments, the Director noted her appreciation for our acknowledgement of the agency’s leadership role in addressing human capital considerations relevant to COOP planning. However, the Director of OPM stated that the agency has already carried out our recommendation to more fully address human capital considerations in emergency preparedness guidance, including COOP, by incorporating the key actions identified in the report. The Director provided numerous examples of actions OPM has taken to support emergency preparedness efforts, all of which she noted were influenced by the agency’s human capital framework. In addition, the Director also attached an enclosure to the agency comments that contain examples of OPM’s internal COOP-related efforts that she believes would be helpful to federal agencies. Most of the examples of emergency preparedness guidance that the Director of OPM provided were included in the draft report and deal largely with the human capital considerations related to life safety and the needs of personnel performing essential operations. While such initiatives are important first steps, there remain opportunities to improve OPM’s emergency preparedness guidance to include a fuller range of human capital considerations, particularly related to the resumption of all agency operations that are not considered essential. As such, our assessment of OPM’s guidance and our recommendation for the agency to develop and provide additional emergency preparedness guidance that incorporates the key actions identified in the report remain unchanged. With regard to our second recommendation for OPM to determine the desired role of FEBs in improving coordination of emergency preparedness efforts, including COOP, and address any resulting capacity issues, the Director of OPM stated that the leadership role the agency plays with respect to FEBs was not sufficiently developed in the report and she provided examples of OPM’s support for the FEB’s efforts. Most of the supporting examples that the Director provided were included in the draft report. Moreover, the additional examples generally do not address our larger point that the role of FEBs in coordinating emergency preparedness efforts, including COOP, needs to be clearly defined. As such, we maintain our conclusion that the context in which FEBs currently operate, including the lack of a clearly defined role in emergency preparedness efforts and the varying capacities among FEBs, could lead to inconsistent levels of preparedness across the nation. The Director of OPM suggested several clarifications to the report, which we considered and incorporated where appropriate. For example, she suggested both technical and substantive changes to a footnote describing Federal Executive Associations (FEA) and Federal Executive Councils (FEC). While we made technical changes in response to these comments, our work does not allow us to categorically exclude all FEAs and FECs as viable options for the coordination of emergency preparedness activities, as the Director suggested in her response. Instead, we recognize that any guidance provided to FEBs would likely be beneficial to FEAs and FECs despite their differences. The Director also provided additional details describing OPM’s internal working group that is studying the strengths and weaknesses of FEBs, and we have incorporated these details into the report. We are sending copies of this report to the Ranking Minority Member, Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia, Senate Committee on Governmental Affairs; the Chairman and Ranking Minority Member, House Committee on Government Reform; the Chairman and Ranking Minority Member, Subcommittee on Homeland Security, House Committee on Appropriations; the Chairman and Ranking Minority Member, Subcommittee on National Security, Emerging Threats, and International Relations, House Committee on Government Reform; and other interested congressional parties. We will also send copies to the Secretary of Homeland Security, the Under Secretary of Emergency Preparedness and Response and the Director of OPM. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me or William Doherty on (202) 512-6806. Key contributors to this report include Kevin J. Conway, Tiffany Tanner, Thomas Beall, Amy Choi, Amy Rosewarne, John Smale, and Michael Volpe. The objectives of this report were to identify the human capital considerations that are relevant to federal agencies’ continuity planning and implementation efforts; describe the continuity of operations (COOP) guidance provided by the Federal Emergency Management Agency (FEMA) and emergency preparedness guidance and activities of the Office of Personnel Management (OPM) to address human capital considerations relevant to COOP; and describe the role Federal Executive Boards (FEB) play, relevant to COOP, in coordinating efforts outside of the Washington, D.C., area. To address human capital considerations that are relevant to continuity planning and implementation efforts, we reviewed relevant literature, such as industry journals, federal guidance, and codes of standards on disaster/emergency management and continuity programs. Because the available literature was limited in its attention to human capital, we based our work primarily on semistructured interviews with experts from private sector businesses, federal government agencies, and public institutions. We first reviewed industry journals, magazines, and Web sites; queried state and international auditors; attended a national business continuity conference; and sought input from the National Academy of Public Administration (NAPA), the Private Sector Council (PSC), and FEMA to identify individuals or organizations with the relevant knowledge needed to address our first objective. We selected individuals or organizations that had one or more of the following characteristics: (1) experience responding to, recovering from, and resuming business activities following an emergency, from which human capital lessons may have been drawn; (2) experience incorporating human capital considerations into their organization’s continuity planning efforts; (3) specific human capital expertise that could be applied to continuity planning and implementation efforts; and (4) specific continuity expertise that is broad enough to identify those critical areas that require human capital attention. When an organization was selected, we then contacted the organization to identify the specific individuals who had the relevant expertise. On the basis of these characteristics and the input from NAPA, PSC, and FEMA, we selected organizations or individuals within organizations to obtain a diversity of views from both the public and private sector. Individuals from a total of 15 organizations, in addition to FEMA, provided their expertise in addressing our objective. The organizations include five federal agencies—the Centers for Disease Control and Prevention, the Department of Housing and Urban Development, the Department of Veterans Affairs, the General Services Administration, and the Social Security Administration; five private sector businesses—the Gillette Company, Lockheed Martin Corporation, Macy’s West, Marsh & McLennan Companies, Inc., and Science Applications International Corporation; and five public institutions—the Business Continuity Institute, the Disaster Recovery Institute International, Emergency Management Alberta (Canada), Clark-Atlanta University, and the University of Tasmania (Australia). We then conducted three cycles of work to identify the human capital considerations that are relevant to continuity, with each subsequent cycle building upon the information gathered in previous cycles. We adopted this approach because our initial conversations with experts indicated that a common perspective of the continuity process could help structure and focus our subsequent interviews with experts about the relevant human capital considerations. Cycle one involved conducting semistructured interviews with experts from FEMA and 5 of the 15 organizations. We asked each to describe a view of the entire continuity process from a human capital perspective. We used those descriptions to synthesize a framework that we then shared with each of the first cycle experts for comment. The experts generally agreed with the content of the framework and agreed that it would be useful in focusing subsequent interviews about human capital considerations. In the second cycle, we used this framework as a reference when conducting in-depth, semistructured interviews with experts from all 15 organizations and FEMA about the human capital considerations relevant to continuity. For the third cycle, we held a 1-day working group, in cooperation with FEMA, to more fully discuss the human capital considerations previously identified in cycles one and two. The interactive nature of the working group, which included a cross-section of the experts and additional representatives from GAO, helped to ensure that we had adequately captured the key considerations relevant to continuity. As a final check, we provided all of the experts with a summary document that included the statements used throughout this report and attributed to the experts. We asked the experts to review the statements for fundamental disagreement or fatal flaws. Almost all experts responded and generally agreed with our treatment of these issues. To supplement information we received in the three cycles, we held additional interviews with officials from OPM; representatives from the Chicago, Cleveland, and Philadelphia FEBs; and representatives from the National Treasury Employees Union (NTEU) and the American Federation of Government Employees (AFGE). We spoke with representatives of the FEBs because the FEBs’ role as coordinative bodies in regions across the nation gives them a unique view of federal emergency preparedness efforts outside of the Washington, D.C., area. We spoke with representatives from NTEU and AFGE because unions can play a key role in addressing human capital considerations. To describe the COOP guidance provided by FEMA and emergency preparedness guidance and activities of OPM to address human capital considerations relevant to COOP, we interviewed officials from both agencies. In addition, we reviewed and analyzed relevant documents. For example, we reviewed Federal Preparedness Circular 65, the primary guidance for federal executive branch COOP, to identify the human capital considerations that are included in federal COOP guidance. We also reviewed OPM publications, including four emergency preparedness guides and a series of memorandums that list available agency flexibilities in times of emergencies. To describe the role FEBs play, relevant to COOP, in coordinating efforts outside of the Washington, D.C., area, we held interviews with officials from OPM with responsibility for FEBs nationwide and representatives from the three FEBs discussed above. We conducted our work from February 2003 through December 2003 in accordance with generally accepted government auditing standards. OPM has issued a series of memorandums outlining the existing human resources management flexibilities that executive departments and agencies might employ in emergency situations with and without OPM approval. Other human capital flexibilities and programs, such as those detailed in OPM’s handbook, Human Resources Flexibilities and Authorities in the Federal Government, that are available to agencies in nonemergency situations may also provide additional assistance in responding to and recovering from COOP emergencies. For additional information on these flexibilities, OPM has advised that agency chief human capital officers, human resources (HR) directors, or both should contact their assigned OPM human capital officer. Employees are advised to contact their agency HR offices for assistance. A compilation of the emergency flexibilities outlined by OPM in its emergency guidance memorandums appears below. Agencies have the discretion, without OPM approval, to grant excused absence to employees who are prevented from reporting to work because of an emergency. The authority to grant excused absence also applies to employees who are needed for emergency law enforcement, relief, or recovery efforts authorized by federal, state, or local officials having appropriate jurisdiction and whose participation in such activities has been approved by the employing agency. Military leave under 5 U.S.C. § 6323(b) is appropriate for federal employee members of the National Guard or Reserves who are called up to assist in an emergency. Subject to approval by the President, OPM may establish an emergency leave transfer program, which is separate from the federal leave-sharing program, to assist employees affected by an emergency or major disaster. Under 5 U.S.C. § 6391, the emergency leave transfer program would permit employees in an executive agency to donate unused annual leave for transfer to employees of the same or other agencies who have been adversely affected by an emergency and who need additional time off work without having to use their own paid leave. If agencies believe there is a need to establish an emergency leave transfer program to assist employees affected by an emergency, they are to contact their OPM human capital officer. In certain emergency or mission-critical situations, agencies have the discretion, without OPM approval, to apply an annual premium pay cap instead of a biweekly premium pay cap, subject to the conditions set forth in 5 U.S.C. § 5547(b) and 5 C.F.R. § 550.106. In this regard, the agency head, his or her designee, or OPM may determine that an emergency exists. Agencies have the discretion, without OPM approval, to apply an annual cap to certain types of premium pay for any pay period for (1) employees performing work in connection with an emergency, including work performed in the aftermath of such an emergency, or (2) employees performing work critical to the mission of the agency. Such employees may receive premium pay under these conditions only to the extent that the aggregate of basic pay and premium pay for the calendar year does not exceed the greater of the annual rate for (1) General Schedule (GS)–15 step 10 (including any applicable special salary rate or locality rate of pay, or (2) level V of the Executive Schedule. In some emergency situations, agencies have the discretion, without OPM approval, to furlough employees, that is, to place them in a temporary status without duties and pay for nondisciplinary reasons. Under 5 C.F.R. § 752.404(d)(2), agencies are relieved of the requirement to provide employees advanced notice and an opportunity to respond when the furlough is based on “unforeseeable circumstances,” such as a sudden breakdown in equipment, an act of nature, or a sudden emergency requiring the agency to immediately curtail activities. Workers’ compensation benefits are available when federal employees are injured or killed while on duty. The Department of Labor may establish special procedures to provide direct assistance to affected employees and their families. To assist agencies in responding to employee needs during and after an emergency situation, OPM may establish special expedited arrangements for processing disability retirement applications; survivor benefits; and payments under the Federal Employees Group Life Insurance Program, currently administered by the Metropolitan Life Insurance Company. Under Section 651 of Pub. L. No. 104-208 (Omnibus Consolidated Appropriations Act, 1997), 5 U.S.C. § 8133 note, agencies have the authority, without OPM approval, to pay up to $10,000 to the personal representative of a civilian employee who dies in the line of duty. Agencies have the discretion, without OPM approval, to approve telecommuting arrangements and alternative work sites to accommodate emergency situations. According to OPM, one of the major benefits of the telework program is the ability of telework employees to continue working at their alternative work sites during a disruption to operations. In recognition of the growing importance of teleworkers in the continuity of agency operations, OPM states that agencies may wish to modify their current policies concerning teleworkers and emergency closures. Agencies may also wish to require that some or all of their teleworkers continue to work at their alternative work sites on their telework day during emergency situations when the agency is closed. Although agencies would not have to designate a teleworker as an emergency employee, OPM states that any requirement that a telework employee continue to work if the agency closes on his or her telework day should be included in the employee's formal or informal telework agreement. Under 5 C.F.R. § 213.3102(i)(2), agencies have the discretion, without OPM approval, to fill positions for which an emergency or critical hiring need exists; however, initial excepted appointments under this authority may not exceed 30 days and may be extended only for an additional 30 days. Such an extension may be made only if the appointee’s continued employment would be essential to the agency’s operations. Under 5 C.F.R. § 213.3102(i)(3), OPM may also grant agencies the authority to temporarily appoint individuals to the excepted service in positions for which OPM has determined that examination is impracticable (e.g., because of the time involved). For example, in the aftermath of the September 11, 2001, attacks, OPM granted agencies authority to fill positions affected by or that needed to deal with the attacks for up to 1 year, and later extended that authority. When OPM grants agencies the authority to appoint individuals under 5 C.F.R. § 213.3102, agencies, not OPM, are responsible for establishing the qualifications that an individual must have to fill the position. In addition, in accordance with 5 C.F.R. pt. 330, agencies are not required to comply with the regulations regarding the Career Transition Assistance Plan (CTAP), Reemployment Priority List (RPL), and Interagency CTAP (ICTAP) because these regulations do not apply to excepted appointments. Agencies have the discretion, without OPM approval, to use the authority granted by OPM under 5 C.F.R. § 213.3102 to fill senior-level positions, as well as positions at lower levels. Under appropriate circumstances, OPM may also authorize agencies to use a senior-level position allocation to appoint an individual under this section (5 C.F.R. § 319.104). Agencies have the authority to appoint candidates directly when OPM determines there is a critical hiring need, or a shortage of candidates, for particular occupations, grades (or equivalent), geographic locations, or some combination of the three. This authority can be governmentwide or limited to one or more specific agencies depending on the circumstances. OPM has granted governmentwide direct-hire authority for GS-0602 Medical Officers, GS-0610 and GS-0620 Nurses, GS-0647 Diagnostic Radiologic Technicians, and GS-0660 Pharmacists, at all grade levels and all locations, and for GS-2210 Information Technology Specialists (Information Security) positions at GS-9 and above, at all locations, in support of governmentwide efforts to carry out the requirements of the Government Information Security Reform Act and the Federal Information Security Management Act. OPM also approved a direct-hire authority that permits agencies to immediately appoint individuals with fluency in Arabic or other Middle Eastern languages to positions in support of the reconstruction efforts in Iraq. Agencies have the discretion, without OPM approval, to give individuals in the categories, occupations and specialties, and grades listed above competitive service career, career-conditional, term, temporary, emergency indefinite, or overseas limited appointments, as appropriate. In all cases, agencies must adhere to public notice requirements in 5 U.S.C. §§ 3327 and 3330 and ICTAP requirements. If agencies believe they have one or more occupations for which an agency- specific direct-hire authority may be appropriate in support of emergency relief and recovery efforts, they are to contact their OPM human capital officer. To meet a bona fide, unanticipated, urgent need, agencies have the authority under 5 C.F.R. § 317.601 to make Senior Executive Service limited emergency appointments of career employees, without OPM approval. OPM approval is required to appoint individuals who are not current career employees and OPM cannot delegate this authority; however, OPM will process such requests on a priority basis and will also consider temporary position allocations for agencies that identify the need as essential to deal with the emergency. Agencies have the discretion, without OPM approval, to employ retirees to deal with an emergency, to replace employees called to active duty military service, or both. Agencies may immediately offer reemployment to retirees under any applicable appointing authority. However, generally, dual compensation restrictions (e.g., 5 U.S.C. §§ 8344 and 8468) require agencies to reduce the pay of a federal civil service retiree by the amount of his or her annuity. For details, see the CSRS and FERS Handbook for Personnel and Payroll Offices, Chapter 100 – Reemployed Annuitants. OPM may waive these dual compensation restrictions and, upon request, may also delegate such authority to an agency head or designee to deal with emergency staffing requirements. See 5 C.F.R. pt. 553 for details. Dual compensation waivers cannot be approved retroactively. However, according to OPM guidance, annuitants who agree to work under salary offset pending a dual compensation waiver may be recognized for their special service by the agency through an individual cash award. Ordinarily, employees who resign or retire upon acceptance of a voluntary separation incentive payment (VSIP) (or buyout) can be reemployed only if they agree to repay the amount of that payment. However, upon agency’s request, OPM may waive the repayment requirement if the individual’s reemployment is necessary to deal with the emergency situation. (See 5 C.F.R. § 576.203(a)(1).) Persons being considered for VSIP repayment waivers must be the only qualified applicants available for the positions and possess expertise and special qualifications to replace persons lost or otherwise unavailable. Waivers may be limited by the agency’s specific statutory VSIP authority. Under 5 C.F.R. pt. 300, subpart E, agencies have the discretion, without OPM approval, to contract with private sector temporary employment firms for services to meet their emergency staffing needs. These contracts may be for 120 days and may be extended for an additional 120 days, subject to displaced employee procedures. Agencies have the discretion, without OPM approval, to make competitive service appointments of 120 days or less without regard to CTAP, ICTAP, or RPL eligibles. These programs do not apply to such appointments. See 5 C.F.R., pt. 330, Subparts F and G for CTAP/ICTAP conditions and 5 C.F.R. § 330.207(d) for RPL conditions. Agencies have the discretion, without OPM approval, to appoint current and former employees from RPL to temporary, term, or permanent competitive service appointments. Conversely, agencies may make exceptions to the RPL provisions to appoint others under 5 C.F.R. 330.207(d). 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. | Federal agencies must have the capacity to serve the public during disruptions to normal operations. This depends, in part, on continuity efforts that help agencies marshal, manage, and maintain their most important asset--their people, or human capital. GAO identified the human capital considerations relevant to federal continuity efforts; described efforts by the Federal Emergency Management Agency (FEMA) and the Office of Personnel Management (OPM) to address these considerations relevant to continuity of operations (COOP); and described the role Federal Executive Boards (FEB) play in coordinating such efforts outside Washington, D.C. According to recognized experts from the private and public sectors, continuity efforts should give priority to the immediate aftermath of a crisis--securing the safety of all employees and addressing the needs of employees who perform essential operations. However, experts noted that additional human capital considerations, especially those associated with the majority of an organization's employees who would be needed to resume all other operations, are also crucial and have not been well developed by many public and private sector organizations. To more fully address human capital considerations, experts identified two human capital principles that should guide all continuity efforts--demonstrating sensitivity to individual employee needs and maximizing the contributions of all employees--and six key organizational actions designed to enhance continuity efforts. FEMA and OPM have exhibited leadership in addressing human capital considerations relevant to COOP, but opportunities to improve exist. For example, while both agencies have issued guidance that addresses securing the safety of all employees and responding to the needs of personnel performing essential operations, neither agency's guidance addresses human capital considerations related to resuming broader agency operations. Although not specifically tasked with coordinating emergency preparedness efforts, including COOP, FEBs are uniquely positioned to do so, given their general responsibility for improving coordination among federal activities in areas outside of Washington, D.C. While some FEBs already play an active role in coordinating such efforts, the current context in which FEBs operate, including the lack of a clearly defined role and varying capacities among FEBs, could lead to inconsistent levels of preparedness across the nation. |
DOE has taken several steps to implement the ATVM program. First, it set three goals for the program: increase the fuel economy of U.S. passenger vehicles as a whole, advance U.S. automotive technology, and protect taxpayers’ financial interests. In that regard, EISA calls for the program to make loans to provide funding to automobile manufacturers and component suppliers for projects that re-equip, expand, or establish U.S. facilities that are to build more fuel-efficient passenger cars and light-duty trucks. According to DOE, the program’s goals also support the agency’s goals of building a competitive, low-carbon economy by, among other things, funding vehicles that reduce the use of petroleum-derived fuels and accelerating growth in advanced automotive technology manufacturing, and protecting U.S. taxpayers’ financial interests. DOE, in its interim final rule, also set technical, financial, and environmental requirements that vehicle and components manufacturers must meet to qualify to receive a loan under the program. For example, an established vehicle manufacturer—one that was manufacturing vehicles in 2005—must demonstrate that the adjusted average fuel economy of the fleet of vehicles it produced in its most recent model year was at least equal to that of the fleet of vehicles it produced in model year 2005. Similarly, a manufacturer that was not producing vehicles in 2005 must show that its proposed vehicles’ adjusted average fuel economy will at least equal that of established manufacturers for a similar classs of vehicles for model year 2005. For applicants deemed eligible, DOE also uses statutorily based technical criteria to determine which projects are eligible. For example, proposed vehicles must achieve at least 125 percent of the average fuel economy achieved by all manufacturers’ vehicles with substantially similar attributes in 2005. In addition, DOE established criteria for ATVM staff, aided by experts from within and outside DOE, to judge and score the technical and financial merits of applicants and projects deemed eligible, along with policy factors to consider, such as a project’s potential for supporting jobs and whether a project is likely to advance automotive technology. Finally, the Credit Review Board, composed of senior DOE officials, uses the merit scores and other information, including Office of Management and Budget’s approved subsidy cost estimates for projects, to recommend loan decisions to the Secretary of Energy. To date the ATVM program has made about $8.4 billion in loans: $5.9 billion to the Ford Motor Company; $1.4 billion to Nissan North America; $529 million to Fisker Automotive, Inc.; $465 million to Tesla Motors, Inc.; and $50 million to The Vehicle Production Group LLC. About 62 percent of the funds loaned—$5.2 billion—are for projects that largely enhance the technologies of conventional vehicles powered by gasoline-fueled internal combustion engines. These projects include such fuel-saving improvements as adding assisted direct start technology to conventional vehicles, which reduces fuel consumption by shutting off the engine when the vehicle is idling (e.g., while at traffic lights) and automatically re- starting it with direct fuel injection when the driver releases the brake. According to DOE’s analysis, the projects will result in vehicles with improved fuel economy that will contribute in the near term to improving the fuel economy of the passenger vehicles in use in the United States as a whole because the conventional vehicles are to be produced on a large scale relatively quickly and offered at a price that is competitive with other vehicles being offered for sale. DOE used data from the borrowers to estimate the fuel economy in miles per gallon (mpg) of the enhanced conventional vehicles that were considered for ATVM loans. According to our calculations using DOE’s estimates of fuel economy, these projects are expected to result in vehicles with improved fuel economy that exceed both the program’s eligibility requirements and the CAFE targets that will be in place at the time the vehicles are produced —by, on average, 14 and 21 percent, respectively. The remaining 38 percent of the funds loaned—about $3.1 billion— support projects for vehicles and components with newer technologies. Fisker’s loan is for two plug-in hybrid sedan projects—the Karma and the Nina. Tesla’s loan is for an all-electric sedan, the Model S, and Nissan’s loan is for the LEAF, an all-electric vehicle classified by DOE as a small wagon. The Vehicle Production Group’s loan is for a wheelchair-accessible vehicle that will run on compressed natural gas. Finally, a portion of the Ford loan supports projects for manufacturing hybrid and all-electric vehicles. In addition, there are two advanced technology components projects: Nissan’s, to build a manufacturing facility to produce batteries for the LEAF and potentially other vehicles; and Tesla’s, to build a manufacturing facility to produce electric battery packs, electric motors, and electric components for the Tesla Roadster and vehicles from other manufacturers. In contrast to the projects supporting enhancements to conventional vehicles, DOE’s and the borrowers’ analyses indicate that the projects with newer technologies will result in vehicles with far greater fuel economy gains per vehicle but that these vehicles will be sold in smaller volumes, thereby having a less immediate impact on the fuel economy of total U.S. passenger vehicles. According to our calculations using DOE’s fuel economy estimates, the projects for vehicles with newer technologies, like the projects for enhanced conventional vehicles, are expected to result in improved fuel economy that exceeds both the program’s eligibility requirements and CAFE targets—by about 125 percent and about 161 percent respectively. The loans made to date represent about a third of the $25 billion authorized by law, but the program has used 44 percent of the $7.5 billion allocated to pay credit subsidy costs, which is more than was initially anticipated. The $7.5 billion Congress appropriated was based on the Congressional Budget Office’s September 2008 estimated average credit subsidy rate of 30 percent per loan ($7.5 billion divided by $25 billion equals 30 percent). However, the average credit subsidy rate for the $8.4 billion in loans awarded to date is 39 percent—a total of roughly $3.3 billion in credit subsidy costs. At this rate, the $4.2 billion remaining to be used to pay credit subsidy costs will not be sufficient to enable DOE to loan the full $25 billion in loan authority. These higher credit subsidy costs were, in part, a reflection of the risky financial situation of the automotive industry at the time the loans were made. For DOE to make loans that use all of the remaining $16.6 billion in loan authority, the credit subsidy rate for the loans would have to average no more than 25 percent ($4.2 billion divided by $16.6 billion). As a result, the program may be unable to loan the full $25 billion allowed by statute. As of May 9, 2011, DOE reported that 16 projects seeking a total of $9.3 billion in loans—representing $3.5 billion in credit subsidy costs—were under consideration. The ATVM program has set procedures for overseeing the financial and technical performance of borrowers and has begun oversight, but at the time of our February report the agency had not yet engaged engineering expertise for technical oversight as called for by the procedures. To oversee financial performance, staff are to review data submitted by borrowers on their financial health to identify challenges to repaying the loans. Staff also rely on outside auditors to confirm whether funds have been used for allowable expenses. As of February 2011, the auditors had reported instances in which three of the four borrowers did not spend funds as required. According to ATVM officials, these instances were minor—the amounts were small relative to the total value of the loans— and the inappropriate use of funds and the borrowers’ practices have been corrected. The ATVM program’s procedures also specify technical oversight duties, a primary purpose of which is to confirm that borrowers have made sufficient technical progress before the program disburses additional funds. To oversee technical performance, ATVM staff are to analyze information borrowers report on their technical progress and are to use outside engineering expertise to supplement their analysis once borrowers have begun constructing or retrofitting facilities or are performing engineering integration—that is, designing and building vehicle and component production lines. According to our review, several projects needing additional technical oversight are under way but the program, as of February of 2011, had not brought in additional technical oversight expertise to supplement program staffs’ oversight. For example, ATVM officials identified one borrower with projects at a stage requiring heightened technical monitoring; however, ATVM program staff alone had monitored the technical progress of the project. ATVM officials told us that the manufacturer has experience with bringing vehicles from concept to production so additional technical oversight expertise has not been needed, despite the procedures’ calling for it. Further, according to documents we reviewed, at the time of our report, four borrowers—rather than the single one identified by ATVM—had one or more projects that, according to the program’s procedures, had already reached the stage requiring heightened technical monitoring. Because ATVM staff, whose expertise is largely financial rather than technical, had so far provided technical oversight of the loans without the assistance of independent engineering expertise, we found that the program may be at risk of not identifying critical deficiencies as they occur and DOE cannot be adequately assured that the projects will be delivered as agreed. At the time of our report, according to ATVM staff, they were in the process of evaluating one consultant’s proposal to provide engineering expertise and were working with DOE’s Loan Guarantee Program to make that program’s manufacturing consultants available to assist the ATVM program. DOE has not developed sufficient performance measures that would enable it to fully assess whether the ATVM program is achieving its three goals. Principles of good governance indicate that agencies should establish quantifiable performance measures to demonstrate how they intend to achieve their program goals and measure the extent to which they have done so. These performance measures should allow agencies to compare their programs’ actual results with desired results and should be linked to program goals. Although the ATVM program has established performance measures for assessing the performance of ATVM-funded vehicles relative to the performance of similar vehicles in model year 2005, the measures stop short of enabling DOE to fully determine the extent to which it has accomplished its overall goal of improving the fuel economy of all passenger vehicles in use in the United States. The measures stop short because they do not isolate the impact of the program on improving U.S. fuel economy from fuel economy improvements that might have occurred in the absence of the program—by consumers investing in more fuel efficient vehicles not covered by the program in response to high gasoline prices, for example. In addition, the ATVM program lacks performance measures that will enable DOE to assess the extent to which it has achieved the other two goals of the program—advancing automotive technology and protecting taxpayers’ financial interests. In our February 2011 report, to help ensure the effectiveness and accountability of the ATVM program, we recommended that the Secretary of Energy direct the ATVM program to (1) accelerate efforts to engage sufficient engineering expertise to verify that borrowers are delivering projects as agreed and to (2) develop sufficient and quantifiable performance measures for its three goals. DOE’s Loan Programs Executive Director disagreed with the first recommendation, saying that the projects were in the very early stages of engineering integration and such expertise had not yet been needed for monitoring. However, at that time, three of the four loans had projects that had been in engineering integration for at least 10 months, and the fourth loan had at least one project that was under construction. We maintained that DOE needed technical expertise engaged in monitoring the loans so that it could become adequately informed about technical progress of the projects. DOE’s Loan Programs Executive Director also disagreed with the second recommendation. He said that DOE would not create new performance measures for the agency’s three goals, saying that performance measures would expand the program and did not appear to be the intent of Congress. We maintained that by not setting appropriate performance measures for its program goals, DOE was not able to assess its progress in achieving what it set out to do through the program; furthermore, it could not provide Congress with information on whether the program was achieving its goals and warranted continued support. Chairman Bingaman, this concludes my prepared statement. I would be pleased to answer any questions that you, Ranking Member Murkowski, or other Members of the Committee may have at this time. For further information about this testimony, please contact Frank Rusco at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Karla Springer, Assistant Director; Nancy Crothers; Carol Kolarik; Rebecca Makar; Mick Ray; Kiki Theodoropoulous; Barbara Timmerman; and Jeremy Williams made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In the Energy Independence and Security Act of 2007, Congress mandated higher vehicle fuel economy by model year 2020 and established the Advanced Technology Vehicles Manufacturing (ATVM) loan program in the Department of Energy (DOE). ATVM is to provide up to $25 billion in loans for more fuel-efficient vehicles and components. Congress also provided $7.5 billion to pay the required credit subsidy costs--the government's estimated net long-term cost, in present value terms, of the loans. This testimony is based on GAO's February 2011 report on the ATVM loan program (GAO-11-145). It discusses (1) steps DOE has taken to implement the program, (2) progress in awarding loans, (3) how the program is overseeing the loans, and (4) the extent to which DOE can assess progress toward its goals. DOE has taken several steps to implement the ATVM program. First, it set three program goals: increase the fuel economy of U.S. passenger vehicles as a whole, advance U.S. automotive technology, and protect taxpayers' financial interests. DOE also set technical, financial, and environmental eligibility requirements for applicants. In addition, DOE established criteria for judging the technical and financial merits of applicants and projects deemed eligible, and policy factors to consider, such as a project's potential for supporting jobs. DOE established procedures for ATVM staff, aided by experts from within and outside DOE, to score applicants and projects. Finally, the Credit Review Board, composed of senior DOE officials, uses the scores and other information to recommend loan decisions to the Secretary of Energy. The ATVM program, as of May 2011, had made $8.4 billion in loans that DOE expects to yield fuel economy improvements in the near term along with greater advances, through newer technologies, in years to come. Although the loans represent about a third of the $25 billion authorized by law, the program has used 44 percent of the $7.5 billion allocated to pay credit subsidy costs, which is more than was initially anticipated. These higher credit subsidy costs were, in part, a reflection of the risky financial situation of the automotive industry at the time the loans were made. As a result of the higher credit subsidy costs, the program may be unable to loan the full $25 billion allowed by statute. The ATVM program has set procedures for overseeing the financial and technical performance of borrowers and has begun oversight, but at the time of our February report it had not yet engaged engineering expertise needed for technical oversight as called for by its procedures. To oversee financial performance, staff review data submitted by borrowers on their financial health to identify challenges to repaying the loans. Staff also rely on outside auditors to confirm whether funds have been used for allowable expenses. To oversee technical performance, ATVM staff are to analyze information borrowers report on their technical progress and are to use outside engineering expertise to supplement their analysis, as needed. According to our review, projects needing additional technical oversight are under way, and the ATVM staff lack the engineering expertise called for by the program's procedures for adequately overseeing technical aspects of the projects. However, the program had not yet engaged such expertise. As a result, DOE cannot be adequately assured that the projects will be delivered as agreed. DOE has not developed sufficient performance measures that would enable it to fully assess progress toward achieving its three program goals. For example, DOE has a measure for assessing the fuel economy gains for the vehicles produced under the program, but the measure falls short because it does not account for, among other things, the fuel economy improvements that would have occurred if consumers purchased more fuel-efficient vehicles not covered by the program. Principles of good governance call for performance measures tied to goals as a means of assessing the extent to which goals have been achieved. GAO is making no new recommendations at this time. In the February report, GAO recommended that DOE (1) accelerate efforts to engage engineering expertise and (2) develop sufficient, quantifiable performance measures. DOE disagreed with the recommendations, stating that such expertise had not yet been needed and that performance measures would expand the scope of the program. GAO continues to believe that these recommendations are needed to help ensure that DOE is achieving its goals and is accountable to Congress. |
The Runaway and Homeless Youth Act, as amended, authorizes federal funding in the form of discretionary grants for three programs to assist runaway and homeless youth. These programs are administered by the Family and Youth Services Bureau (FYSB) within HHS’s Administration for Children and Families (ACF). The three programs—the Basic Center Program, Transitional Living Program, and Street Outreach Program— enable local public and private organizations and shelters in all 50 states and the U.S. territories to compete for grants that allow them to serve runaway, homeless, and sexually exploited youth who may be on the streets and in need of shelter or longer-term support. The Basic Center Program provides temporary shelter, counseling, and other services to runaway and homeless youth under the age of 18. Basic Center grants are awarded competitively to providers and may be awarded for a period of up to 3 years. The Transitional Living Program provides homeless youth ages 16 through 21 with longer-term residential services for up to 18 months. These services include such things as counseling and education in basic life skills, interpersonal skills, educational advancement, job attainment skills, and physical and mental health care. Transitional Living grants are awarded competitively to providers and may be awarded for up to 5 years. The Street Outreach Program provides education, treatment, counseling, and referrals for runaway, homeless youth under the age of 18 who have been subjected to or are at risk of being sexually abused and exploited. Street Outreach grants may be awarded for up to 3 years. See figure 1 for key aspects of these three programs. For fiscal years 2002 through 2009, funding for these programs has been just over $100 million in total, with Basic Center funding representing the largest dollar amount authorized of the three grant programs. Funding for these programs over the past several years is shown in table 1. HHS’s grant award process for Runaway and Homeless Youth grants is comprised of several major steps. HHS’s Family and Youth Services Bureau, which is referred to as the Program Office, and the Grants Management Office are responsible for carrying out and overseeing this process. Some of the steps in the grant award process are performed by contractors on behalf of the agency, and one step in the process is performed by panels of peer reviewers selected by the agency to evaluate grant applications. The grant award process consists of the major steps as illustrated in figure 2. Grant Announcement: Each fiscal year, the agency develops and publishes a grant announcement for each grant program. Announcements provide the information potential applicants need to determine if they are eligible to apply and the instructions on how to complete and submit their application. In addition, they include the criteria used to evaluate applications. Technical Assistance: Each announcement lists the technical service providers responsible for providing technical assistance to potential applicants to help them understand the announcement requirements. Technical assistance can be provided through a webinar, seminar, information on the Web, or upon request. Application Submission: Applications may be submitted electronically via Grants.gov or by hard copy via mail or other delivery service. Applicants may also hand deliver their application to the agency’s contractor responsible for receiving the applications. The deadline for submitting applications is usually 45 to 60 days after an announcement is published. Application Pre-Screening: Applications are prescreened to determine whether they meet two requirements. Applications are eliminated from review if they are received after the deadline or if they request more funding than the maximum amount specified in the announcement. Peer Review of Applications: Applications remaining after pre- screening are submitted to peer review panels. A panel generally consists of three peer reviewers, who apply the evaluation criteria contained in the announcement to applications and score the applications, and a panel chair responsible for facilitating consensus of the peer review panel. Peer reviewers assign points to each application, based upon specific criteria that are outlined in the announcement. The points are added up and the applicant’s average score is derived. This score, ranging from 0 to 100, becomes the basis for the ranked listing of applicants which the agency uses in its award decisions. Because applicants whose score places them below the total available funding limit may be denied a grant, a single point can make a difference between awarding a grant and denying a grant. Final Grant Award Decisions: Taking into account peer review panel scores and comments for each application and, in some cases, other factors, the Program Office and the Grants Management Office make the final award decisions. These decisions are documented in the final funding award decision memos, which contain the listing of all applicants, ranked by their scores, and the final award decisions. Notification of Award Decisions: Each applicant is sent a letter that communicates the grant award decision. Successful applicants are notified before letters are sent to unsuccessful applicants. application, including those for Runaway and Homeless Youth Grants, must receive an objective, “…advisory review...by a minimum of three unbiased reviewers with expertise in the programmatic area for which applications are submitted.” To meet this requirement, the agency relies on the peer review process, in which three reviewers convene to evaluate and score applications based on the criteria outlined in the announcement. The peer reviewers are defined by the agency as experts in the field of runaway and homeless youth programs. Figure 3 provides an overview of the peer review process. HHS awarded grants to about one-quarter of the applicants that applied in 2007 and 2008, as shown in table 2. Based on the grant announcements we reviewed and our observation of the peer review process, the criteria upon which grant applications would be evaluated were not clearly defined in a single location in the announcement. Rather, we found that criteria were scattered throughout various sections of the announcement, had multiple labels, and were not presented in an orderly manner in a single location. For example, for the 2009 Street Outreach Program grant competition, grant applications were evaluated and scored based on how well they addressed criteria contained in three different sections of the announcement. First, applicants must address the “Program Requirements,” found in Section 1 of the announcement. Second, applicants must address the “Project Description,” found in Section 4. Third, applicants must address the “Evaluation Criteria” found in Section 5. However, only the “Evaluation Criteria” section of the announcement explicitly described how their responses would be evaluated and scored. Because the applicant must address criteria contained in different sections of the announcement, if applicants focused primarily on responding to the “Evaluation Criteria” they may not have adequately addressed information in the other sections. If the applicants focused only on the “Evaluation Criteria,” these applicants could have received lower scores, which would have decreased their likelihood of being awarded grants. Figure 4 represents the various locations where we found descriptions of criteria. Additionally, peer reviewers we interviewed noted that consolidation of criteria in the announcement into a single location would aid them in their evaluation of applications by reducing the time it would take to review the application because they would not need to look in multiple places in the application for information. During our observation of the 2009 Street Outreach Program grant competition, we found that the agency provided detailed guidance to peer reviewers to help them evaluate and score applications. This guidance, which was not available to applicants, consolidated information from various sections of the announcement. The federal officials instructed reviewers to focus on specific information when evaluating and scoring applications. Because applicants did not have this detailed guidance, which combined information from various parts of the announcement, applicants may not have had full knowledge of what information was critical to receiving a high score. Table 3 shows examples of the guidance provided to peer reviewers during the 2009 Street Outreach Program grant competition. ACF provides technical assistance to potential applicants for runaway and homeless youth grants, as required by statute. Technical assistance is generally defined as providing expertise or support to applicants and grantees for the purpose of strengthening their capabilities for providing shelter and support services for runaway and homeless youth. In fiscal years 2006 and 2007, the agency provided technical assistance to potential applicants through its regional network of 10 providers, and listed these providers in its announcements. However, beginning in September 2007, ACF centralized its technical assistance in order to provide more consistent technical assistance for all applicants, regardless of where they were located. At that time, the agency entered into cooperative agreements with the University of Oklahoma to provide technical assistance nationwide. Through its providers, the agency coordinates technical assistance, which generally consists of a pre-application conference (webinar) covering the application requirements such as the project description, eligibility, and the evaluation criteria, among other things. After the conference, a recording and transcript is posted on the agency Web site. Potential applicants may also ask specific questions of the contacts listed on the announcement. These contacts include the Program Office officials and technical assistance providers. If the technical assistance providers cannot answer the questions, they coordinate with agency staff to obtain responses that are then posted to the Web site. The technical assistance providers also arrange seminars on broader topics related to runaway youth, such as mental health, crisis intervention, and skills training. Most of the applicants we interviewed who received technical assistance under both systems reported that they found it helpful. For example, 17 of the 20 applicants who sought technical assistance were satisfied with the help they received. However, three of these applicants said they prefer the technical assistance provided by their regional providers because of such things as the regional assistance being more “hands-on,” the regional staff being more responsive and accessible, and the regional staff being more knowledgeable of local programs. Agency officials noted that the agency has moved toward centralized approach to gain a more consistent approach to the technical assistance it provides. ACF’s process for determining which grant applicants will be awarded grants is primarily based on the results of the peer review process, which has weak internal controls to ensure that applications are evaluated consistently. According to GAO standards, internal controls should provide reasonable assurance that the agency’s objectives, such as providing grants to the most qualified providers, are being achieved. Ideally, internal controls should be continuous, built-in components of the agency’s processes, and should provide reasonable assurance that the grant award process works as it is designed to work. Our review of ACF’s grant award process found that, while the agency has a number of internal controls in place to help ensure consistent application of evaluation criteria across reviewers and across panels, some of these controls are limited in their effectiveness. For example, we found weaknesses in four out of six internal controls related to the grant award process, as shown in table 4. First, ACF does not always select peer reviewers whose qualifications comply with the standards outlined in HHS policy. The policy states that each application for runaway and homeless youth grants must receive an objective, advisory review by a minimum of three unbiased reviewers with expertise in the programmatic area for which applications are submitted. Furthermore, the announcements we reviewed stated that grant application reviewers should be experts in the field of runaway and homeless youth programs. However, we found that HHS considered students, school teachers, business consultants, and television and media workers as qualified peer reviewers. Our review of resumes of all the peer reviewers and chairs for 2009 Street Outreach Program grants found that many had professional and volunteer experiences that were not always directly related to runaway and homeless youth programs. Based on the resumes of 76 peer reviewers, we found that 26 peer reviewers had direct experience with runaway and homeless youth programs listed on their resume, and another 31 had indirect experience, such as social work, teaching, or grant reviewing. However, 19 did not appear to have any of the relevant knowledge and expertise in runaway and homeless youth programs required by HHS policy. Three of these 19 reviewers were identified as “youth reviewers” in their resumes. One agency official responsible for the grant review process during 2009 explained that HHS interprets its policies governing peer reviewer qualifications broadly and accepts all related experience. He also noted that HHS encourages the use of “youth reviewers” for its peer review panels. Second, during our observation of the 2009 Street Outreach Program grant competition, we found that the meetings for peer reviewers and chairs were not mandatory. These meetings included an orientation session, panel chair meetings, and new reviewer meetings. Meetings for panel chairs are particularly important for helping to ensure consistent evaluations across panels because in these meetings, all panel chairs agree on how to apply the evaluation criteria. However, we observed that some panel chairs did not attend these meetings, and, therefore, their panels may not have applied the evaluation criteria in the same manner as panels whose chairs had attended the meetings. Similarly, new reviewers were permitted to miss the new reviewers’ meetings and still participate in the reviews, which could also increase the risk of inconsistent application of evaluation criteria. Third, we observed that the agency provided detailed guidance to peer reviewers to aid them in evaluating applications. The detailed guidance provided to reviewers explaining the evaluation criteria has led to variation in application of criteria by review panels. For example, when we observed peer review panel deliberations for the 2009 Street Outreach grants, we found that peer review panels varied in the way they applied the criterion for evaluation of emergency evacuation plans. The announcement’s “Evaluation Criteria” section contained the following evaluation criterion related to emergency plans: The application “describes the emergency preparedness and management plan by addressing steps to be taken in case of a local or national situation that poses risk to the health and safety of program staff and youth.” At the panel session, agency officials told panels that they should also apply all of the information in the detailed guidance they were given, which included information in the “Program Requirements” section of the announcement. Federal officials advised peer reviewers that they should score the application on the following information: “Grantees must immediately provide notification to FYSB when evacuation plans are executed.” As a result, peer review panels that followed the guidance gave lower scores to applicants that did not specifically indicate that they would notify the agency when an evacuation occurred. One peer review panel we observed, however, did not give lower scores when this was not specified in an application. These peer reviewers said that they did not think it was fair to assign lower scores in these cases because the more detailed information about evacuation requirements was not listed in the “Evaluation Criteria” section of the announcement. Additionally, we interviewed peer reviewers who participated in panels for 2008 runaway and homeless youth grants. Three of the six peer reviewers we interviewed told us they observed variations in the way panels applied the criteria. Reviewers said that the 2008 Transitional Living Program announcements contained evaluation criteria requiring applicants to provide background checks for all staff members who would be working with youth. However, the peer reviewers told us that the guidance provided to peer reviewers by the agency during that review process further specified that these background checks must be conducted in accordance with local, state, and national requirements. According to the peer reviewers we interviewed, this could have led to variation in how this aspect of the application was evaluated by different panels. Given that the peer review score is the key factor in determining grant awards, inconsistent evaluation criteria across panels can have a significant impact on whether an applicant is awarded a grant or not. The fourth control weakness we observed during our review of the 2009 Street Outreach Program grant competition was that agency officials did not keep a permanent record of their comments and feedback to peer review panels during their oversight of the peer review process, which introduced further potential for inconsistent application of evaluation criteria. Agency officials review the panel’s scores and narrative comments for each application during the peer review process before they are finalized. The officials visit panels as peer reviewers deliberate and respond to their questions, and provide feedback to chairpersons on their panel’s evaluations. Agency officials told us their review and feedback is meant to ensure that all panels apply the evaluation criteria in the same way. However, the federal officials we observed did not record this information in a permanent record. Instead, the officials provided their feedback to the chair via comments written on post-it notes. This lack of permanent documentation of federal official feedback to peer review panels makes it difficult for the agency to ensure that it is providing consistent guidance to panels and responding to problems across panels in the same way during the peer review process. No weaknesses were apparent in two of the six internal controls--(1) the provision of standard training materials to peer reviewers prior to panel sessions, and (2) the presence of federal officials on site during panel sessions to respond to questions from, and communicate on a daily basis with panels. Final funding decision memos used to internally document grant award decisions for 2007 and 2008 did not contain supporting information regarding why applications with high scores were not funded. Final decisions regarding grant awards are determined by HHS’s Program Office and Grants Management Office, taking into account the review panels’ scores and narrative comments for each application. According to HHS policy and guidance, the agency has the discretion to deny a grant to an applicant who would otherwise receive one based on the results of the peer review score alone. The agency is permitted to use its discretion to deny grants based on other reasons, such as the agency’s concerns about the applicant’s program or about the concentration of service providers in the applicant’s location, which is referred to as concerns about “geographic distribution” of services. However, the agency does not always clearly document the rationale for its decision to deny a grant based on “geographic distribution” of services. When grants were denied for geographic reasons in 2007 and 2008, we found that the final funding decision memos did not clearly describe the details surrounding such denials, such as the number of other programs that exist in the same locale, the services they provide, or the numbers of youth they serve. Such details could support or justify a denial for geographic reasons. Without fully documenting and permanently recording its rationale for exercising its discretion to deny grants to highly scored applicants, the agency decision-making process is not transparent. Grant award decisions are not always communicated in a timely manner, which may present planning challenges for some applicants. According to one ACF official, successful applicants are generally notified at the end of the federal fiscal year. Based on our review of grant documents for fiscal years 2007 and 2008, we found that for all but the 2008 Transitional Living Program grants, this was true, regardless of when the announcement closed or when the funding decisions were made. For example, applications for the 2008 Basic Center Program were due in February 2008 and were evaluated and scored in March; however, applicants were not notified of their award status until September, 6 months later. HHS policy does not indicate when notification letters should be distributed to applicants, but according to an ACF official, awards to successful applicants are made by September 30 because most new programs are expected to start on or before October 1. Given the proximity of the notification date to program start date, some successful applicants with new programs we spoke with told us that the September notification timeframe did not allow enough preparation time to hire staff and secure the resources needed to provide services. See figure 5 for the timeline of dates for key events for the fiscal year 2007 and 2008 grant award process. Notification delays also create planning issues for ongoing programs that are not awarded new grants and, as a result, need to develop contingency plans for continuing or discontinuing services. Since unsuccessful applicants are notified of their grant award status after successful applicants have been notified, an applicant whose previous grant is about to expire may experience planning problems if notifications are delayed. Delays in notifying unsuccessful applicants may not give applicants adequate time to react to not being awarded a new grant. In the event that funding is denied or discontinued, earlier notification of award decisions could help providers properly plan. According to an ACF official, there is nothing in policy that prohibits notifying an applicant as soon as award decisions have been made. The official told us that delays in sending out notification letters are linked to the timeliness of writing and issuing the announcement. According to this official, announcements must be reviewed by many departments within the agency, and, therefore, the turnaround time is not as timely as it could be. However we found that even after the announcements were published and closed, applicants were still not notified of their award status for several months. For example, for the 2008 Transitional Living grant, regardless of when the announcement was published, applicants were not notified of their award, until close to 4 months after the panels had completed evaluating the applications. Similarly, notifications of decisions related to 2008 Basic Center grants were not sent out until about 7 months after the panels. In addition to the challenges applicants experienced due to notification delays, the agency created additional planning challenges for applicants when it unexpectedly changed the timing of the funding cycle for the Transitional Living Program in fiscal year 2008 without notifying applicants of this change in a timely manner. The announcement stated that ACF anticipated making grant awards in the first quarter of fiscal year 2008, which would have been from October through December of 2007. However, the grant award start date was changed to March 2008 after this announcement was published. According to an agency official, the original start date was moved in an effort to spread out the timing of peer review panels for each of the three runaway and homeless youth programs and other activities that were scheduled to occur around the same time during the summer months. As a result of moving the cycle start date—from October to March—some successful applicants were without federal funding for several months between the end of the previous grant cycle and the new grant award start date. Runaway and homeless youth service providers have also raised concerns to their congressional representatives about the timeliness of notifications. Specifically, we reviewed nine complaint letters that were sent to congressional representatives regarding runaway and homeless youth grants applications in 2007 and 2008. One letter, representing six providers, stated that notification delays created planning problems for service providers who were not able to develop contingency planning for either the continuation or discontinuation of their programs. ACF responded to the complaint by noting that it offers funding for successful applicants to recoup some of the costs that programs incurred due to the delay. In addition, the National Network for Youth, an organization that represents providers of services to youth and families also noted that the timeliness of notifications has been an issue of concern for its membership. In particular, some service providers have raised issues about the difficulties receiving timely communications from ACF concerning grant awards. All of the successful applicants we spoke with felt that their notification letters were clear and contained sufficient information; however, unsuccessful applicants were not all satisfied with the clarity and completeness of the information presented in their letters. The standard letter to unsuccessful applicants may list several possible “other factors” for the denial, beyond their peer review panel score, without any indication of which of the reasons listed in the standard notice applied to their application. See appendix I for a standard letter. The “other factors” include: “comments of reviewers and government officials,” “staff evaluation and input,” “geographic distribution,” and “audit reports and previous program performance.” Some unsuccessful applicants told us the letter did not contain enough information for them to understand why their application was denied. In particular, some applicants told us that they did not understand what the agency meant by geographic distribution, which was the basis for denying grants to at least eight applicants during fiscal years 2007 and 2008. Officials told us that “geographic distribution” means that an applicant was denied because the geographical area their program would serve is already served by another runaway and homeless youth service provider. The agency does not keep a record to document detailed information that would support or justify a denial for geographic reasons, such as the number or names of programs that exist in the same locale, the services these programs provide, or the numbers of youth they serve. As a result, it is not possible to verify that denying a grant based on “geographic distribution” was justified. Applicants who want further explanation of their award decisions may request additional information along with their scores from ACF through a Freedom of Information Act request. An ACF official told us that it would be difficult to provide all unsuccessful applicants more information supporting the denial decision based on other factors such as “geographic distribution” in notification letters because of limited resources. However, the resources needed to provide such information may be small, given that “geographic distribution” was the basis for denying grants to only a small number of applicants during fiscal years 2007 and 2008. Moreover, based upon our review of decision notices sent to applicants who were screened out of the competition due to late submissions or improper funding requests, we found contradictory language that may confuse applicants. Specifically, the letter states that “the limited availability of funds permitted us to select only the highest scoring applications that also met all of the eligibility requirements,” leaving the impression that the application, in these cases, had been evaluated and scored by a peer review panel. However, applications that are screened- out of the process before the peer review session are not evaluated or scored. When we pointed out this statement to the agency, officials agreed the language could be confusing to applicants. The runaway and homeless youth grant programs provide much needed services to a vulnerable population and the number of applications far exceed the number of grants that can be awarded with available funding. To ensure that ACF awards these grants to the most capable applicants, its award process must be fair and transparent. Without clearly organized evaluation criteria in grant announcements, applicants can have difficulty determining what their applications will be evaluated on. Furthermore, without consistent evaluation of applications in the process, there cannot be a level playing field for all applicants. All peer reviewers must have the required programmatic expertise, or not all applicants are evaluated by their peers. Additionally, unless all peer reviewers attend meetings at panel review sessions; these meetings cannot help ensure consistent evaluation of applications. Without documentation of ACF comments to peer review panels during the review process there is also a risk that the evaluation process will not be consistent. Moreover, without fully documenting the rationale for denying grants to highly scored applicants, agency grant award decisions are not transparent. Once the grant award decisions are made, it is incumbent on ACF to notify applicants of decisions in a timely manner and provide them with clear and specific information about, in particular, decision not to grant awards. Without such notification, applicants may experience planning challenges and not fully understand the reasons they were denied grants. To enhance transparency and fairness in the grant award process, and improve grantees ability to plan for services, we recommend that the Secretary of Health and Human Services direct the Assistant Secretary for the Administration for Children and Families to take the following seven actions: Clearly identify in grant announcements all the criteria that peer reviewers will use to evaluate and score applications, and ensure that peer reviewers use only those criteria during the peer review process. Select peer reviewers with expertise in the programmatic area for which they are evaluating grant applications. Make all meetings for peer reviewers, including those for new reviewers and chairs, mandatory. Document and maintain records of ACF comments to peer review panels during the review process. Document the specific reasons for denying grants to high-scoring applicants in favor of other applicants for the agency record. Provide clear information to applicants about the specific reasons their applications were not approved. Notify applicants about the outcome of their applications as soon as grant award decisions are made. We provided a draft of this report to the Department of Health and Human Services for review and comment; these appear in appendix II. In its comments, HHS disagreed with our recommendation to review and revise announcements to ensure that all evaluation criteria listed be clearly labeled as evaluation criteria and be contained in a single section of the announcement. HHS maintains that all of the criteria used to evaluate and score applications are contained in section 5 of the announcement. However during the peer review process we observed, in addition to evaluating and scoring applications based on criteria specified in the “Evaluation Criteria” section of the announcement (section 5), some of the panels evaluated and scored applications based on criteria from two other sections of the announcement. Given the difference between the agency’s response to our recommendation and what we observed, we are revising our recommendation to highlight the need to ensure that the all criteria used to evaluate and score applications are clearly identified to applicants and peer reviewers, and that peer reviewers use only those criteria when evaluating and scoring applications. With regard to our recommendation to select peer reviewers with expertise in the program for which they are evaluating grant applications, HHS commented that the agency has elected to accept reviewers who are knowledgeable of the risk factors faced by runaway and homeless youth, and that many professional disciplines often intersect with runaway and homeless youth. However, we found that in the past the agency has used individuals that would not be expected to have relevant expertise, such as television and media workers. Noting our concern in this area, the agency indicated that they plan to take steps to ensure that all reviewers possess the knowledge and expertise in the particular program for which they are reviewing grant applications. In the event of a shortage of reviewers, the agency intends to staff panels with at least one peer reviewer with extensive relevant knowledge, which would continue to differ from the current policy that grants must receive an objective, advisory review by a minimum of “three” unbiased reviewers with expertise in the programmatic area for which applications are submitted. We agree that professionals in varied disciplines could have sufficient expertise to serve as reviewers and recognize that it may be difficult for the agency to find enough reviewers with expertise in a particular program. As a result, we are clarifying our recommendation to include those that have expertise in the programmatic area for which they are evaluating grant applications, and not a specific program. Regarding our recommendations to make peer review meetings mandatory, HHS indicated that all meetings for peer reviewers and chairs are already mandatory but due to unforeseen factors, it is not always possible for all reviewers to attend. Indeed, during our observation of a peer review session, not all reviewers and chairs attended the meetings. Moreover, at the time, agency officials told us that attendance at these meetings was not explicitly mandatory, but highly encouraged. They also indicated that attendance was not enforced and attendance records were not maintained. In response to this recommendation, the agency indicated that they plan to officially notify all reviewers and chairpersons participating in future reviews that all training is mandatory. In the event some reviewers and chairpersons are not able to attend the mandatory training sessions due to unforeseen circumstances, the agency intends to offer “make up” sessions. HHS did not provide comments on our recommendation to maintain records of ACF comments to peer reviewer panels during the review process. However they agreed with our recommendation to document the specific reasons for denying grants to high-scoring applicants in favor of other applicants. HHS commented that the agency plans to include more details concerning geographic distribution in the letters to applicants who are denied grants for this reason. While these efforts would be in line with our recommendation; the details supporting such decisions must be consistently documented in the agency’s records to support the information provided to applicants in their letters. In response to our recommendation to provide clear information to applicants about specific reasons their applications were not approved, HHS stated that in accordance with ACF policy and procedures, every unsuccessful applicant is entitled to an explanation of why their application was not funded. In addition, the agency noted that, upon request, the Program Office will provide a debriefing to applicants. However, letters sent to unsuccessful applicants should clearly note that applicants may request a debriefing by the Program Office regarding specific reasons why their application was not funded. Currently, letters to unsuccessful applicants do not include this information. In addition, it is important to revise the language in letters to applicants that are screened out of the grant competition that implies their application was evaluated and scored. Finally, HHS agrees with our recommendation to notify applicants about the outcome of their application as soon as grant award decisions are made. As part of the grant application process, the agency plans to explain to applicants that final grant decisions depend on the results of the grant award negotiations between ACF and the prospective grantees. We recognize that these grants are discretionary and that final award decisions involve negotiations that may take time. However, every effort should be made to complete negotiations and notify both successful and unsuccessful applicants as quickly as possible. To enable applicants to efficiently and effectively manage their programs, it is important for applicants to receive their notices in a timely manner. HHS also provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to the Secretary of HHS, relevant congressional committees, 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 staffs have any questions about this report, please contact Kay E. Brown at (202) 512-7215 or [email protected]. GAO staff who made major contributions to this report are listed in appendix III. In addition to the contact named above, Clarita Mrena (Assistant Director) and Jacqueline Harpp (Analyst-in-Charge) managed all aspects of the assignment up to report production. Anna Kelley managed the report production and Vernette Shaw made significant contributions in all aspects of the work. Lisa Fisher and Jennifer McDonald also made significant contributions to this report. Additionally, Walter Vance and Minette Richardson provided technical support in design and methodology. James Rebbe provided legal support and Susannah Compton assisted in message and report development. James Bennett assisted with visual communications. | The Department of Health and Human Services (HHS) awards grants to provide shelter and services to runaway and homeless youth through the Basic Center, Transitional Living and Street Outreach Programs. In response to a mandate for a review of the grant award process for these programs in the Reconnecting Homeless Youth Act of 2008 (Pub. L. No. 110-378), GAO examined (1) grant announcements and application requirements, (2) technical assistance for grant applicants, (3) how grant award decisions are made, and (4) notification of grant award decisions. GAO reviewed requirements, documents, and records associated with this process for fiscal years 2007 and 2008, observed the grant evaluation portion of this process, and interviewed applicants, peer reviewers, and agency officials. Based on GAO's review of past grant announcements for these programs, GAO found that the criteria upon which grant applications were evaluated were not clearly identified or presented in a single location in the announcement. Rather, GAO found that criteria were scattered throughout various sections of the announcement, had multiple labels, and were not presented in an orderly manner. As a result, applications that did not address the criteria from all sections were likely to receive lower evaluation scores, decreasing their chances of receiving a grant. HHS provides technical assistance to potential applicants for runaway and homeless youth grants, as required by statute. Of the 20 applicants GAO interviewed who sought technical assistance, 17 were satisfied with the help they received. Grant award decisions are primarily based on the results of the peer review process, and internal controls in place to ensure that applications are evaluated consistently were not always adequate. GAO found weaknesses in four out of the six procedures the agency relies on to ensure consistent evaluation of applications. For example, although HHS policy requires peer reviewers to be experts in the field of runaway and homeless youth programs, about one- quarter of the reviewers who evaluated applications for 2009 Street Outreach grants had little or no experience in this area. With regard to notification of grant award decisions, GAO found that they have not always been communicated to applicants in a timely manner, which can delay the start of new programs and present planning challenges for existing ones. GAO also found that the information in notification letters to applicants who were not awarded grants was not always clear or complete. |
Medicaid is a joint federal-state program that finances health care coverage for low-income and medically needy individuals. In fiscal year 2014, Medicaid covered on average an estimated 65 million beneficiaries at an estimated cost of over $500 billion. States pay for Medicaid- covered services provided to eligible individuals under a federally approved Medicaid state plan, and the federal government pays its share of a state’s expenditures. States that wish to change their Medicaid programs in ways that deviate from certain federal requirements may seek to do so under the authority of an approved demonstration. Section 1115 of the Social Security Act authorizes the Secretary of Health and Human Services to waive certain federal Medicaid requirements and to allow costs that would not otherwise be eligible for federal matching funds—through “expenditure authorities”—for experimental, pilot, or demonstration projects that, in the Secretary’s judgment, are likely to assist in promoting Medicaid objectives. The demonstrations provide a way for states to test and evaluate new approaches for delivering Medicaid services. To obtain approval, states submit applications for section 1115 demonstrations to HHS for review. Upon approval, HHS issues an award letter to the state and an approval specifying the Medicaid requirements that are being waived, the expenditure authorities approved, and the special terms and conditions detailing the requirements for the demonstration. HHS typically approves a section 1115 demonstration for a 5-year period that can be amended or extended. Under HHS policy in place since the early 1980s, section 1115 demonstrations should be budget neutral to the federal government. In other words, the Secretary should not approve demonstrations that would increase federal costs for the state’s Medicaid program beyond what the federal government would have spent without the demonstration. To have a budget-neutral demonstration, generally a state must establish that its planned changes to its Medicaid program—including receiving federal matching funds for otherwise unallowable costs—will be offset by savings or other available Medicaid funds. Once approved, each demonstration operates under a negotiated budget neutrality agreement that places a limit on federal Medicaid spending over the life of the demonstration, typically 5 years. According to HHS’s policy, demonstration spending limits are based on states’ projected costs of continuing their Medicaid programs without a demonstration. The higher the projected costs without a demonstration, the more federal funding states are eligible to receive for the demonstration. HHS’s policy calls for establishing a spending base using a state’s actual historical spending from a recent year and projecting spending over the course of the demonstration using certain growth rates established in policy. HHS approved expenditure authorities for a broad range of purposes beyond expanding Medicaid coverage to individuals, including state- operated programs and funding pools. However, how these programs and funding pools would further Medicaid objectives was not always apparent from HHS’s documentation. Recent approvals highlight the need for specific criteria and clear documentation to show how demonstrations further Medicaid purposes. In our April 2015 report examining recent demonstration approvals in 25 states, we found that HHS had approved expenditure authorities allowing 5 states to receive federal Medicaid matching funds for state expenditures for more than 150 state-operated programs. Prior to the demonstrations, these programs were not coverable under Medicaid. The 5 states were approved to spend up to $9.5 billion in Medicaid funds (federal and state) for these programs during their current demonstration approval periods, which ranged from 2.5 to 5 years. The state programs were operated or funded by a wide range of different state agencies, such as state departments of mental health, public health, corrections, youth services, developmental disabilities, aging, and state educational institutions. Prior to being included in the demonstrations, these programs could have been financed with state or non-Medicaid federal funding sources, or a combination of these, such as state appropriations or non-Medicaid federal grant funding. Under the demonstrations, states must first allocate and spend state resources for programs to receive federal Medicaid matching funds. The federal matching funds received could replace some of the state’s expenditures for the programs, freeing up state funding for other purposes. For example, states could use the freed-up state funding to invest in health care quality improvement efforts or health reform initiatives or simply to address shortfalls in states’ budgets. The expenditure authorities for state programs supported a broad range of state program costs that would not otherwise have been eligible for federal Medicaid funding. Although many of the programs offered health- related services, such as prostate cancer treatment and newborn immunizations, not all were necessarily income-based. In addition to programs providing health-related services, other state programs authorized to receive funding included those providing support services to individuals and families, for example, to non-Medicaid-eligible individuals; those providing access to private insurance coverage for targeted groups; and those funding health care workforce training programs. Overall, state programs that were approved for federal Medicaid funds appeared to be wide ranging in nature. How funding for these state-operated programs would likely promote Medicaid objectives was not always clear from HHS’s approval documents. We found that the documents did not consistently include information indicating what, specifically, the approved expenditures for state programs were for and, therefore, how they would likely promote Medicaid objectives. State programs approved by HHS were generally listed by program name in the special terms and conditions of each state’s approval, but often without any further detailed information. Examples of state program names listed in the approval documents included a healthy neighborhoods program, grants to councils on aging, childhood lead poisoning primary prevention, and a state-funded marketplace subsidies program. A full listing of the state programs funded by expenditure authorities we reviewed is included in appendix I. Further, we found that several state programs approved for federal Medicaid funds appeared, based on information in the approvals, to be only tangentially related to improving health coverage for low-income individuals and lacked documentation explaining how their approval was likely to promote Medicaid objectives. For example, the purposes of some programs approved included funding insurance for fishermen and their families at a reduced rate; constructing supportive housing for the homeless; and recruiting and retaining health care workers. For two of the five states we reviewed, HHS’s approvals included additional details beyond the program names about the programs—including program descriptions and target populations—in the special terms and conditions. Such information can help explain how the programs may promote Medicaid objectives; however, we found that even when such information was included, HHS’s basis for approving expenditure authorities for some state programs was still not transparent. For example, one state received approval to claim matching funds for spending on a state program that issues licenses and approves certifications of hospitals and other providers in the state. While the terms and conditions delineated the program’s mission and funding limits, it did not explicitly address how the program related to Medicaid objectives. The approvals for the other three states, accounting for nearly half of the more than 150 state programs in our review, lacked information on how the state programs would promote Medicaid objectives, such as how they would benefit low-income populations. We also found that HHS’s approvals varied in the extent to which they provided assurances that Medicaid funding for state programs would not duplicate any other potential sources of non-Medicaid federal funding. In two of the five states we reviewed, the terms and conditions identified all other federal and nonfederal funding sources for each state program and included specific instructions on how states should “offset” other revenues received by the state programs related to eligible expenditures. The approval for a third state did not identify other funding sources received by each program but included a general program integrity provision requiring the state to have processes in place to ensure no duplication of federal funding. In contrast, the approvals for two states did not identify other federal and nonfederal funding sources for each program and lacked language expressly prohibiting the states’ use of funding for the same purposes. Another major type of non-coverage-related expenditure authority that HHS approved allowed states to make new kinds of supplemental payments—that is, payments in addition to base payments for covered services—to hospitals and other providers. In our April 2015 report, we found that HHS approved expenditure authorities in eight states for pools of dedicated funds—called funding pools—amounting to more than $26 billion (federal and state share) over the course of the current approvals, which ranged from 15 months to over 5 years. These expenditure authorities allowed states to receive federal Medicaid funds for supplemental payments made to providers for uncompensated care or for delivery system or infrastructure improvements. In addition, some states had funding pools approved for other varied purposes, such as graduate medical education. Funding pools for hospital uncompensated care costs. In our April 2015 report, we found that HHS approved expenditure authorities in six states to establish or maintain hospital uncompensated care funding pools for a total of about $7.6 billion (federal and state) in approved spending. Funding pools for incentive payments to hospitals. HHS also approved new expenditure authorities in five states for funding pools to make incentive payments to promote health care delivery system or infrastructure improvements for nearly $18.8 billion (federal and state share) in spending. These expenditure authorities were for payments to incentivize hospitals or their partners to make a variety of improvements, such as lowering hospitals’ rates of adverse events or incidence of disease, improving care for patients with certain conditions, and increasing delivery system capacity. As with approvals of expenditure authorities for state programs, we found that HHS’s approvals of expenditure authorities for funding pools also did not consistently document how expenditures would likely promote Medicaid objectives. The approvals of incentive payment funding pools we reviewed established a structure for planning, reporting on, and getting paid for general, system-wide improvements—for example, increasing primary care capacity or lowering admission rates for certain diseases—but most provided little or no detail on how the initiatives related to Medicaid objectives, such as their potential impact on Medicaid beneficiaries or low-income populations. Further, the criteria for selecting providers eligible to participate in incentive pools were not apparent in most of the approvals we reviewed. HHS’s approvals typically listed eligible providers but with no additional information about their role in providing services to Medicaid populations. For example, none of the terms and conditions for the five states’ demonstrations that we reviewed established a minimum threshold of Medicaid or low-income patient volume as the basis for participation; however, three of the five states’ approvals required that the payment allocations be weighted in part on measures of Medicaid or low-income patient workload. We also found that the approvals for incentive payment funding pools varied in the extent to which they provided assurances that Medicaid funding for these initiatives would not duplicate other sources of federal funding. The terms and conditions for only one of the five states required the state to demonstrate that its funding pool was not duplicating any other existing or future federal funding streams for the same purpose. Two other states’ terms and conditions required hospitals to demonstrate that incentive projects did not duplicate other HHS initiatives. The extent to which approvals for uncompensated care pools included protections against potential duplication of federal funds was somewhat mixed. The approvals placed some limits on the potential overlap between payments to individual providers from the uncompensated care pool and Medicaid’s Disproportionate Share Hospital program, which provides allotments to states for payments to hospitals that serve a disproportionate share of low-income and Medicaid patients. We found that HHS consistently included a requirement that when states calculate their Disproportionate Share Hospital payment limits for individual hospitals, they include as offsetting revenue any payments for inpatient or outpatient services the hospitals may have received from the uncompensated care pool. Aside from instructions about the Disproportionate Share Hospital program, however, the approvals generally did not explicitly prohibit other potentially duplicative sources of funding, such as grants awarded under other federal programs. While section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities for demonstrations that, in the Secretary’s judgment, are likely to promote Medicaid objectives, as we reported in April 2015, according to HHS officials, the agency has not issued explicit criteria explaining how it assesses whether demonstration expenditures meet this broad statutory requirement. HHS officials also told us that for a demonstration to be approved, its goals and purposes must provide an important benefit to the Medicaid program, but they did not provide more explicit criteria for determining whether approved demonstration expenditures would provide an important benefit or promote Medicaid objectives. HHS officials also said that it is not in the agency’s interest to issue guidelines that might limit its flexibility in determining which demonstrations promote Medicaid objectives. Given the breadth of the Secretary’s authority under section 1115—the exercise of which may result in billions of dollars of federal expenditures for costs not otherwise allowed under Medicaid, we recommended in April 2015 that HHS issue criteria for assessing whether section 1115 expenditure authorities are likely to promote Medicaid objectives. HHS partially concurred with this recommendation, stating that all section 1115 demonstrations are reviewed against “general criteria” to determine whether Medicaid objectives are met, including whether the demonstration will (1) increase and strengthen coverage of low-income individuals; (2) increase access to, stabilize, and strengthen providers and provider networks available to serve Medicaid and low-income populations; (3) improve health outcomes for Medicaid and other low- income populations; and (4) increase the efficiency and quality of care for Medicaid and other low-income populations through initiatives to transform service delivery networks. HHS was silent, however, as to whether it planned to issue written guidance on these general criteria, and we maintain that these general criteria are not sufficiently specific to allow a clear understanding of what HHS considers in reviewing whether expenditure authorities are likely to promote Medicaid objectives. For example, although each of HHS’s four general criteria relates to serving low-income or Medicaid populations, HHS does not define low-income or what it means to serve these individuals. In our April 2015 report, we also emphasized the importance of HHS documenting the basis for its approval decisions and showing how approved expenditure authorities are likely to promote Medicaid’s objectives. Without such documentation, HHS cannot provide reasonable assurance that it is consistently applying its criteria for determining whether demonstration expenditures promote Medicaid objectives. We recommended that HHS ensure the application of its criteria for assessing section 1115 demonstrations is documented in all approvals, to inform stakeholders—including states, the public, and Congress—of the basis for its determinations that approved expenditure authorities are likely to promote Medicaid objectives. HHS concurred with this recommendation, stating that it will ensure that all future section 1115 demonstration approval documents identify how each approved expenditure authority promotes Medicaid objectives. Finally, we recommended that HHS take steps to ensure that demonstration approval documentation consistently provides assurances that states will avoid duplicative spending by offsetting as appropriate all other federal revenues when claiming federal Medicaid matching funds. In response, HHS said it would take steps to ensure approval documentation for state programs, uncompensated care pools, and incentive payment pools consistently provides assurances that states will avoid duplication of federal spending. HHS’s policy and process for approving state spending on Medicaid demonstrations lack transparency and do not provide assurances that demonstrations will be budget neutral for the federal government. Longstanding concerns support the need for budget neutrality policy and process reform. GAO’s prior work has found that HHS’s policy and process for determining state demonstration spending limits lack transparency related to the criteria and evidence used to support state spending limits, and the most recent written policy, issued in 2001, does not reflect HHS’s actual practices. Spending limits are based on states’ estimated costs of continuing their Medicaid programs without the proposed demonstration. According to HHS policy, demonstration spending limits should be calculated by estimating future costs of baseline spending—using actual Medicaid costs, typically from the most recently completed fiscal year— and applying a benchmark growth rate (which is the lower of the state- specific historical growth rates for a recent 5-year period and estimates of HHS officials reported that their policy and nationwide Medicaid growth).process allow for negotiations in determining spending limits, including adjustments to the growth rates used to project baseline costs. For example, if there are documented anomalies in historical spending data, adjustments can be made so that projected spending is accurate. However, HHS’s policy does not specify criteria and methods for such adjustments or the documentation and evidence that are needed to support adjustments. GAO, Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency, GAO-13-384 (Washington, D.C.: June 25, 2013) any adjustments. But HHS officials did not have documentation for the agency’s process or policy on when estimates are allowed or an explanation for what type of documentation of adjustments is required. Between 2002 and 2014, we have reviewed more than a dozen states’ approved comprehensive demonstrations and found that HHS had not consistently ensured that the demonstrations would be budget neutral. We found that HHS has allowed states to use questionable methods and assumptions for their spending baselines and growth rates in projecting spending, without providing adequate documentation to support them. In particular, HHS allowed states to make adjustments that allowed for cost growth assumptions that were higher than growth rates based on historical spending and nationwide spending, without adequate support for the deviations from these benchmarks included in its policy. HHS also allowed states to include costs in the baseline spending that the state never incurred. In some cases, these practices allowed states to add billions of dollars in costs to their projected spending. For example, in our 2013 report, we found that One state’s approved spending limit for 2011 through 2016 was based on outdated information on spending—1982 data were projected forward to represent baseline spending and state-specific historical spending growth for a recent period. Had baseline expenditures and benchmark growth rates been based on recent expenditure data that were available, the 5-year spending limit would have totaled about $26 billion less, and the federal share of this reduction would have been about $18 billion. Another state’s approved spending limit for 2011 through 2016 included hypothetical costs in the state’s estimate of its baseline spending; that is, costs the state had not incurred were included in the base year spending estimate. These costs represented higher payment amounts that the state could have paid providers during the base year, but did not actually pay. For example, the state base year included costs based on the state’s hypothetically paying hospitals the maximum amount allowed under federal law, although the state had not paid the maximum amount. We estimated that had the state included only actual expenditures as indicated by HHS’s policy, the 5-year spending limit would have totaled about $4.6 billion less, and the federal share of this reduction would have been about $3 billion. Allowing questionable assumptions and methods increases projected spending and allows for significant increase in federal costs. We have found that had HHS developed demonstration spending limits based on levels suggested by its policy, spending limits would have been tens of billions of dollars lower. For example, for five states’ demonstrations we reviewed in our 2013 and 2014 reports, we estimate that had HHS used growth rates consistent with its policy and allowed only actual costs in base year spending, demonstration spending limits would have been almost $33 billion lower than what was actually approved.The federal share of the $33 billion reduction would constitute an estimated $22 billion. (See table 1.) Our concerns with HHS’s process and criteria are long-standing, and our recommendations for improving HHS’s policy and process have not yet been addressed. On several occasions since the mid-1990s, we have found that HHS had approved demonstrations that were not budget neutral to the federal government, and we have made a number of recommendations to HHS to improve the budget neutrality process, but HHS has not agreed. Specifically, we have recommended that HHS (1) better ensure that valid methods are used to demonstrate budget neutrality, (2) clarify criteria for reviewing and approving demonstration spending limits, and (3) document and make public the bases for approved spending limits. In 2008, because HHS disagreed with our recommendations—maintaining that its review and approval process was sufficient—we suggested that Congress consider requiring the Secretary of Health and Human Services to improve the department’s review criteria and methods by documenting and making clear the basis for approved spending limits. In 2013, we further recommended that HHS update its written budget neutrality policy to reflect the actual criteria and processes used to develop and approve demonstration spending limits, and ensure the policy is readily available to state Medicaid directors and others. HHS disagreed with this recommendation, stating that it has applied its policy consistently. However, based on multiple reviews of Medicaid demonstrations, we continue to believe that HHS must take actions to improve the transparency of its demonstration approvals. In conclusion, section 1115 Medicaid demonstrations provide HHS and states with a powerful tool for testing and evaluating new approaches for potentially improving the delivery of Medicaid services to beneficiaries. In using the broad authority provided under section 1115, the Secretary has responsibility for the prudent use of federal Medicaid resources, including ensuring that demonstration expenditures promote Medicaid objectives and do not increase overall federal Medicaid costs. Our work has shown, however, that it has not always been clear how approved demonstration spending relates to Medicaid objectives. For example, several state programs that were approved for Medicaid spending that we reviewed appeared, based on information in the approvals, to be only tangentially related to improving health coverage for low-income individuals. HHS’s approved expenditure authorities can set new precedents for other states to follow and raise potential for overlap with other funding streams. Similarly, we have had longstanding concerns, dating back decades, that HHS’s policy and process for approving total spending limits under demonstrations have not always ensured that spending under demonstrations will not increase federal Medicaid costs. As section 1115 demonstrations have become a significant and growing proportion of Medicaid expenditures, ensuring that demonstration expenditures are linked to Medicaid purposes and are budget neutral is even more critical to ensuring the long-term sustainability of the program, upon which tens of millions of low-income beneficiaries depend to cover their medical costs. Without clear criteria, policies, appropriate methods for developing spending limits, and improved documentation of the bases for decisions, HHS’s demonstration approvals affecting tens of billions in federal spending will continue to lack transparency and to raise concerns about the fiscal stewardship of the program. Chairman Pitts, Ranking Member Green, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you might have at this time. If you or your staff have any questions about this testimony, please contact Katherine Iritani, Director, Health Care 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 statement. GAO staff who made key contributions to this testimony are Catina Bradley, Assistant Director; Tim Bushfield, Assistant Director; Christine Davis; Shirin Hormozi; Linda McIver; Roseanne Price; and Emily Wilson. From June 2012 through mid-October 2013, five states received approval from the Department of Health and Human Services (HHS) for section 1115 demonstrations that included expenditure authorities allowing funding for state programs. Table 2 shows examples of the names of the state programs funded in the terms and conditions of each state’s approval documentation. Often there was no further detailed information regarding the approved programs. Medicaid Demonstrations: Approval Criteria and Documentation Need to Show How Spending Furthers Medicaid Objectives. GAO-15-239. Washington, D.C.: April 13, 2015. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. Medicaid Demonstrations: HHS’s Approval Process for Arkansas’s Medicaid Expansion Waiver Raises Concerns. GAO-14-689R. Washington, D.C.: August 8, 2014. Cost Savings – Health – Medicaid Demonstration Waivers. GAO-14-343SP. Washington, D.C.: April 2014. Medicaid Demonstration Waivers: Approval Process Raises Cost Concerns and Lacks Transparency. GAO-13-384. Washington, D.C.: June 25, 2013. Medicaid Demonstration Waivers: Recent HHS Approvals Continue to Raise Cost and Oversight Concerns. GAO-08-87. Washington, D.C.: January 31, 2008. Medicaid Demonstration Projects in Florida and Vermont Approved under Section 1115 of the Social Security Act. B-309734. July 27, 2007. Medicaid Demonstration Waivers: Lack of Opportunity for Public Input during Federal Approval Process Still a Concern. GAO-07-694R. Washington, D.C.: July 24, 2007. Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue to Raise Cost and Oversight Concerns. GAO-04-480. Washington, D.C.: June 30, 2004. SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program Goals. GAO-04-166R. Washington, D.C.: January 5, 2004. Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002. Medicaid Section 1115 Waivers: Flexible Approach to Approving Demonstrations Could Increase Federal Costs. GAO/HEHS-96-44. Washington, D.C.: November 8, 1995. 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 long-term sustainability of the $500 billion joint federal-state Medicaid program is important for the low-income and medically needy populations that depend on it. Section 1115 of the Social Security Act provides the Secretary of Health and Human Services with broad authority to waive certain Medicaid requirements and to authorize federal and state expenditures that would not otherwise be allowed under Medicaid, for experimental or pilot projects likely to promote Medicaid objectives. Spending under section 1115 demonstrations has increased rapidly from about one-fifth of Medicaid expenditures in fiscal year 2011 to close to one-third in fiscal year 2014. Expenditure authorities in approved demonstrations have been used by states to expand Medicaid coverage to individuals and for other purposes. HHS policy requires that demonstrations not increase federal costs for the Medicaid program. This testimony addresses (1) the types of expenditure authorities HHS has approved for non-coverage-related purposes and whether the approval documentation shows how they promote Medicaid objectives, and (2) HHS's policy and processes for ensuring demonstrations are not likely to raise federal costs. The testimony is based on GAO's April 2015 report on expenditure authorities in demonstrations approved from June 2012 through mid-October 2013 ( GAO 15 239 ) and several GAO reports issued from 2002 to 2014 addressing HHS's policies and practices for ensuring demonstrations are budget neutral. In April 2015, GAO found that under Medicaid section 1115 demonstrations—experimental or pilot projects to test new ways of providing services which account for nearly one-third of Medicaid expenditures—the Department of Health and Human Services (HHS) had authorized expenditures not otherwise allowed under Medicaid for a broad range of purposes beyond expanding coverage. How these expenditure authorities promoted Medicaid objectives was not always apparent. In the 25 states' demonstrations GAO reviewed, two types of non-coverage-related expenditure authorities—state-operated programs and funding pools—were significant in the amounts of spending approved. GAO found that HHS allowed five states to spend up to $9.5 billion in Medicaid funds to support over 150 state-operated programs. The programs were wide-ranging in nature, such as workforce training, housing, and public health programs, and operated by a wide range of state agencies, such as educational institutions, corrections, aging, and public health agencies, and could have received funding from other sources. HHS allowed eight states to spend more than $26 billion to establish capped funding pools through which states could make payments to hospitals and other providers for a range of purposes, including payments to incentivize hospital infrastructure or other improvements. How the approved expenditures for the state-operated programs and funding pools would promote Medicaid objectives was not always clear in HHS's approval documentation. For example, some state programs approved for funding appeared to be only tangentially related to health coverage for low-income individuals. Although section 1115 of the Social Security Act provides HHS with broad authority in approving expenditure authorities that, in the Secretary's judgment, are likely to promote Medicaid objectives, GAO found that HHS has not issued specific criteria for making these determinations. In multiple reports, issued from 2002 to 2014, GAO also found that HHS's policy and process for approving state spending limits under demonstrations have lacked transparency and have not ensured that demonstrations will be budget neutral to the federal government. The criteria and methods used to set spending limits were not always clear or well supported, such that approved spending limits for some demonstrations were billions of dollars higher than what was supported. For example, for five demonstrations GAO reviewed in 2013 and 2014, using assumptions suggested by HHS's policy, GAO found that spending limits would have been $33 billion lower than what was actually approved. In its 2015 report and prior work, GAO has made multiple recommendations to HHS aimed at (1) improving the transparency of approved spending and how it furthers Medicaid purposes and (2) ensuring Medicaid demonstrations do not increase federal costs. HHS generally agreed to improve its expenditure authority approval documentation, but did not agree with several other recommendations aimed at improving its approval policies and processes and transparency. GAO maintains that, unless HHS takes the actions necessary to implement GAO's prior recommendations, tens of billions of dollars could be at risk. |
DOD, Medicaid, and Medicare Part D use different methods to pay for prescription drugs dispensed in retail pharmacies based on program design differences and statutory requirements. Specifically, DOD reimburses retail pharmacies directly for drugs dispensed to its beneficiaries, state Medicaid programs reimburse pharmacies and then receive federal matching funds for a portion of these expenditures, and Medicare Part D pays pharmacies indirectly through plan sponsors. Under the Medicare Part D program, beneficiaries may choose from competing prescription drug plans offered by plan sponsors (primarily private health insurers), and those plan sponsors are responsible for paying pharmacies. In addition, DOD and Medicaid are statutorily entitled to certain refunds or rebates from drug manufacturers for drugs dispensed to their beneficiaries, while Medicare Part D plan sponsors negotiate with manufacturers for rebates and other price concessions. In fiscal year 2011, DOD provided prescription drug coverage to about 9.7 million beneficiaries through retail pharmacies, its military treatment facilities, and its mail order pharmacy. Active duty service members (including activated National Guard and Reserve members) are not charged for covered prescriptions. For all other beneficiaries, the beneficiary-paid amount (i.e., the amount they pay to the pharmacy when filling a prescription) varies based on the type of medication and where the prescription is filled. For certain drugs dispensed to beneficiaries at retail pharmacies after January 28, 2008, DOD is statutorily entitled to pay the federal ceiling price (FCP), which also pertains to its directly-purchased drugs. In practice, DOD obtains these prices through post-purchase refunds paid by the manufacturers of certain drugs—primarily brand-name drugs. In fiscal year 2011, DOD’s prescription drug spending totaled about $7.48 billion, according to DOD officials, representing about 8.9 percent of federal spending for prescription drugs. In fiscal year 2011, Medicaid provided prescription drug coverage to about 71.5 million low income beneficiaries. Prescription drug coverage is an optional benefit under federal Medicaid law that all states and the District of Columbia provide. States establish and administer their own Medicaid programs within broad federal guidelines. Thus, Medicaid programs vary from state to state. Most states require a nominal beneficiary copayment for prescription drugs. State Medicaid programs reimburse retail pharmacies for drugs dispensed to Medicaid beneficiaries and then report these payments to CMS. The federal government provides matching funds to state programs to cover a portion of these costs. Federal law requires manufacturers to pay rebates to state Medicaid agencies for drugs dispensed to Medicaid beneficiaries. These statutorily mandated rebates are calculated based on two prices manufacturers must report to CMS—the average manufacturer price (AMP) and the “best price.” For brand-name drugs: the rebate equals the greater of 23.1 percent of the AMP or the difference between the AMP and the best price. If the AMP rises faster than inflation as measured by the change in the consumer price index, the manufacturer is required to provide an additional rebate to the state Medicaid program. The rebate is capped at 100 percent of AMP. For generic drugs: the rebate equals 13 percent of AMP. Best price is not a factor and there are no additional rebates or caps. In addition, most state Medicaid programs negotiate additional rebates— known as state supplemental rebates—from drug manufacturers. In fiscal year 2011, total federal and state Medicaid net spending on prescription The federal share was $8.6 billion, accounting drugs was $13.7 billion.for about 10.3 percent of federal drug expenditures. In 2011, about 33.2 million Medicare beneficiaries were enrolled in the Medicare Part D program. Medicare beneficiaries can obtain coverage for outpatient prescription drugs by choosing from multiple competing plans offered by plan sponsors—primarily private health insurers—that contract with CMS to offer the prescription drug benefit. The plan sponsors are responsible for reimbursing retail pharmacies for drugs dispensed to Medicare Part D beneficiaries. Drug plans may differ in the premiums charged to CMS and beneficiaries; beneficiary deductibles and copayments (i.e., beneficiary-paid amounts); the drugs covered; pharmacies available to beneficiaries for filling prescriptions; and the drug prices, rebates, and other price concessions negotiated with manufacturers and pharmacies. Although Medicare Part D plans can design their own formularies, CMS generally requires that each formulary include at least two drugs within each therapeutic class and has also designated six categories of clinical concern for which plans must cover all or substantially all of the drugs. As we previously reported, plan sponsors have indicated that these formulary requirements limit their ability to negotiate lower prices for some drugs. Medicare Part D beneficiaries fill prescriptions at retail or mail order pharmacies affiliated with their plans; these pharmacies then submit claims to the plan sponsors for reimbursement. Plan sponsors often negotiate point-of-sale and post-purchase rebates and other price concessions with manufacturers and pharmacies; these must be reported to CMS each year at the national drug code (NDC) level in the DIR reports. In 2011, federal spending on Medicare Part D totaled approximately $55.2 billion, accounting for about 65.9 percent of total federal drug expenditures. Medicaid paid a lower average net unit price—that is, the price after subtracting any beneficiary-paid amounts and post-purchase price adjustments—than DOD and Medicare Part D across the entire sample of 78 prescription drugs and the subsets of brand-name and generic drugs. Specifically, Medicaid’s average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). (See fig. 1.) Similarly, Medicaid’s average net price for the subset of brand- name drugs in our sample was $1.57 per unit, the lowest among the three programs, while DOD paid 34 percent more ($2.11 per unit), and Medicare Part D paid an estimated 69 percent more ($2.65 per unit). Medicaid also paid the lowest net price for the subset of generic drugs in our sample ($0.28 per unit), while Medicare Part D paid 4 percent more ($0.29 per unit) and DOD paid 50 percent more ($0.42 per unit). When we examined the net prices that each program paid for the individual drugs in the sample after subtracting all reported beneficiary- paid amounts and post-purchase price adjustments, we found that Medicaid paid the lowest prices for 25 brand-name and 3 generic drugs, while DOD paid the lowest net price for 5 brand-name and 22 generic drugs, and Medicare Part D paid the lowest estimated net price for 3 brand-name and 20 generic drugs. We found that multiple factors affected the net prices paid by each program, including the amount of post-purchase price adjustments each program received, the gross prices paid to pharmacies, the beneficiary- paid amounts, and market dynamics. Of these, a key factor for the entire sample and for the brand-name subset was the amount of manufacturer post-purchase price adjustments received. (See fig. 2.) On average across the entire sample, these price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid. For the brand-name subset of the sample, these rebates ranged from about 19 percent of the gross price for Medicare Part D to nearly 39 percent for DOD and 62 percent for Medicaid. The statutory framework allowing each program to obtain post-purchase price adjustments contributes to the wide range of percentages observed. Medicaid’s federally mandated rebates apply to virtually all drugs, while DOD’s refunds only apply to certain drugs (i.e., primarily brand-name drugs). Furthermore, we found that even when DOD received a refund for a given drug, DOD’s per-unit refund amount was less than Medicaid’s per-unit rebate for most of the drugs in our sample even though we applied only the federally mandated (i.e., URA-based) rebates for the calculation of Medicaid net prices. If we had been able to accurately apply the Medicaid state supplemental rebates, the per-unit Medicaid rebate amounts would be even larger (i.e., a greater percentage of the gross unit price) than we report. Finally, we found that Medicare Part D obtained the lowest per-unit price adjustments among the three programs. In contrast to the statutory authority allowing DOD and Medicaid to collect specific refunds and rebates, Medicare Part D plan sponsors rely on independent negotiations to obtain price concessions from drug manufacturers. As we have previously reported, plan sponsors have noted limitations on their ability to negotiate price concessions for some drugs due to formulary requirements set by CMS, lack of competitors for some drugs, or low utilization for some drugs that limit incentives for manufacturers to provide price concessions. The gross unit prices paid to retail pharmacies by each program and the magnitude of beneficiary-paid amounts also contributed to the differences in net prices, although to a lesser degree than post-purchase price adjustments. As shown in figure 2, each of the three programs paid the lowest gross unit price to pharmacies for one of the groups of sample drugs: Medicare Part D for the sample as a whole, DOD for the subset of brand-name drugs, and Medicaid for the subset of generic drugs. These different gross unit prices act as a “starting point” for determining net prices paid by the programs—a lower gross price negotiated between the program and the pharmacy makes it easier for the program to achieve a lower net unit price after accounting for beneficiary-paid amounts and post-purchase price adjustments. Beneficiary-paid amounts also affected the net prices paid by each program; larger beneficiary payments contributed to lower net prices paid by the agency. The average beneficiary-paid amounts varied across the three programs; for example, on average for all 78 drugs in our sample, beneficiaries paid nearly 19 percent—or $0.23—of Medicare Part D’s gross price per unit, while DOD beneficiaries paid about 7 percent—or $0.12—of DOD’s average gross price per unit. Beneficiary-paid amounts also varied depending on the category of drugs examined. For the subset of brand-name drugs in our sample, beneficiary-paid amounts ranged from 6 percent of the gross price for DOD to 17 percent for Medicare Part D, while for the subset of generic drugs these amounts ranged from 14 percent of the gross price for DOD to 21 percent for Medicare Part D. Market dynamics—such as manufacturer responses to offset discounts, the number of competitors for a given drug, and varying utilization of specific drugs by different programs—can also affect the net prices paid by these and other drug programs and thus the amount of savings the programs might be able to achieve. For example, the DOD, Medicaid, and Medicare Part D drug programs theoretically could have achieved savings had they been able to pay the lowest price for each of the drugs in our sample through having access to the post-purchase price adjustments available to the program with the lowest net price for each drug. However, market dynamics, such as manufacturer responses, likely would offset at least some of the savings. Previous reports by GAO and the Congressional Budget Office have noted that making rebates or other discounts available to federal programs could provide savings for the newly eligible programs but could result in higher prices for other programs—including those already eligible for the discounts—as drug manufacturers respond by raising their prices to offset the change. The magnitude of these potential offsetting price increases could depend on a number of factors. For example, if a large federal program with many beneficiaries became eligible for the discounts, manufacturers might choose to raise prices by a greater amount than they would if a smaller program with fewer beneficiaries became eligible. Manufacturers might choose to raise prices more for drugs with fewer competitors than for drugs with many competitors. Furthermore, because federal prices are generally based on prices paid by nonfederal purchasers such as private health insurers, manufacturers would have to raise prices to those purchasers in order to raise the federal prices. The magnitude of these potential effects would vary by drug and would depend on a number of factors, including the relationship between the specific federal price extended to newly eligible programs and the price paid by nonfederal purchasers. Other factors that may affect the magnitude of savings, if any, which could be achieved by DOD, Medicaid, and Medicare Part D include differences between the programs with regard to: programs’ formulary practices—for example, in exchange for price concessions, a program may offer a reduced copayment or preferred placement of a manufacturer’s drug in the formulary to encourage beneficiaries to choose that drug rather than a similar alternative. In addition, programs may differ in their ability to exclude certain drugs from their formularies, which can limit their ability to negotiate; for example, DOD officials told us that they must cover all drugs within a class. number of beneficiaries enrolled—that is, a program or plan with more beneficiaries can generally negotiate lower gross prices with pharmacies and more rebates from manufacturers through offering greater anticipated utilization of drugs than a program with fewer beneficiaries. utilization practices based on differences in beneficiary populations—for example, Medicare Part D’s predominantly elderly population is likely to use a different mix of drugs than a program such as Medicaid, which serves a younger population, and these utilization differences can affect each program’s ability to obtain discounts on certain drugs based on volume. copayment structure—for example, one program may achieve lower net prices on certain drugs by charging beneficiaries a higher copayment for the drug. type of pharmacy—for example, the Medicare Part D net prices we are reporting include data from prescriptions filled at mail order pharmacies used by the plans, which typically charge the plans less overhead than retail store-based pharmacies, while DOD prices are limited to prescriptions filled at store-based pharmacies; if the mail order prescriptions were excluded, the average Medicare Part D prices would likely be higher than those we report. We provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated. We will send copies of this report to relevant congressional committees and other interested members. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding 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 members who made key contributions to this report are listed in appendix II. In this appendix we describe our data sources, the selection of the drug sample, and calculations of gross and net unit prices paid by the Department of Defense (DOD), Medicaid, and Medicare Part D for prescription drugs dispensed to their beneficiaries at retail pharmacies. We obtained prescription drug claims data from DOD and the Centers for Medicare & Medicaid Services (CMS) for the third calendar quarter of 2010. Specifically, we obtained Pharmacy Data Transaction Service (PDTS) data from DOD covering prescription drugs dispensed to its beneficiaries by non-DOD retail pharmacies and we obtained Medicaid Analytic eXtract (MAX) data and Medicare Part D Prescription Drug Event (PDE) claims data from CMS. For each data source, we excluded claims with third-party payments; we also excluded physician-administered outpatient prescription drugs and items that are not traditionally considered drugs such as bandages, syringes, needles, diabetes test For Medicaid, we excluded Arizona and Delaware strips, and saline.because claims from those states did not include third-party payment data. We included only fee-for-service Medicaid claims because claims paid under a capitated managed care plan or similar methods would not provide an accurate picture of drug prices actually paid. We also excluded Medicaid claims for beneficiaries who were also eligible for Medicare because retail prescription drugs for those beneficiaries are covered by Medicare Part D. We excluded Medicare Part D claims from plans that restrict enrollment, such as employer plans, Program of All- Inclusive Care for the Elderly (PACE) plans, and demonstration plans. We used Red Book data from Truven Health Analytics to determine the brand-name or generic status of each drug. We reviewed agency data for reasonableness and consistency, including screening for outlier prices and examining possible reasons for inconsistencies between the data sources. We also reviewed documentation and talked to agency officials about steps they take to ensure data reliability. We determined that the data were sufficiently reliable for our purposes. We determined utilization using units of each (for drugs measured in discrete units such as tablets, capsules, vials, or kits), milliliters (for drugs measured in liquid volume), and grams (for drugs measured by weight). When calculating expenditures, we used the sum of the programs’ payments for each drug plus any reported beneficiary-paid amounts (e.g., deductibles and copayments). Cleaned and validated Medicaid data for 2010 were not available at the time that we selected our sample. Therefore, we used only DOD and Medicare Part D data to select our sample. However, such data became available later and we were able to use these data to determine Medicaid gross and net unit prices. To select the highest utilization and highest expenditure drugs for the sample, we aggregated the utilization and expenditure data at the drug level (i.e., drug name, strength, and dosage form) separately for DOD and Medicare Part D. For example, all national drug codes (NDC) corresponding to 10 mg tablets of Lipitor reimbursed by DOD on behalf of its beneficiaries were aggregated and the associated utilization and expenditures were summed and compared to other brand-name drugs, while NDCs corresponding to 10 mg tablets of atorvastatin (the generic equivalent of Lipitor) reimbursed by DOD were aggregated separately and compared to other generic drugs. Because we encountered difficulty in identifying and removing outliers from the Medicare Part D PDE data due to issues with the reliability of the “Quantity Dispensed” field, we narrowed the drugs considered for inclusion in the sample by first using DOD utilization and expenditure data to rank the top 150 brand-name and top 150 generic drugs in each category (high utilization and high expenditure). We were then able to clean the data by identifying and removing outliers from the much smaller subset of PDE claims corresponding to these drugs. We ranked the brand-name and generic drugs based on utilization and expenditures for Medicare Part D. We then combined the DOD and Medicare Part D rankings to determine the top brand-name and generic drugs that were reimbursed by both agencies. The drug sample was selected to include the top 50 brand-name and top 50 generic drugs; 25 of the brand-name drugs and 25 of the generic drugs were selected on the basis of the combined DOD and Medicare Part D utilization ranks, and the other 25 brand-name and 25 generic drugs were selected on the basis of the combined DOD and Medicare Part D expenditure ranks. After accounting for drugs that were in both the high-expenditure group and the high-utilization group, the final sample contained 33 brand-name drugs and 45 generic drugs and accounted for at least 25 percent of utilization and 25 percent of expenditures for both DOD and Medicare Part D retail prescriptions filled by beneficiaries in the third calendar quarter of 2010 (see table 1). (See table 2 for a list of the drugs in the sample.) After selecting the sample, we calculated gross unit prices paid to pharmacies by DOD, Medicaid, Medicare Part D, and their beneficiaries for all individual drugs. We calculated gross unit prices by first adding the program-paid and beneficiary-paid amounts for each drug, then dividing these expenditures by total utilization. For Medicaid, we were unable to include beneficiary-paid amounts because CMS does not collect these data. Therefore the Medicaid gross prices we report are somewhat lower than the actual gross prices would have been had beneficiary-paid amounts been included. However, beneficiary-paid amounts for Medicaid are generally nominal and it is likely that they would be smaller than corresponding amounts for DOD and Medicare Part D. We also calculated gross unit prices for the entire sample, the subset of brand- name drugs, and the subset of generic drugs by dividing the total expenditures for all relevant drugs by the total utilization for those drugs. All three programs (DOD, Medicaid, and Medicare Part D) obtain refunds, rebates, or other price concessions from drug manufacturers for at least some drugs dispensed to their beneficiaries by retail pharmacies. In order to more accurately calculate reimbursement prices paid to pharmacies by each program, we accounted for these post-purchase price adjustments by calculating program-paid net unit prices. To calculate these prices for DOD, we obtained post-purchase refund data from DOD for prescription drugs dispensed to its beneficiaries at non-DOD retail pharmacies.These refunds were subtracted from the NDC-level gross unit prices to determine net unit prices paid by DOD for each NDC. We then aggregated these net NDC-level prices as appropriate to determine average net unit prices for each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. Manufacturers are required to provide rebates (which are calculated on the basis of URA data) to state Medicaid agencies for covered drugs. See 42 U.S.C. § 1396r-8. States may also negotiate supplemental rebates directly with manufacturers for drugs dispensed to Medicaid recipients. These supplemental rebates are reported in Form CMS-64, a standardized quarterly expenditure report that states submit to CMS documenting payments and rebates or offsets in various medical categories, including prescription drugs, to obtain federal matching funds to which states are entitled. each individual drug in our sample, for the entire sample, for the subset of brand-name drugs, and for the subset of generic drugs. For Medicare Part D, plan sponsors may negotiate rebates and other price concessions from manufacturers for drugs dispensed to their beneficiaries. Beginning in 2010, the annual total of all such price concessions at the NDC level must be reported to CMS on the annual Medicare Part D Direct and Indirect Remuneration (DIR) Detailed Report. However, because plan sponsors have several options for allocating DIR to the NDC level, calculation of the net drug price using the NDC-level DIR data provides only an estimate of the net prices paid by plan sponsors. We also evaluated the impact of point-of-sale (POS) rebates as reported in the PDE data to our calculation of net prices for Medicare Part D and determined that POS rebates were insignificant in comparison to DIR amounts; we therefore ignored POS rebates in our calculation of net prices. To estimate program-paid net prices for Medicare Part D, we obtained the 2010 DIR Detailed Report from CMS. To calculate the total DIR for each NDC, we added the “rebate” and “all_other_dir” variables. Because the DIR report includes annual—rather than quarterly—data on price concessions, we estimated the proportion of Medicare Part D price concessions applicable to our sample by determining the proportion of 2010 expenditures that occurred in the third calendar quarter for each NDC in our sample. We multiplied this result by the total amount of price concessions reported in the 2010 DIR Detailed Report for a given NDC to estimate the proportion of each NDC’s DIR (in dollars) to apply to our analysis. We divided this result by the NDC-level utilization and subtracted the resulting per-unit price concession amount from the Medicare Part D gross unit price for that NDC. We then aggregated the results for the appropriate NDCs to determine average net unit prices for the entire sample, the subset of brand-name drugs, and the subset of generic drugs. We interviewed DOD and CMS officials and reviewed literature describing factors that affect drug prices. The results of our analyses are limited to the 78 high-utilization and high-expenditure drugs in our sample for the third calendar quarter of 2010 and are not necessarily applicable across all drugs or any other time periods. In addition to the contact named above, key contributors to this report were Robert Copeland, Assistant Director; Zhi Boon; Karen Howard; Laurie Pachter; and Carmen Rivera-Lowitt. | In 2011, federal spending for prescription drugs by DOD, Medicaid, and Medicare Part D totaled $71.2 billion—representing about 85 percent of all federal prescription drug expenditures—for about 114.4 million beneficiaries. Each program reimbursed retail pharmacies for outpatient prescriptions filled at these pharmacies by their beneficiaries. GAO was asked to compare prices paid for prescription drugs across federal programs. This report compares retail reimbursement prices paid by DOD, Medicaid, and Medicare Part D for a sample of prescription drugs and describes factors affecting these prices. Using agency data for the third quarter of 2010 (the most recent data available at the time of GAO's analysis), GAO selected a sample of 50 high-utilization and 50 high-expenditure drugs; after accounting for overlap between the two groups, the final sample contained 78 drugs. GAO calculated average gross unit prices paid to pharmacies by each program by adding total program-paid and beneficiary-paid amounts and dividing by total utilization for each drug, the entire sample, and the subsets of brand-name and generic drugs. GAO calculated net unit prices paid by each program by subtracting all agency-reported beneficiary-paid amounts, rebates, refunds, and other price concessions from the gross unit prices. GAO also interviewed DOD, Medicaid, and Medicare Part D officials and reviewed literature describing factors affecting drug prices. GAO found that Medicaid paid the lowest average net prices across a sample of 78 high-utilization and high-expenditure brand-name and generic drugs when compared to prices paid by the Department of Defense (DOD) and Medicare Part D. Specifically, Medicaid's average net price for the entire sample was $0.62 per unit, while Medicare Part D paid an estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more ($0.99 per unit). Similarly, Medicaid paid the lowest net price for the subset of brand-name drugs in the sample, while DOD paid 34 percent more and Medicare Part D paid an estimated 69 percent more. Medicaid also paid the lowest net price for the subset of generic drugs, while Medicare Part D paid 4 percent more and DOD paid 50 percent more. GAO found that multiple factors affected the net prices paid by each program. Specifically, a key factor for the entire sample and the brand-name subset was the amount of any post-purchase price adjustments, which are the refunds, rebates, or price concessions received by each program from drug manufacturers after drugs have been dispensed to program beneficiaries. These price adjustments ranged from about 15 percent of the gross price for Medicare Part D to about 31 percent for DOD, and nearly 53 percent for Medicaid across the entire sample. The gross prices each program negotiated with pharmacies and the magnitude of beneficiary-paid amounts also contributed to differences in net prices paid by the three programs, but to a lesser degree. GAO provided a copy of the draft report to DOD and the Department of Health and Human Services (HHS) for comment. DOD stated that it had no comments. HHS provided a technical comment, which was incorporated. |
US-VISIT is a governmentwide program intended to enhance the security of U.S. citizens and visitors, facilitate legitimate travel and trade, ensure the integrity of the U.S. immigration system, and protect the privacy of our visitors. Its scope includes the pre-entry, entry, status, and exit of hundreds of millions of foreign national travelers who enter and leave the United States at over 300 air, sea, and land POEs, and the provision of new analytical capabilities across the overall process. To achieve its goals, US-VISIT uses biometric information (digital fingerscans and photographs) to verify identity. In many cases, the US-VISIT process begins overseas at U.S. consular offices, which collect biometric information from applicants for visas and check this information against a database of known criminals and suspected terrorists. When a visitor arrives at a POE, the biometric information is used to verify that the visitor is the person who was issued the visa. In addition, at certain sites, visitors are required to confirm their departure by undergoing US-VISIT exit procedures—that is, having their visas or passports scanned and undergoing fingerscanning. The exit confirmation is added to the visitor’s travel records to demonstrate compliance with the terms of admission to the United States. (App. III provides a detailed description of the pre-entry, entry, status, exit, and analysis processes.) collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; identifying foreign nationals who (1) have overstayed or violated the terms of their admission; (2) may be eligible to receive, extend, or adjust their immigration status; or (3) should be apprehended or detained by law enforcement officials; detecting fraudulent travel documents, verifying traveler identity, and determining traveler admissibility through the use of biometrics; and facilitating information sharing and coordination within the immigration and border management community. In July 2003, DHS established a program office with responsibility for managing the acquisition, deployment, operation, and sustainment of the US-VISIT system and its associated supporting people (e.g., Customs and Border Protection (CBP) officers), processes (e.g., entry/exit policies and procedures), and facilities (e.g., inspection booths and lanes), in coordination with its stakeholders (CBP and the Department of State). As of October 2005, about $1.4 billion has been appropriated for the program, and, according to program officials, about $962 million has been obligated. DHS plans to deliver US-VISIT capability in four increments, with Increments 1 through 3 being interim, or temporary, solutions that fulfill legislative mandates to deploy an entry/exit system, and Increment 4 being the implementation of a long-term vision that is to incorporate improved business processes, new technology, and information sharing to create an integrated border management system for the future. In Increments 1 through 3, the program is building interfaces among existing (“legacy”) systems; enhancing the capabilities of these systems; and deploying these capabilities to air, sea, and land POEs. These increments are to be largely acquired and implemented through existing system contracts and task orders. In May 2004, DHS awarded an indefinite-delivery/indefinite-quantity prime contract to Accenture and its partners. According to the contract, the prime contractor will help support the integration and consolidation of processes, functionality, and data, and it will develop a strategy to build on the technology and capabilities already available to produce the strategic solution, while also assisting the program office in leveraging existing systems and contractors in deploying the interim solutions. Increment 1 concentrates on establishing capabilities at air and sea POEs. It is divided into two parts—1 and 1B. Increment 1 (air and sea entry) includes the electronic capture and matching of biographic and biometric information (two digital index fingerscans and a digital photograph) for selected foreign nationals, including those from visa waiver countries. Increment 1 was deployed on January 5, 2004, for individuals requiring a nonimmigrant visa to enter the United States, through the modification of pre-existing systems. These modifications accommodated the collection and maintenance of additional data fields and established interfaces required to share data among DHS systems in support of entry processing at 115 airports and 14 seaports. Increment 1B (air and sea exit) involves the testing of exit devices to collect biometric exit data for select foreign nationals at 11 airports and seaports. Three exit alternatives were pilot tested: Kiosk—A self-service device (which includes a touch-screen interface, document scanner, finger scanner, digital camera, and receipt printer) that captures a digital photograph and fingerprint and prints out an encoded receipt. Mobile device—A hand-held device that is operated by a workstation attendant; it includes a document scanner, finger scanner, digital camera, and receipt printer and is used to capture a digital photograph and fingerprint. Validator—A hand-held device that is used to capture a digital photograph and fingerprint, which are then matched to the photograph and fingerprint captured via the kiosk and encoded in the receipt. Increment 2 focuses primarily on extending US-VISIT to land POEs. It is divided into three parts—2A, 2B, and 2C. Increment 2A (air, sea, and land) includes the capability to biometrically compare and authenticate valid machine-readable visas and other travel and entry documents issued by State and DHS to foreign nationals at all POEs. Increment 2A was deployed on October 23, 2005, according to program officials. It also includes the deployment by October 26, 2006, of technology to read biometrically enabled passports from visa waiver countries. Increment 2B (land entry) redesigns the Increment 1 entry solution and expands it to the 50 busiest land POEs. The process for issuing Form I-94 was redesigned to enable the electronic capture of biographic, biometric (unless the traveler is exempt), and related travel documentation for arriving travelers. This increment was deployed to the busiest 50 U.S. land border POEs as of December 29, 2004. Before Increment 2B, all information on the Form I-94s was handwritten. The redesigned systems electronically capture the biographic data included in the travel document. In some cases, the form is completed by CBP officers, who enter the data electronically and then print the form. Increment 2C is to provide the capability to automatically, passively, and remotely record the entry and exit of covered individuals using radio frequency (RF) technology tags at primary inspection and exit lanes. An RF tag that includes a unique ID number is to be embedded in each Form I-94, thus associating a unique number with a record in the US-VISIT system for the person holding that Form I-94. In August 2005, the program office deployed the technology to five border crossings (three POEs) to verify the feasibility of using passive RF technology to record traveler entries and exits via a unique ID number embedded in the CBP Form I-94. The results of this demonstration are to be reported in February 2006. Increment 3 extended Increment 2B (land entry) capabilities to 104 land POEs; this increment was essentially completed as of December 19, 2005. Increment 4 is the strategic US-VISIT program capability, which program officials stated will likely consist of a further series of incremental releases or mission capability enhancements that will support business outcomes. The program reports that it has worked with its prime contractor and partners to develop this overall vision for the immigration and border management enterprise. Increments 1 through 3 include the interfacing and integration of existing systems and, with Increment 2C, the creation of a new system, the Automated Identification Management System (AIDMS). The three main existing systems are as follows: The Arrival Departure Information System (ADIS) stores noncitizen traveler arrival and departure data received from air and arrival data captured by CBP officers at air and sea POEs, Form I-94 issuance data captured by CBP officers at Increment 2B departure information captured at US-VISIT biometric departure pilot (air and sea) locations, pedestrian arrival information and pedestrian and vehicle departure information captured at Increment 2C POE locations, and status update information provided by the Student and Exchange Visitor Information System (SEVIS) and the Computer Linked Application Information Management System (CLAIMS 3) (described below). ADIS provides record matching, query, and reporting functions. The passenger processing component of the Treasury Enforcement Communications System (TECS) includes two systems: Advance Passenger Information System (APIS), a system that captures arrival and departure manifest information provided by air and sea carriers, and the Interagency Border Inspection System, a system that maintains lookout data and interfaces with other agencies’ databases. CBP officers use these data as part of the admission process. The results of the admission decision are recorded in TECS and ADIS. The Automated Biometric Identification System (IDENT) collects and stores biometric data on foreign visitors. US-VISIT also exchanges biographic information with other DHS systems, including SEVIS and CLAIMS 3. These two systems contain information on foreign students and foreign nationals who request benefits, such as a change of status or extension of stay. Some of the systems previously described, such as IDENT and the new AIDMS, are managed by the program office, while some systems are managed by other organizational entities within DHS. For example, TECS is managed by CBP, SEVIS is managed by Immigration and Customs Enforcement, CLAIMS 3 is under United States Citizenship and Immigration Services, and ADIS is jointly managed by CBP and US-VISIT. US-VISIT also interfaces with other, non-DHS systems for relevant purposes, including watch list updates and checks to determine whether a visa applicant has previously applied for a visa or currently has a valid U.S. visa. In particular, US-VISIT receives biographic and biometric information from State’s Consular Consolidated Database as part of the visa application process, and returns fingerscan information and watch list changes. The US-VISIT program office structure includes nine component offices. Each of the program offices includes a director and subordinate organizational units, as established by the director. The responsibilities for each office are stated below. Figure 1 shows the program office structure, including its nine offices. The roles and responsibilities for each of the nine offices include the following: Chief Strategist is responsible for developing and maintaining the strategic vision, strategic documentation, transition plan, and business case. Budget and Financial Management is responsible for establishing the program’s costs estimates; analysis; and expenditure management policies, processes, and procedures that are required to implement and support the program by ensuring proper fiscal planning and execution of the budget and expenditures. Mission Operations Management is responsible for developing business and operational requirements based on strategic direction provided by the Office of the Chief Strategist. Outreach Management is responsible for enhancing awareness of US-VISIT requirements among foreign nationals, key domestic audiences, and internal stakeholders by coordinating outreach to media, third parties, key influencers, Members of Congress, and the traveling public. Information Technology Management is responsible for developing technical requirements based on strategic direction provided by the Office of the Chief Strategist and business requirements developed by the Office of Mission Operations Management. Implementation Management is responsible for developing accurate, measurable schedules and cost estimates for the delivery of mission systems and capabilities. Acquisition and Program Management is responsible for establishing and managing the execution of program acquisition and management policies, plans, processes, and procedures. Administration and Training is responsible for developing and administering a human capital plan that includes recruiting, hiring, training, and retaining a diverse workforce with the competencies necessary to accomplish the mission. Facilities and Engineering Management is responsible for establishing facilities and environmental policies, procedures, processes, and guidance required to implement and support the program office. In response to legislative mandate, we have issued four reports on DHS’s annual expenditure plans for US-VISIT. Our reports have, among other things, assessed whether the plans satisfied the legislative conditions and provided observations on the plans and DHS’s program management. As a result of our assessments, we made 24 recommendations aimed at improving both plans and program management, all of which DHS has agreed to implement. Of these 24 recommendations, 18 address risks stemming from program management. The current status of DHS’s implementation of our 18 recommendations on program risks is mixed, but progress in critical areas has been slow. For example, over 2 years have passed, and the program office has yet to develop a security plan consistent with federal guidance or to economically justify its investment in system increments. According to the Program Director, the pace of progress is attributable to competing demands on time and resources. DHS agreed to implement all 18 recommendations. Of these 18, DHS has completely implemented 2, has partially implemented 11, and is in the process of implementing another 5. Of the 11 that are partially implemented, 7 are about 2 years old, and 4 are about 10 to 19 months old. Of the 5 that are in progress, 3 are about 10 months old. These 18 recommendations are aimed at strengthening the program’s management effectiveness. The longer that the program takes to implement the recommendations, the greater the risk that the program will not meet its goals on time and within budget. Figure 2 provides an overview of the extent to which each recommendation has been implemented. The figure is followed by sections providing details on each recommendation and our assessment of its implementation status. In June 2003, we reported that the Immigration and Naturalization Service had not developed a security plan and performed a privacy impact assessment for the entry exit program (as US-VISIT was then known). A security plan and privacy impact assessment are important to understanding system requirements and ensuring that the proper safeguards are in place to protect system data and resources. System acquisition best practices and federal guidance advocate understanding and defining security and privacy requirements both early and continuously in a system’s life cycle, and effectively planning for their satisfaction. Accordingly, we recommended that DHS do the following: Develop and begin implementing a system security plan, and perform a privacy impact assessment and use the results of the analysis in near-term and subsequent system acquisition decision making. Since we made the system security plan recommendation about 2½ years ago, its implementation has been slow. For example, we reported in September 2003 and again in May 2004 that the program office had not developed a security plan. In February 2005, we reported that the program office had developed a security plan, dated September 2004, and that this plan was generally consistent with federal guidance. That is, the plan provided an overview of system security requirements, described the controls in place or planned for meeting those requirements, referred to the applicable documents that prescribe the roles and responsibilities for managing the US-VISIT component systems, and addressed security awareness and training. However, the program office had not conducted a risk assessment or included in the plan when an assessment would be completed. According to guidance from the Office of Management and Budget (OMB), the security plan should describe the methodology that is used to identify system threats and vulnerabilities and to assess risks, and it should include the date the risk assessment was completed. According to program officials, they completed a programwide risk assessment in December 2005, but have yet to provide a copy of the assessment to us. Therefore, we cannot confirm that the assessment has been done, and done properly. The absence of a risk assessment and a security plan that reflects this assessment is a significant program weakness. Risk assessments are critical to establishing effective security controls because they provide the basis for establishing appropriate policies and selecting cost-effective controls to implement these policies. Without such an assessment, US-VISIT does not have adequate assurance that it knows the risks associated with the program and thus whether it has implemented effective controls to address them. Notwithstanding these limitations in the security plan, the program office has begun to implement aspects of its September 2004 security plan. For example, the Information Systems Security Manager told us that a security awareness program is established and key personnel have attended security training. Since June 2003, US-VISIT has also developed and periodically updated a privacy impact assessment. An initial impact assessment was issued in January 2004, and a revised assessment was issued in September 2004. A more recent assessment, dated July 2005, reflects changes related to Increments 1B and 2C. Each of these assessments is generally consistent with OMB guidance. That is, each of the assessments addressed most OMB requirements, including the impact that the system will have on individual privacy, the privacy consequences of collecting the information, and alternatives considered to collect and handle information. The most recent impact assessment, for example, states that three alternatives were considered for Increment 1B—the kiosk, the mobile device, and the validator (a combination of the two)—and discusses proposals to mitigate the privacy risks of all three, such as by limiting the duration of data retention on the exit devices and using encryption. However, OMB guidance also requires that privacy impact assessments developed for systems under development address privacy in relevant system documentation, including statements of need, functional requirements documents, and cost-benefit analyses. As we reported about previous privacy impact assessments, privacy is only partially addressed in system documentation. For example, the Increment 1B cost-benefit analysis assesses the privacy risk associated with each exit alternative, and the Increment 2C business requirements state that all solutions are to be compliant with privacy laws and regulations and adhere to US-VISIT privacy policy. However, we did not find privacy in the Increment 1B business requirements or the Increment 2C functional requirements. Program officials, including the US-VISIT Privacy Officer, acknowledged that privacy is not included in the system documentation, but stated that privacy is considered in the development of the documentation and that the privacy office reviews key system documentation at relevant times during the system development life cycle. Nevertheless, we did not find evidence of privacy being addressed in the system documentation, and program officials acknowledged that it was not included. Until the program performs a risk assessment and fully implements a security plan that reflects this assessment, it cannot adequately ensure that US-VISIT is cost-effectively safeguarding assets and data. Moreover, without reflecting privacy in system documentation, it cannot adequately ensure that privacy needs are being fully addressed. We reported in September 2003 that the program office had not defined key acquisition management controls to support the acquisition of US-VISIT, and therefore its efforts to acquire, deploy, operate, and maintain system capabilities were at risk of not satisfying system requirements and of not meeting benefit expectations on time and within budget. The Capability Maturity Model–Integration® (CMMI) developed by Carnegie Mellon University’s Software Engineering Institute (SEI) explicitly defines process management controls that are recognized hallmarks of successful organizations and that, if implemented effectively, can greatly increase the chances of successfully acquiring software-intensive systems. SEI’s CMMI model uses capability levels to assess process maturity. Because establishing the basic acquisition process capabilities, according to SEI, can take on average about 19 months, we recognized the importance of starting early to build effective acquisition management capabilities by recommending that DHS do the following: Develop and implement a plan for satisfying key acquisition management controls, including acquisition planning, solicitation, requirements management, program management, contract tracking and oversight, evaluation, and transition to support, and implement the controls in accordance with SEI guidance. The program office has recently taken foundational steps to establish key acquisition management controls. For example, it has developed a process improvement plan, dated May 16, 2005 (about 20 months after our recommendation), to define and implement these controls. As part of its improvement program, the program office is implementing a governance structure for overseeing improvement activities, consisting of three groups: a Management Steering Group, an Enterprise Process Group, and Process Action Teams. Specific roles for each of these groups are described below. The Management Steering Group is to provide policy and procedural guidance and to oversee the entire improvement program. The steering group is chaired by the US-VISIT Director, with the Deputy Director and the functional office directors serving as core members. The Enterprise Process Group is to provide planning, management, and operational guidance in day-to-day process improvement activities. The group is chaired by the process improvement leader and is composed of individuals from each functional office. Process Action Teams are to provide specific process documentation and to provide implementation support and training services. These teams are to be active as long as a particular process improvement initiative is under way. To date, the program office has chartered five process teams—configuration management, cost analysis, process development, communications, and policy. In addition, the program office has recently completed a self-assessment of its acquisition process maturity, and it plans to use the assessment results to establish a baseline of its acquisition process maturity for improvement. According to program officials, the assessment included 13 key process areas that are generally consistent with the process areas cited in our recommendation. The program has ranked these 13 process areas according to their priority, and, for initial implementation, it plans to focus on the following 6: Configuration management. Establishing and maintaining the integrity of the products throughout their life cycle. Process and product quality assurance. Taking actions to provide management with objective insight into the quality of products and processes. Project monitoring and control. Tracking the project’s progress so that appropriate corrective actions can be taken when performance deviates significantly from plans. Project planning. Establishing and maintaining plans for work activities. Requirements management. Managing the requirements and ensuring a common understanding of the requirements between the customer and the product developers. Risk management. Identifying potential problems before they occur so that they can be mitigated to minimize any adverse impact. The improvement plan is currently being updated to reflect the results of the baseline assessment and to include a detailed work breakdown structure, process prioritization, and resource estimates. According to the Director, Acquisition and Program Management Office (APMO), the goal is to conduct a formal SEI appraisal to assess the capability level of some or all of the six processes by October 2006. Notwithstanding the recent steps to begin addressing our recommendation, much work remains to fully implement key acquisition management controls. Moreover, effectively implementing these controls takes considerable time. Therefore, it is important that these improvement efforts stay on track. Until these processes are effectively implemented, US-VISIT will be at risk of not delivering promised capabilities on time and within budget. In September 2003, we reported that the program had not assessed the costs and benefits of Increment 1, which is extremely important because the decision to invest in any capability should be based on reliable analyses of return on investment. Further, according to OMB guidance, individual increments of major systems are to be individually supported by analyses of benefits, cost, and risk. Without reliable analyses, an organization cannot adequately know that a proposed investment is a prudent and justified use of limited resources. Accordingly, we recommended that DHS do the following: Determine whether proposed US-VISIT increments will produce mission value commensurate with cost and risks and disclose to the Congress planned actions. As we reported in September 2003 and again in February 2005, the program office did not justify its planned investment in Increments 1 and 2B, respectively, based on expected return on investment. Since then, the program has developed a cost-benefit analysis for Increment 1B. OMB has issued guidance concerning the analysis needed to justify investments. According to this guidance, such analyses should meet certain criteria to be considered reasonable. These criteria include, among other things, comparing alternatives on the basis of net present value and conducting uncertainty analyses of costs and benefits. DHS has also issued guidance on such economic analyses that is consistent with that of OMB. The latest cost-benefit analysis for Increment 1B (dated June 23, 2005) identifies potential costs and benefits for three exit solutions at air and sea POEs and provides a general rationale for the viability of the three alternatives described. This latest analysis meets four of eight OMB economic analysis criteria. However, it does not, for example, include a complete uncertainty analysis (i.e., both a sensitivity analysis and a Monte Carlo simulation) for the three exit alternatives evaluated. That is, the cost-benefit analysis does include a Monte Carlo simulation, but it does not include a sensitivity analysis for the three alternatives. An analysis of uncertainty is important because it provides decision makers with a perspective on the potential variability of the cost and benefit estimates should the facts, circumstances, and assumptions change. Table 1 summarizes our analysis of the extent to which US-VISIT’s June 23, 2005, cost-benefit analysis for Increment 1B satisfies eight OMB criteria. It is important that the program adhere to relevant guidance in developing its incremental cost-benefit analyses. If this is not done, the reliability of the analyses is diminished, and an adequate basis for prudent investment decision making does not exist. Moreover, if the mission value of a proposed investment is not commensurate with costs, it is vital that this information be fully disclosed to DHS and congressional decision makers. The underlying intent of our recommendation is that this information be available to inform such decisions. In September 2003, we reported that key aspects of the larger homeland security environment in which US-VISIT would need to operate had not been defined. For example, we stated that certain policy and standards decisions had not been made (e.g., whether official travel documents will be required for all persons who enter and exit the country, including U.S. and Canadian citizens, and how many fingerprints are to be collected). In the absence of this operational context, program officials were making assumptions and decisions that, if they proved inconsistent with subsequent policy or standards decisions, would require US-VISIT rework. To minimize the impact of these changes, we recommended that DHS do the following: Clarify the operational context in which US-VISIT is to operate. After about 27 months, defining this operational context remains a work in progress. According to the Chief Strategist, an immigration and border management strategic plan was drafted in March 2005 that shows how US-VISIT is aligned with DHS’s organizational mission and defines an overall vision for immigration and border management. This official stated that this vision provides for an immigration and border management enterprise that unifies multiple internal departmental and other external stakeholders with common objectives, strategies, processes, and infrastructures. Since the plan was drafted, DHS has reported that other relevant initiatives have been undertaken, such as the Security and Prosperity Partnership of North America and the Secure Border Initiative. The Security and Prosperity Partnership is to, among other things, establish a common approach to securing the countries of North America— the United States, Canada, and Mexico—by, for example, implementing a border facilitation strategy to build capacity and improve the legitimate flow of people and cargo at our shared borders. The Secure Border Initiative is to implement a comprehensive approach to securing our borders and reducing illegal immigration. According to the Chief Strategist, while portions of the strategic plan are being incorporated into these initiatives, these initiatives and their relationship with US-VISIT are still being defined. We have yet to receive the US-VISIT strategic plan because, according to program officials, it had not yet been approved by DHS management. Until US-VISIT’s operational context is fully defined, DHS is increasing its risk of defining, establishing, and implementing a program that is duplicative of other programs and not interoperable with them. This in turn will require rework to address these areas. While this issue was significant 27 months ago, when we made the recommendation, it is still more significant now. We reported in September 2003 that the program had not fully staffed its program office. Our prior experience with major acquisitions like US-VISIT shows that to be successful, they need, among other things, to have adequate resources. Accordingly, we recommended that DHS do the following: Ensure that human capital and financial resources are provided to establish a fully functional and effective program office. About 2 years later, US-VISIT had filled 102 of its 115 planned government positions and all of its planned 117 contractor positions. For the remaining 13 government positions, 5 positions had been selected (pending completion of security clearances), and recruitment action was in process for filling the remaining 8 vacancies. According to the Office of Administration and Training Manager, funding is available to complete the hiring of all 115 government employees. Notwithstanding this progress, in February 2005, US-VISIT completed a workforce analysis and requested additional positions based on the results. According to program officials, a revised analysis was submitted in the summer of 2005, but the request has not yet been approved. Figure 3 shows the program office organization structure and functions and how many of the 115 positions needed have been filled. Securing necessary resources will be a continuing challenge and an essential ingredient to the program’s ability to acquire, deploy, operate, and maintain system capabilities on time and within budget. We reported in September 2003 that the program had not defined specific roles and responsibilities for its staff. Our prior experience and leading practices show that for major acquisitions like US-VISIT to be successful, program staff need, among other things, to understand what they are to do, how they relate to each other, and how they fit in their organization. Accordingly, we recommended that DHS do the following: Define program office positions, roles, and responsibilities. The program office has developed charters for its nine component offices that include roles and responsibilities for each. For example, the Acquisition and Program Management Office is responsible, among other things, for establishing acquisition and program management policies; coordinating development of configuration management plans and project schedules, including the integrated milestone schedule; and developing policies and procedures for guidance and oversight of systems development and implementation activities. The program has also defined a set of core competencies (knowledge, skills, and abilities) for each position. For example, it has defined critical competencies for program and management analysts that include, among others, flexibility, interpersonal skills, organizational awareness, oral communication, problem solving, and teamwork. These efforts to define position, roles, and responsibilities should help in managing the program effectively. As previously stated, we reported in September 2003 that US-VISIT had not fully staffed its program office or defined roles and responsibilities for its program staff. We observed that prior research and evaluations of organizations showed that effective human capital management can help agencies establish and maintain the workforce they need to accomplish their missions. Accordingly, we recommended that DHS do the following: Develop and implement a human capital strategy for the program office that provides for staffing positions with individuals who have the appropriate knowledge, skills, and abilities. In February 2005, we reported that the program office, in conjunction with the Office of Personnel Management (OPM), developed a draft human capital plan that employed widely accepted human capital planning tools and principles. The draft plan included, for example, an action plan that identified activities, proposed completion dates, and the office (OPM or the program office) responsible for the action. We also reported that the program office had completed some of the activities, such as designating a liaison responsible for ensuring alignment between departmental and program human capital policies. Since then, the program office has finalized the human capital plan and completed more activities. For example, program officials told us that they have analyzed the program office’s workforce to determine diversity trends, retirement and attrition rates, and mission-critical and leadership competency gaps; updated the program’s core competency requirements to ensure alignment between the program’s human capital and business needs; developed an orientation program for new employees; and administered competency assessments to incoming employees. Program officials also told us that they have plans to complete other activities, such as developing a staffing forecast to inform succession planning; analyzing workforce data to maintain strategic focus on preserving the skills, knowledge, and leadership abilities required for the US-VISIT program’s success; and developing organizational leadership competency models for the program’s senior executive, managerial, and supervisory levels. In addition, the officials said that several activities in the plan have not been completed, such as assessing the extent of any current employees’ competency gaps and developing a competency-based listing of training courses. These officials said that the reason these activities have not been completed is that they are related to the department’s new human capital initiative, MAXHR, which is to provide greater flexibility and accountability in the way employees are paid, developed, evaluated, afforded due process, and represented by labor organizations. MAXHR is to include the development of departmentwide competencies. Because of this, the officials told us that it could potentially impact the program’s ongoing competency-related activities. As a result, these officials said that they are coordinating these activities closely with the department as it develops and implements this new initiative, which is currently being reviewed by the DHS Deputy Secretary for approval. Until US-VISIT fully implements a comprehensive human capital strategy, it will continue to risk not having staff with the right skills and abilities to successfully execute the program. We reported in September 2003 that the operational performance of initial system increments was largely dependent on the performance of existing systems that were to be interfaced to create these increments. For example, we said that the performance of an increment will be constrained by the availability and downtime of the existing systems that it includes. Accordingly, we recommended that DHS do the following: Define performance standards for each increment that are measurable and reflect the limitations imposed by relying on existing systems. In February 2005 (17 months later), we reported that several technical performance standards for Increments 1 and 2B had been defined, but that it was not clear that these standards reflected the limitations imposed by the reliance on existing systems. Since then, for the Increment 2C Proof of Concept (Phase 1), the program office has defined certain other performance standards. For example, the functional requirements document for Increment 2C (Phase 1) defines several technical performance standards, including reliability, recoverability, and availability. For each, the document states that the performance standard is largely dependent on those of Increment 2B. More specifically, the document states that Phase 1 system availability is largely dependent upon the individual and collective availability of the current systems. The document also states that the Increment 2C components shall have an aggregated availability greater than or equal to 97.5 percent. However, the document does not contain sufficient information to determine whether these performance standards actually reflect the limitations imposed by reliance on existing systems. To further develop performance standards, the program office has prepared a Performance Engineering Plan, dated March 31, 2005, that links US-VISIT performance engineering activities to its System Development Life Cycle. Further, the plan (1) provides a framework to be used to align its business, application, and infrastructure performance goals and measures; (2) describes an approach to translate business goals into operational measures, and then to quantitative metrics; and (3) identifies system performance measurement areas (effectiveness, efficiency, reliability, and availability). According to program officials, they intend to establish a group to develop action plans for implementing the engineering plan, but did not have a time frame for doing so. Without defining performance standards that reflect the limitations of the existing systems upon which US-VISIT relies, the program lacks the ability to identify and effectively address performance shortfalls. In September 2003, we reported that US-VISIT was a risky undertaking because of several factors inherent to the program, such as its large scope and complexity, as well as because of various program management weaknesses. We concluded that these risks, if not effectively managed, would likely cause program cost, schedule, and performance problems. Risk management is a continuous, forward-looking process that is intended either to prevent such problems from occurring or to minimize their impact if they occur by proactively identifying risks, implementing risk mitigation strategies, and measuring and disclosing progress in doing so. Because of the importance of effectively managing program risks, we recommended that DHS do the following: Develop and implement a risk management plan and ensure that all high risks and their status are reported regularly to the executive body. About 2 years later, the program office has developed and has begun implementing a risk management plan. The plan, which was approved in September 2005, includes, among other things, a process for identifying, analyzing, handling, and monitoring risk. It also defines the governance structure to be used in overseeing and managing the process. The program also maintains a risk database, which includes, among other things, a description of the risk, its priority (e.g., high, medium, or low), and its mitigation strategy. According to program officials, the database is currently available to program management and staff. The program has also begun implementing its risk management plan. For example, it has established a Risk Review Board, Risk Review Council, and Risk Owners to govern its risk activities. The roles and responsibilities are described below. The Risk Review Board directs all risk governance within the program and provides the mechanism to escalate/transfer the consideration of risks to program governing boards and to organizations external to the program. The Risk Review Council oversees and manages program-related risks that are significant, controversial, or cross-project or that may require escalation to the Risk Review Board. Risk Owners analyze, handle, and monitor risks. However, full implementation of the risk management plan has yet to occur. As part of its CMMI process maturity baseline self-assessment (previously discussed), the program office found that the risk management process detailed in its plan was not being consistently applied across the program. In response, according to program officials, they have developed risk management training and began conducting training sessions in November 2005. These officials also stated that the Risk Review Board, where risks are reviewed with program executives, has been meeting monthly since September 2005. With respect to regular risk reports to program executives, the plan includes thresholds for escalating risks within the risk governance structure and to DHS governance entities. For example, risks are to be elevated to the Risk Review Board when the cost of the project exceeds more than 5 percent of the project baseline cost, the schedule slippage exceeds more than 5 percent of the baseline schedule, major areas of scope are affected, or quality reduction requires approval. However, program officials stated that these thresholds are not currently being applied. They further stated that although the plan allows for escalation of risks to officials outside the program office, doing so is at the discretion of the Program Director; in addition, according to these officials, although high risks are not routinely escalated outside the program, selected high risks have been disclosed to the Assistant Secretary for Policy in weekly program status reports. As of December 5, 2005, the Program Director proposed submitting monthly reports of high-priority risks and issues through the Assistant Secretary for Policy to the Deputy Secretary. Until US-VISIT fully implements its risk management plan and process, it cannot be assured that all program risks are being identified and managed in order to effectively mitigate any negative impact on the program’s ability to deliver promised capabilities on time and within budget. We reported in May 2004, and again in February 2005, that system testing was not based on well-defined test plans, and thus the quality of testing being performed was at risk. The purpose of system testing is to identify and correct system defects (i.e., unmet system functional, performance, and interface requirements) and thereby obtain reasonable assurance that the system performs as specified before it is deployed and operationally used. To be effective, testing activities should be planned and implemented in a structured and disciplined fashion. Among other things, this includes developing effective test plans to guide the testing activities and ensuring that test plans are developed and approved before test execution. According to relevant systems development guidance, an effective test plan (1) specifies the test environment; (2) describes each test to be performed, including test controls, inputs, and expected outputs; (3) defines the test procedures to be followed in conducting the tests; and (4) provides traceability between the test cases and the requirements to be verified by the testing. Because these criteria were not being met, we recommended that DHS do the following: Develop and approve test plans before testing begins that (1) specify the test environment; (2) describe each test to be performed, including test controls, inputs, and expected outputs; (3) define the test procedures to be followed in conducting the tests; and (4) provide traceability between test cases and the requirements to be verified by the testing. About 19 months later, the quality of the system test plans, and thus system testing, is still problematic. To the program’s credit, the test plans for the Increment 2C Proof of Concept (Phase 1), dated June 28, 2005, satisfied part of our recommendation. Specifically, the test plan for this increment was approved on June 30, 2005, and, according to program officials, testing began on July 5, 2005. Further, the test plan described, for example, the scope, complexity, and completeness of the test environment, and it described the tests to be performed, including a high-level description of controls, inputs, and outputs, and it identified test procedures to be performed. However, the test plan did not adequately trace between test cases and the requirements to be verified by testing. For example, 300 of the 438 functional requirements, or about 70 percent of the requirements that we analyzed, did not have specific references to test cases. In addition, we identified traceability inconsistencies, including the following: One requirement was mapped to over 50 test cases, but none of the 50 cases referenced the requirement. One requirement was mapped to a group of test cases in the traceability matrix, but several of the test cases to which the requirement was mapped did not reference the requirement, and several test cases referenced the requirement and were not included in the traceability matrix. One requirement was mapped to all but one of the test cases within a particular group of test cases, but that test case did refer to the requirement. Time and resources were identified as the reasons that test plans have not been complete. Specifically, program officials stated that milestones do not permit existing testing/quality personnel the time required to adequately review testing documents. According to these officials, even when the start of testing activities is delayed because, for example, requirements definition or product development takes longer than anticipated, testing milestones are not extended. Without complete test plans, the program does not have adequate assurance that the system is being fully tested, and thus unnecessarily assumes the risk that system defects will not be detected and addressed before the system is deployed. This means that the system may not perform as intended when deployed, and defects will not be addressed until late in the systems development cycle, when they are more difficult and time-consuming to fix. As we previously reported, this has happened: postdeployment system interface problems surfaced for Increment 1, and manual work-arounds had to be implemented after the system was deployed. We reported in May 2004 that the program had not assessed its workforce and facility needs for Increment 2B. Because of this, we questioned the validity of the program’s workforce and facility assumptions used to develop its workforce and facility plans, noting that the program lacked a basis for determining whether its assumptions and thus its plans were adequate. Accordingly, we recommended that DHS do the following: Assess the full impact of Increment 2B on land POE workforce levels and facilities, including performing appropriate modeling exercises. Seven months later, the program office evaluated Increment 2B operational performance. The purpose of the evaluation was to determine the effectiveness of Increment 2B performance at the 50 busiest land POEs. To assist in the evaluation, the program office established a baseline for comparing the average Form I-94 or Form I-94W issuance processing times at 3 of the 50 POEs where processing times were to be evaluated. The program office then conducted two evaluations of the processing times at the 3 POEs following Increment 2B deployment. The first was in December 2004, after Increment 2B was deployed to these sites as a pilot, and the second was in February 2005, after Increment 2B was deployed to all 50 POEs. The evaluation results showed that the average processing times decreased for all 3 sites. Table 2 compares the results of the two evaluations and the baseline. According to program officials, these evaluations supported the workforce and facilities planning assumption that no additional staff were required to support deployment of Increment 2B, and that minimal modifications to interior workspace were required to accommodate biometric capture devices and printers and to install electrical circuits. These officials stated that modifications to existing officer training and interior space were the only changes needed. However, the scope of the evaluation was too limited to satisfy the evaluation’s stated purpose or our recommendation for assessing the full impact of Increment 2B. Specifically, program officials stated that the evaluation focused on the time to process Form I-94s and not on operational effectiveness, including workforce impacts and traveler waiting time. Second, the 3 sites were selected, according to program officials, on the basis of a number of factors, including whether the sites already had sufficient staff to support the pilot. Selecting sites on the basis of this factor could affect the results and presupposes that not all POEs have the staff needed to support Increment 2B. Third, evaluation conditions were not always held constant. For example, fewer workstations were used to process travelers in establishing the baseline processing times at 2 of the POEs—Port Huron (9 versus 14) and Douglas (4 versus 6)—than were used during the pilot evaluations. Moreover, CBP officials from 1 POE, which was not an evaluation site, told us that US-VISIT has actually lengthened processing times. (San Ysidro processes the highest volume of travelers of all land POEs.) While these officials did not provide specific data to support this statement, it nevertheless raises questions about the potential impact of Increment 2B on the 47 sites that were not evaluated. It is important that the impact of Increment 2B on workforce and facilities be fully assessed. Since we made our recommendation, Increment 2B deployment and operational facts and circumstances have materially changed, making the implementation of our recommendation using predeployment baseline data for the other 47 sites impractical. Nevertheless, other alternatives, such as surveying officials at these sites to better understand the increment’s impact on workforce levels and facilities, have yet to be explored. Until they are, the program may not be able to accurately project resource needs or make required modifications to achieve its goals of minimizing US-VISIT’s impact on POE processing times. We reported in May 2004 that US-VISIT had not established effective configuration management practices. Configuration management establishes and maintains the integrity of system components and items (e.g., hardware, software, and documentation). A key ingredient is a change control board to evaluate and approve proposed configuration changes. Accordingly, we concluded that the program did not have adequate assurance that approved system changes were actually made, and that changes made to the component systems (for non–US-VISIT purposes) did not interfere with US-VISIT functionality. Accordingly, we recommended that DHS do the following: Implement effective configuration management practices, including establishing a US-VISIT change control board to manage and oversee system changes. After 19 months, US-VISIT has begun implementing configuration management practices. To its credit, the program recently issued a configuration management policy (September 2005) and prepared a draft configuration management plan (August 2005). The policy contains guiding principles, direction, and expectations for planning and performing configuration management, and includes activities, authorities, and responsibilities. The draft plan describes the configuration management governance structure, including organizational entities and their responsibilities, the processes and procedures to be applied, and how controls are to be applied to products. The governance structure includes the Executive Configuration Control Board and the Configuration Management Impact Review Team. According to its charter, the configuration control board is responsible for determining the status of requested configuration changes and resolving any conflicts related to those changes for US-VISIT–managed systems (i.e., not for US-VISIT component systems managed by other DHS organizations). The Impact Review Team, which reports to the board, is responsible for reviewing requests for system changes and submitting a recommendation to the appropriate change review authority (i.e., either the US-VISIT control board or the control board in the DHS organization that manages the component system). According to program officials, for US-VISIT–managed systems, the review authority is the Executive Configuration Control Board. For other systems, such as TECS (which CBP manages), the US-VISIT review team may submit a recommendation to the appropriate control board (in this case, the CBP Control Board). The APMO director stated that the planned configuration management program is intended to complement rather than replace the configuration management programs for the legacy systems. That is, change requests approved by the US-VISIT Executive Configuration Control Board that require changes to a legacy system will be coordinated with the board having responsibility for that system. This means, however, that changes to component systems (e.g., IDENT, ADIS, and TECS) that are initiated and approved by another DHS organization, and that could affect US-VISIT performance, are not subject to US-VISIT configuration management processes and are not also being examined and approved by the US-VISIT control board. This lack of US-VISIT control was the impetus for our recommendation. Although US-VISIT has recently taken steps to begin addressing our recommendation, the program still does not adequately control changes to the component systems upon which US-VISIT performance depends. Until programwide configuration management practices are implemented, the program does not have an effective means for ensuring that approved system changes are actually made and that changes made to the component systems for non–US-VISIT purposes do not compromise US-VISIT functionality and performance. We reported in May 2004 that the program office’s independent verification and validation (IV&V) contractor was not independent of the products and processes that it was verifying and validating. The purpose of IV&V is to provide management with objective insight into the program’s processes and associated work products. Its use is a recognized best practice for large and complex system development and acquisition projects like US-VISIT. To be effective, the verification and validation function is to be performed by an entity that is independent of the processes and products that are being reviewed. Accordingly, we recommended that DHS do the following: Ensure the independence of the IV&V contractor. In July 2005, the program office issued a new contract for IV&V services. To ensure the contactor’s independence, the program office (1) required that IV&V contract bidders be independent of the development and integration contractors; (2) reviewed each of the bidder’s affiliations with the prime contract; (3) included provisions in the contract that prohibit the contractor from soliciting, proposing, or being awarded work (other than IV&V services) for the program; (4) required all contractor personnel to certify that they do not have any conflicts of interest; and (5) ensured that the contractor’s management plan (Oct. 17, 2005) describes how the contractor will ensure technical, managerial, and financial independence. Such steps, if effectively enforced, should adequately ensure that verification and validation activities are performed in an objective manner and, thus, should provide valuable assistance to program managers and decision makers. We reported in May 2004 that US-VISIT’s overall progress on implementing our recommendations had been slow, and considerable work remained to fully address them. As we also noted, given that most of our recommendations focused on fundamental limitations in US-VISIT’s ability to manage the program, it was important to implement the recommendations quickly and completely. Accordingly, we recommended that DHS do the following: Develop a plan, including explicit tasks and milestones, for implementing all of our open recommendations and periodically report to the DHS Secretary and Under Secretary on progress in implementing this plan; and report this progress, including reasons for delays, in all future expenditure plans. About 19 months after our recommendation, the program assigned responsibility to specific individuals for preparing a plan, including specific actions and milestones, to address each recommendation. In addition, it developed a report that identifies the responsible person for each recommendation and summarizes progress made in implementing each. The program office provided this report for the first time to the DHS Deputy Secretary on October 3, 2005, and plans to forward subsequent reports every 6 months. However, the report’s description of progress on 4 recommendations is inconsistent with our assessment, as discussed below: First, the report states that the program completed a privacy impact assessment that is in full compliance with OMB guidance. As previously discussed, an assessment has been developed, but OMB guidance requires that these assessments for systems under development (such as Increment 2C) address privacy in the system’s documentation. Increment 2C systems documentation does not address privacy and therefore is not fully compliant with OMB guidance. Second, the report states that a human capital strategy has been completed. However, as previously discussed, several of the activities in the human capital plan have yet to be implemented. For example, the program has not developed a staffing forecast to inform succession planning. Third, the report states that the impact of Increment 2B on land POE workforce levels and facilities has been fully assessed. However, as we previously stated, the scope of the evaluations was not sufficient to satisfy our recommendation. For example, program officials stated that the evaluation focused on the time to process Form I-94s and not on operational effectiveness, including workforce impacts and traveler waiting time. Moreover, officials at the largest land POE told us that the effect of Increment 2B was the opposite of that reported in the pilot results. Fourth, the report states that the program has partially completed implementing configuration management practices. However, as previously discussed, the program office has yet to implement practices or establish a configuration control board with authority over all changes affecting US-VISIT functionality and performance, including those made to component systems for non–US-VISIT purposes, which was the intent of our recommendation. In addition, the report does not specifically describe progress against 11 of our other recommendations, so that we could not determine whether the program’s assessment is consistent with ours (described in this report). For example, we recommended that the program reassess plans for deploying an exit capability to ensure that the scope of the exit pilot provides for adequate evaluation of alternative solutions. The report states that the program office has completed exit testing and has forwarded the exit evaluation report to the Deputy Secretary for a decision. However, it does not state whether the program office had expanded the scope or time frames of the pilot. Fully understanding and disclosing progress against our recommendations are essential to building the capability needed to effectively manage the program, and to ensuring that key decision makers have the information needed to make well-informed choices among competing investment options. We reported in February 2005 that US-VISIT had not followed effective practices to develop cost estimates for its system increments, and thus the reliability of its cost estimates was questionable. Such cost-estimating practices are embedded in the 13 criteria in SEI’s checklist for determining the reliability of cost estimates. Of these 13 criteria, we reported in February 2005 that the program’s cost estimate met 2, partially met 6, and did not meet 5. Accordingly, we recommended that DHS do the following: Follow effective practices for estimating the costs of future increments. The latest US-VISIT–related cost estimate is for Increment 1B. This estimate is in the June 2005 cost-benefit analysis for Increment 1B and establishes the costs associated with three exit solutions for air and sea POEs. As was the case for the estimate described in our February 2005 report, this latest estimate also did not meet all 13 criteria, meeting 3 and partially meeting another 5. For example, these estimates did not include a detailed work breakdown structure and omitted important cost elements, such as system testing. A work breakdown structure serves to organize and define the work to be performed, so that associated costs can be identified and estimated. Thus, it provides a reliable basis for ensuring that the estimates include all relevant costs. In addition, the uncertainties associated with the Increment 1B cost estimate were not identified. An uncertainty analysis provides the basis for adjusting these estimates to reflect unknown facts and circumstances that could affect costs and identifies the risk associated with the cost estimate. Table 3 summarizes our analysis of the extent to which US-VISIT’s Increment 1B cost estimates satisfy SEI’s 13 criteria. Program officials stated that they recognize the importance of developing reliable cost estimates and have initiated actions to more reliably estimate the costs of future increments. For example, as part of its process improvement program, the program has chartered a cost-analysis process action team, which is to develop, document, and implement a cost-analysis policy, process, and plan for the program. Program officials also stated that they have hired additional contracting staff with cost-estimating experience. Strengthening the program’s cost-estimating capability is extremely important. The absence of reliable cost estimates, among other things, prevents the development of reliable economic justification for program decisions and impedes effective performance measurement. In February 2005, we reported that US-VISIT had not adequately planned for evaluating the Increment 1B exit alternative because its exit pilot evaluation’s scope and timeline were compressed. Accordingly, we recommended that DHS do the following: Reassess plans for deploying an exit capability to ensure that the scope of the exit pilot provides for adequate evaluation of alternative solutions and better ensures that the exit solution selected is in the best interest of the program. Over the last 10 months, the program office has taken actions to expand the scope and time frames of the pilot. For example, it extended the pilot from 5 to 11 POEs—9 airports and 2 seaports. It also extended the time frame for data collection and evaluation to April 2005, which is about 7 months beyond the date for which all exit pilot evaluation tasks were to be completed. Further, according to program officials, they achieved the target sample sizes necessary to have a 95 percent confidence level. Notwithstanding the expanded scope of the pilot, questions remain about whether the exit alternatives have been evaluated sufficiently to permit selection of the best exit solution for national deployment. For example, each of the three exit alternatives was evaluated against three criteria, including compliance with the US-VISIT exit process (i.e., foreign travelers providing information as they exit the United States). However, across the three alternatives, the average compliance with this process was only 24 percent, which raises questions as to the effectiveness of the three alternatives. The evaluation report cites several reasons for the low compliance rate, including that compliance during the pilot was voluntary. The report further concludes that national deployment of the exit solution will not have the desired compliance rate unless the exit process incorporates an enforcement mechanism, such as not allowing persons to reenter the United States if they do not comply with the exit process. Although an enforcement mechanism might indeed improve compliance, program officials stated that no formal evaluation has been conducted of enforcement mechanisms or their effect on compliance. The program director stated that he agrees that additional evaluation is needed to assess the impact of implementing potential enforcement mechanisms and plans to do so. Until the program office adequately evaluates the exit alternatives and knows whether the alternative to be selected will be effective, the program office will not be in a position to select the exit solution that is in the best interest of the program. This is very important because without an effective exit capability, the benefits and the mission value of US-VISIT are greatly diminished. We reported in February 2005 that the overall capacity of the system was not being effectively managed. At that time, US-VISIT, which comprises several legacy systems, was relying on the capacity management activities of these systems. It was not focused on the capacity requirements and performance of the collective systems that make up US-VISIT. This approach increases the risk that the system may not be properly designed and configured for efficient performance, and that it has insufficient processing and storage capacity for current, future, and unpredictable workload requirements. Accordingly, we recommended that DHS do the following: Develop and implement processes for managing the capacity of the US-VISIT system. According to program officials, they have initiated efforts to develop a capacity management process, including a high-level description of the necessary steps, such as identifying tools needed to implement the process. However, a plan, including specific tasks and milestones for developing and implementing capacity management processes, has not yet been developed. Until the program office develops a programwide capacity management program, it increases the risk that US-VISIT may not be able to adequately support program mission needs. We reported in February 2005 that the program office recognized that US-VISIT and the Automated Commercial Environment (ACE) have related missions and operational environments. In addition, US-VISIT and ACE could potentially develop, deploy, and use common information technology infrastructures and services. We also reported that managing this relationship has not been a priority. Accordingly, we recommended that DHS do the following: Make understanding the relationships and dependencies between the US-VISIT and ACE programs a priority matter, and report periodically to the Under Secretary on progress in doing so. US-VISIT and ACE managers met in February 2004, to identify potential areas for collaboration between the two programs and to clarify how the programs could best support the DHS mission and provide officers with the information and tools they need. According to program officials, they have established a US-VISIT/ACE integrated project team to, among other things, ensure that the two programs are programmatically and technically aligned. The team has discussed potential areas of focus and agreed to three areas: RF technology, program control, and data governance. However, it does not have an approved charter, and it has not developed explicit plans or milestone dates for identifying the dependencies and relationships between the two programs. Program officials stated that the team has met three times and plans to meet on a quarterly basis going forward. It is important that the relationships and dependencies between these two programs be managed effectively. The longer it takes for the programs to understand and exploit their relationships, the more rework will be needed at a later date to do so. Over the last 3 years, we have made recommendations aimed at correcting fundamental limitations in US-VISIT’s program management ability and thereby better ensuring the delivery of mission capability and value on time and commensurate with costs. While progress on the implementation of the recommendations is mixed, progress in critical areas has been slow. As with any program, introducing and institutionalizing the program management and accountability discipline at which our recommendations are aimed require investing time and resources while continuing to meet other program demands. In making such investment choices, it is important to remember that institutionalizing such program discipline in the near term will produce long-term payback in a program’s ability to meet these other demands. Accordingly, the longer that US-VISIT takes to implement our recommendations, the greater the risk that the program will not meet its stated goals and commitments. Our open recommendations are all aimed at strengthening US-VISIT program management and improving DHS’s ability to make informed US-VISIT investment decisions. With the exception of one, these recommendations are still relevant and applicable. Since we made our recommendation, facts and circumstances surrounding Increment 2B deployment and operational status have materially changed, making the collection of Increment 2B predeployment impractical. Nevertheless, the need remains to better understand the impact of US-VISIT entry capabilities on all land POEs. Until this understanding exists, the department will be challenged in its ability to accurately estimate and provide facilities and staff resource needs. To recognize both the need to fully assess the impact of US-VISIT entry capabilities on staffing levels and facilities at land POEs, as well as the current operational status of Increment 2B, we are closing our existing recommendation related to assessing the impact of Increment 2B. We recommend that the DHS Secretary direct the US-VISIT Program Director to explore alternative means of obtaining an understanding of the full impact of US-VISIT at all land POEs, including its impact on workforce levels and facilities; these alternatives should include surveying the sites that were not part of the previous assessment. In its written comments on a draft of this report, signed by the Director, Departmental GAO/OIG Liaison Office, and reprinted in appendix II, DHS stated that it agreed with many areas of the report and that our recommendations had made US-VISIT a stronger program. Further, the department stated that while it disagreed with certain areas of the report, it nevertheless concurred with the need to implement our open recommendations with all due speed and diligence. DHS commented specifically on 11 of the 18 recommendations discussed in the report. The recommendations, the department’s comments, and our responses follow: 1. Recommendation: Develop and begin implementing a system security plan, and perform a privacy impact assessment and use the results of the analysis in near-term and subsequent system acquisition decision making. DHS stated that this recommendation has been fully implemented. In support, it said that it has completed a US-VISIT security plan that is consistent with National Institute of Standards and Technology (NIST) guidance, and that it provided the plan to us in September 2004. It also stated that the security risk assessment aspect of this recommendation was established in February 2005, 20 months after we made the recommendation, and thus the age of the recommendation should be shown as 10 months rather that the 30 months cited in the report. The department also commented that there is no US-VISIT system, but rather a US-VISIT program with capabilities delivered by existing interconnected systems. According to the department, these component systems have been certified and accredited, consistent with NIST guidance, and as part of their certification and accreditation, security plans and risk assessments, as well as risk mitigation strategies, have been developed for each system. The department stated that it provided us with these system-level risk assessments, as well as system-specific action plans and milestones for implementing the mitigation strategies. In addition, the department noted that it completed a programwide risk assessment in December 2005 that specifically addresses information security issues that might not be captured in the system-specific documentation used to certify and accredit each system. In light of its system-specific certification and accreditation efforts, existing system-level risk assessments, and the program-level risk management process (see response 4 for discussion of the risk management process), DHS commented that it is inaccurate to state that US-VISIT officials are not in a position to know program risks, and the recommendation should be closed. While we agree that we received a copy of the US-VISIT security plan, dated September 2004, we do not agree that the plan satisfied all relevant federal guidance and that DHS has fully implemented our recommendation. In particular, it has not provided us with evidence that a programwide risk assessment has been done and that a security plan reflective of such an assessment exists. According to relevant guidance, a security plan should describe, among other things, the methodology that is to be used to identify system threats and vulnerabilities and to assess risks, and it should include the date the risk assessment was completed because the assessment is a necessary driver of the security controls described in the plan. As we reported in February 2005 and state in this report, the US-VISIT security plan did not include this information; further, although DHS stated in its comments that it completed this risk assessment in December 2005, this statement is contradicted by a statement elsewhere in its comments that it is still in the process of doing the assessment. In addition to this contradiction, DHS’s comments did not include any evidence to demonstrate that it has developed a complete risk assessment, such as a copy of the assessment. With regard to the age of the recommendation, we do not agree with DHS’s position that we established a new finding regarding the lack of a programwide risk assessment in our February 2005 report. Rather, as part of our analysis of actions to implement our prior recommendation to develop a security plan, which is to include information about the related security risk assessment, we observed that the plan did not indicate a date for completing a risk assessment in accordance with federal guidelines. Therefore, our position that about 30 months had passed from the time of our initial recommendation (June 2003) is accurate. With regard to the individual system-level risk assessments, we agree that we have received them. However, we do not agree that we have received the action plans and milestones cited in the comments. Regardless, we do not believe that system-level assessments are a sufficient substitute for a programwide assessment. Accordingly, our recommendation focused on the need for an integrated US-VISIT system risk assessment as part of security planning. While the system-level plans and risk assessments are relevant and useful, they neither individually nor collectively address the threats and vulnerabilities imposed as a result of these systems’ integration. By stating in its comments its commitment to having a programwide risk assessment that identifies and proposes mitigations for security risks that arise as a result of the interface and integration of the legacy systems, DHS is agreeing with our position. Moreover, without evidence that the program has completely assessed its risks, we continue to find no basis for how program officials would know the full range and degree of US-VISIT security risks. Our position in this regard has been reinforced by a recent DHS Inspector General report that identified a number of US-VISIT security risks. To further support its position that this recommendation has been fully implemented, DHS also commented that it has completed numerous privacy impact assessments and continues to update them to reflect system changes. In particular, it said that it updated the privacy impact assessment in December 2005 to reflect all increments and that it considers the assessment to be part of US-VISIT system documentation. It further commented that we appear to be unaware of privacy staff activities to review system documents and perform privacy risk assessments throughout the system life cycle. Nevertheless, the department acknowledged that its privacy work was not always noted within US-VISIT system documentation. Accordingly, DHS stated that it plans to appropriately reference all privacy requirements and privacy risk assessments in the program’s system documentation in the future. We agree that US-VISIT has developed and updated its privacy impact assessment and would note that our report states this fact. We do not agree, however, with the comment that we are not aware that the privacy staff review system documents and perform privacy risk assessments. In fact, it is because we were aware of these facts that we were careful to ensure that they were reflected in our report. The point that we are making is that privacy is not addressed in all relevant systems documentation, which DHS acknowledged in its comments. With regard to this point of agreement, we support the department’s stated plans to reference all privacy requirements and any privacy risk assessments in all relevant system documentation in the future. 2. Recommendation: Develop and implement a plan for satisfying key acquisition management controls, including acquisition planning, solicitation, requirements management, program management, contract tracking and oversight, evaluation, and transition to support, and implement the controls in accordance with SEI guidance. DHS commented that the report should reflect that US-VISIT had initially adopted Carnegie Mellon University’s Software Engineering Institute (SEI) Software Acquisition Capability Maturity Model® to guide its software-related process improvement efforts and that, in December 2004, it transitioned to SEI’s Capability Maturity Model–Integration (CMMI®). As a result, it said that the program’s process improvement strategy and plans, process development, and process appraisals are now aligned to the most applicable CMMI process areas. We agree that US-VISIT has transitioned to CMMI. We state in our report that US-VISIT has done so and that the key process areas it is addressing in its process improvement strategy and plan are consistent with those cited in our recommendation. We do not believe that this transition materially affects our recommendation, however, because even though the names of the key processes in these two models may in some cases differ, the processes and respective practices are fundamentally consistent. 3. Recommendation: Clarify the operational context in which US-VISIT is to operate. Consistent with our report, DHS commented that the operational context in which US-VISIT operates is in progress, meaning that it has yet to be fully established. For example, it said that the mission of DHS, and therefore the scope of US-VISIT activities to meet the mission, is continually expanding. Further, it acknowledged that more certainty in the operational context is desirable. In mitigation of the risks associated with not having a more stable operational context, DHS made several statements. For example, it said that the principal role of US-VISIT is to integrate information and immigration and border management systems across DHS and the State Department, and to facilitate agencies working toward a common environment that will eliminate redundancies. It also said that elements of its draft immigration and border management strategic plan are being used in current US-VISIT operations. In addition, the department said that mechanisms to mitigate the risks that we cited have been developed and are being implemented. We support DHS’s acknowledgment of the importance of having a well-defined operational context within which to define and implement US-VISIT and related border security programs. However, we do not believe that DHS’s comments provided any evidence showing that sufficient steps and activities to mitigate the associated risks have been taken or are planned. 4. Recommendation: Determine whether proposed US-VISIT increments will produce mission value commensurate with cost and risks and disclose to the Congress planned actions. DHS commented that its cost-benefit analysis (CBA) for Increment 1B conforms to relevant federal guidance, and noted that our expectations as to the scope and level of detail of analysis that should be included in the CBA document are inconsistent with its understanding of OMB Circular A-94 and DHS’s CBA workbook, which were used to guide the development of the CBA analysis. As an example, the department took exception with our statement that year-by-year benefit estimates were not reported by noting that the net present value was based on an estimate of annual benefits and costs, and that net present value could not be estimated without a year-by-year benefit analysis. The department further commented that a comprehensive uncertainty analysis was conducted because it completed a risk analysis, which is more comprehensive, rigorous, and appropriate than conducting a sensitivity analysis. In this regard, it added that the results of the risk analysis provided an indication of Increment 1B’s worthiness in light of existing uncertainty, rather than information on a specific CBA variable or another. The department further noted that it had provided some of these supporting analyses to us. DHS also stated that any investment that has a 5-year life cycle and is considered interim in nature will face considerable challenge in providing economic benefits commensurate with cost. We do not agree that the CBA fully conforms to relevant federal guidance. As our report states, for example, the analysis does not explicitly state the numerical value of the discount rate used for calculating each alternative’s net present value, and hence does not conform to OMB guidance. In addition, the cost estimates used in the analysis were not complete and reliably derived. In deriving the estimate, for example, the department did not clearly define the project’s life cycle to ensure that key factors were not overlooked and that the full cost of the program was included. (See response 10 below for more information on this point.) Last, while we agree that a year-by-year benefit analysis is a necessary component of a net present value determination, OMB nevertheless requires that the year-by-year benefit estimates be reported in the analysis to promote independent review of the estimates. Also, we do not agree that DHS performed a complete uncertainty analysis. According to OMB and DHS guidance, a complete uncertainty analysis should include both a risk analysis and a sensitivity analysis. However, the latter was not done. Thus, our point is not, as DHS comments suggest, that US-VISIT should have performed a sensitivity analysis instead of a risk analysis, but rather, that both types of analyses are necessary to completely examine investment uncertainty. 5. Recommendation: Develop and implement a risk management plan and ensure that all high risks and their status are reported regularly to the executive body. DHS commented that US-VISIT began the development and implementation of its risk management plan in 2004 immediately after we made our recommendation. It further commented that, as part of a CMMI maturity internal appraisal that it completed in July 2005, it found that the risk management process had not been consistently applied across the program. To address this, the department cited actions that it has taken to fully implement risk management, such as approving the risk management plan in September 2005; defining a risk governance structure; establishing and maintaining a risk database; and developing risk management training and providing this training to program personnel and contractors beginning in November 2005. We support the recent actions that the program cited as having been taken to strengthen risk management. However, the actions cited do not demonstrate that the risk management process is being consistently applied. Until US-VISIT fully implements its risk management plan and process, it cannot be assured that all program risks are being identified and managed in order to effectively mitigate any negative impact on the program’s ability to deliver promised capabilities on time and within budget. 6. Recommendation: Develop and approve test plans before testing begins that (1) specify the test environment; (2) describe each test to be performed, including test controls, inputs, and expected outputs; (3) define the test procedures to be followed in conducting the tests; and (4) provide traceability between test cases and the requirements to be verified by the testing. DHS stated that our report does not accurately reflect the status of the Increment 2C Phase 1 testing. In particular, it said that the issues associated with the traceability of requirements to test cases were minor and that the extent of the discrepancies is far less than what our report presents. It further stated that the discrepancies in our report are based on old traceability documentation and do not reflect revised documentation provided to us on November 9, 2005. We agree that DHS provided us with revised traceability matrixes after we had shared with them our analysis of the test plans and traceability matrixes, dated June 28, 2005, and June 27, 2005, respectively. However, the revised documentation referenced in DHS’s comments was provided in November 2005, about 4 months after testing began. This means that the test plans and traceability matrixes available at the time of testing—which are what we reviewed because they governed the scope and nature of actual testing performed—did not adequately trace between test cases and the requirements to be verified. Specifically, 300 of the 438 Increment 2C requirements, or about 70 percent, did not have specific references to test cases. 7. Recommendation: Implement effective configuration management practices, including establishing a US-VISIT change control board to manage and oversee system changes. DHS commented that a US-VISIT representative attends all configuration control board meetings for all applicable legacy component systems, and that any proposed change request from a legacy component control board that could affect US-VISIT functionality is brought to the attention of the US-VISIT Executive Configuration Control Board for consideration. We do not question these statements. However, we do not believe that they demonstrate that US-VISIT has adequate control over system changes that could affect the program. That is, they do not ensure that changes to the component systems that are initiated and approved by another DHS organization and that could affect US-VISIT performance are subject to US-VISIT configuration management and approval processes. US-VISIT could establish explicit and enforceable control over changes to the legacy systems through such mechanisms as defined and enforced memorandums of understanding among the affected DHS organizations. It was the lack of such control that prompted our recommendation. 8. Recommendation: Assess the full impact of Increment 2B on land POE workforce levels and facilities, including performing appropriate modeling exercises. The department stated that, given the imperative to meet the legislatively mandated time frames, the scope of Increment 2B was limited to only one part of POE operations—incorporating the collection of a biometric into the previously manual Form I-94 issuance process. It also stated that wait times are affected by various factors, including traffic volume, staffing levels, and availability of officers. Therefore, DHS focused the Increment 2B evaluation on just the change to this process. The department further commented that given the events since the evaluation—namely, Increment 2B full operations—it is not practical to collect and model baseline data for the 47 sites that were not part of the initial evaluation. Regarding the 3 pilot sites included in the assessment, the department stated that the sites were selected based on criteria developed from input from US-VISIT, as well as CBP operational constraints. The department further commented that the 3 sites provided a reasonable mix of travelers and they did not have other constraints that directly impacted the collection of performance data specific to Form I-94 issuance. DHS also stated that the I-94 processing times vary by POE, and therefore they are not easily generalized from one port to another. Further, the department commented that the number of workstations and officers available to operate those workstations to process applicants for a Form I-94 do not impact the time it takes to issue a Form I-94. We agree that the scope of the Increment 2B evaluation was limited to the I-94 issuance process, and that it did not address the increment’s impact on the POEs’ ability to meet other performance parameters. Our point is that the limited nature of the evaluation does not satisfy either the intent of our recommendation or DHS’s own stated purpose for the evaluation, which was to determine the effectiveness of Increment 2B performance at the 50 busiest land POEs. We also agree that the I-94 processing times vary by POE and cannot be easily generalized. It is for this reason, among others, that we questioned whether the 3 sites selected for the assessment were sufficiently representative to satisfy both our recommendation and the evaluation’s stated purpose. In addition, while we also agree that collecting pre-Increment 2B baseline data is not practical at this time, the fact remains that the operational impact of Increment 2B on workforce levels and facilities has not been adequately assessed, as evidenced by officials at 1 large POE telling us that processing times have increased and DHS’s recognition that each POE is somewhat different. In light of these new facts and circumstances, we are closing our existing recommendation and making a new recommendation to recognize the need for DHS to explore alternative means to assess the impact of US-VISIT entry capabilities at land POEs. This new recommendation will be shown as an open recommendation, and the original recommendation will be closed. 9. Recommendation: Develop a plan, including explicit tasks and milestones, for implementing all of our open recommendations and periodically report to the DHS Secretary and Under Secretary on progress in implementing this plan; and report this progress, including reasons for delays, in all future expenditure plans. DHS stated that it is untrue that 19 months had elapsed from the time we made this recommendation to the time that it assigned responsibilities to program officials for addressing each of our recommendations. In support, it commented that it issued its first plan to address our recommendations on August 18, 2003, and subsequent reports have been issued periodically that update progress in doing so. We agree that DHS has assigned responsibilities to specific individuals for addressing each recommendation. However, we have yet to be provided any evidence to support its statement that it issued the first report addressing our recommendations on August 18, 2003. Similarly, we have not received evidence showing that it has prepared a plan, including specific actions and milestones, for implementing all of our open recommendations, which is a focus of this recommendation. We would also observe that we made this recommendation in May 2004, and at that time the department stated that it agreed with the recommendation but did not indicate that it had taken any steps to address it, such as commenting that a report was issued on August 18, 2003. 10. Recommendation: Follow effective practices for estimating the costs of future increments. DHS either tacitly or explicitly agreed with our findings relative to its satisfaction of 8 of the 13 cost-estimating criteria presented in table 4 (now table 3) of our draft report. For example, it agreed that it did not clearly define the life cycle to which the cost estimate applies. It also agreed that it did not include a work breakdown structure, noting that it used the available project implementation schedule as a proxy for the activities related to the deployment of the exit alternatives. Regarding our five findings concerning its satisfaction of cost-estimating with which DHS disagreed, the department’s primary area of disagreement was with the intended purpose of the Increment 1B CBA that used the cost estimate, which it said in its comments was to inform decision makers about the relative worthiness of each of the three exit alternatives considered for deployment. Hence, DHS stated that the purpose of the CBA was to analyze only the costs associated with deploying an operational solution, not to analyze the costs and benefits of both developing and deploying alternative solutions. DHS further stated that the CBA thus includes only those costs to be incurred in deploying a selected alternative, and it does not include costs already incurred in developing system alternatives (i.e., sunk costs). It further commented that DHS guidance states that sunk costs are not relevant to the current investment analysis because “only current decisions can affect the future consequences of investment alternatives.” DHS also disagreed that the cost estimate in the CBA should have included nonrecurring development costs, and commented that it did appropriately size the task described in the cost estimates for each alternative exit solution, noting that sizing metrics related to software development were not relevant to deployment of the alternatives because development activities had already occurred and therefore are sunk costs. The department added that those sizing metrics that are relevant to the cost estimate are discussed in the CBA, as are the cost estimating parameters (i.e., those associated with deployment and not those associated with development and testing). In addition, DHS disagreed that DHS’s cost estimate excluded important cost categories, such as system testing, and stated that the estimate addresses labor, facilities, operations and maintenance, information technology, travel, and training costs. Once again, DHS emphasized that since the focus of the CBA was on operational deployment and not system design and development, system testing costs were not included because they were not considered relevant. DHS also reiterated its early point that the uncertainty analysis that it conducted was comprehensive. We agree that actual sunk costs should not be included in a CBA cost estimate. However, we disagree that the cost categories that DHS cited as not relevant are only costs that are associated with predeployment activities. Testing, for example, is an activity that is normally performed before, during, and following deployment, and thus the associated costs would be relevant to the stated purpose of the Increment 1B CBA. However, a testing cost category was missing from the CBA cost estimate, as was a cost category for software maintenance. Regarding DHS’s statement that it conducted a complete uncertainty analysis, we reiterate our previous point that a complete uncertainty analysis should include both a risk analysis and a sensitivity analysis, and the CBA did not include the latter. 11. Recommendation: Reassess plans for deploying an exit capability to ensure that the scope of the exit pilot provides for adequate evaluation of alternative solutions and better ensures that the exit solution selected is in the best interest of the program. Concerning the questions we raised about the adequacy of the exit pilots in light of the 24 percent compliance rate, DHS commented that we failed to consider the compliance rate of the previous exit pilot program, the National Security Entry Exit Registration System (NSEERS), which, according to DHS, had a 75 percent compliance rate. DHS added that NSEERS achieved this compliance rate with a very limited number of exit locations, and therefore, any of the three US-VISIT exit alternatives would have at least a 75 percent compliance rate once national deployment was completed. Further, the department commented that Immigration and Customs Enforcement (ICE) had recently conducted enforcement operations at the Denver International Airport, and that the compliance rate during these operations increased from 30 percent to over 90 percent. It then concluded that the combined results of the exit pilot evaluation, the NSEERS pilot, and the ICE enforcement activities at the Denver International Airport lead it to believe that the US-VISIT exit alternatives have been adequately evaluated. We do not agree with this conclusion because it is based on unsupported assumptions. Specifically, DHS did not provide any evidence to support its claim that that US-VISIT would achieve a comparable compliance rate to the NSEERS program. Moreover, even if DHS could achieve a 75 percent compliance rate for US-VISIT exit,that still means that 25 percent of eligible persons would not be complying with the US-VISIT exit process. Further, DHS did not provide any information about the recent enforcement actions conducted by ICE, nor did it provide any evidence that this is a practical and viable option for the US-VISIT exit solution. While we agree that enforcement actions may indeed increase the exit compliance rate, DHS has not yet assessed the impact of such a solution on the US-VISIT exit process. Further, the US-VISIT program director acknowledged the need to evaluate the impact of implementing potential enforcement actions on US-VISIT exit and planned to do so. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Appropriations Committees, as well as to the Chairmen and Ranking Minority Members of other Senate and House committees that have authorization and oversight responsibilities for homeland security. We are also sending copies to the Secretary of Homeland Security, Secretary of State, and the Director of OMB. Copies of this report will also be available at no charge on our Web site at www.gao.gov. Should you or your offices have any questions on matters discussed in this report, please contact me at (202) 512-3439 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. Our objective was to determine the progress of the Department of Homeland Security (DHS) in implementing 18 of our recommendations pertaining to the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) program. To accomplish this objective, we reviewed and analyzed US-VISIT’s most recent status reports on the implementation of our open recommendations and related key documents, augmented as appropriate by interviews with program officials. More specifically, we analyzed relevant systems acquisition documentation, including the program’s process improvement plan, risk management plan, and configuration management plan. We also analyzed the US-VISIT security plan, privacy impact assessment, cost-benefit analysis, cost estimates, test plans, human capital plans, and related evaluations and assessments. In performing our analyses, we compared available documentation and program officials’ statements with relevant federal guidance and associated best practices. A more detailed description of our scope and methodology relative to the cost-benefit analysis, cost estimates, and test plans follows: Our analysis of the cost-benefit analysis focused on Increment 1B because this was the latest cost-benefit analysis and cost estimate prepared. In doing this analysis, we compared the US-VISIT cost-benefit analysis to eight criteria in Office of Management and Budget (OMB) guidance. Our analysis of the cost estimate also focused on Increment 1B for the same reason previously cited. In doing this analysis, we compared the estimate to 13 criteria from the Software Engineering Institute that we have previously reported to be the minimum set of actions needed to develop a reliable cost estimate. We then determined whether the criteria were satisfied, partially satisfied, or not satisfied using the definitions given below. Our analysis of the test plans focused on Increment 2C because it is the most recently tested increment. This analysis included determining the extent to which the test plans for this increment met 4 key criteria that we have previously reported as essential to effective test plans. In doing this analysis, we examined Increment 2C systems documentation, including business and functional requirements and traceability matrixes. We also independently traced 58 business requirements and 438 functional requirements to the test cases in the test plan. Further, we independently traced all test cases to the requirements to determine consistency. In performing our work, we used the following categories and definitions in deciding the extent to which each recommendation had been implemented. Specifically, we considered a recommendation completely implemented when documentation demonstrated that it had partially implemented when documentation indicated that actions were under way to implement it, and in progress when documentation indicated that action had been initiated to implement it. These categories and definitions are consistent with those used in our prior US-VISIT reports. In determining the amount of time it has taken to implement actions on our recommendations, we calculated the time from the date the report was issued through December 2005. We conducted our audit work at the US-VISIT program office in Rosslyn, Virginia, from August 2005 through December 2005, in accordance with generally accepted government auditing standards. US-VISIT involves complex processes governing the stages of a traveler’s visit to the United States (pre-entry, entry, status, and exit) and analysis of hundreds of millions of foreign national travelers at over 300 air, sea, and land ports of entry (POE). A simplified depiction of these processes is shown in figure 4. Pre-entry processing begins with initial petitions for visas, grants of visa status, or the issuance of travel documentation. When a foreign national applies for a visa at a U.S. consulate, biographic and biometric data are collected and shared with border management agencies. The biometric data are transmitted from the Department of State to DHS, where the prints are run against the Automated Biometric Identification System (IDENT) database to verify identity and to run a check against the biometric watch list. The results of the biometric check are transmitted back to State. A “hit” response prevents State’s system from printing a visa for the applicant until the information is reviewed and cleared by a consular officer. Pre-entry also includes transmission by commercial air and sea carriers of crew and passenger manifests to appropriate immigration officers before these carriers arrive in the United States. These manifests are transmitted through the Advanced Passenger Information System (APIS). The APIS lists are run against the biographic lookout system to identify those arrivals for whom biometric data are available. In addition, POEs review the APIS list in order to identify foreign nationals who need to be scrutinized more closely. When a foreign national arrives at a POE’s primary (air and sea) or secondary (land) inspection booth, the inspector, using a document reader, scans the machine-readable travel documents. APIS returns any existing records on the foreign national to the US-VISIT workstation screen, including manifest data matches and biographic lookout hits. When a match is found in the manifest data, the foreign national’s name is highlighted and outlined on the manifest data portion of the screen. Biographic information, such as name and date of birth, is displayed on the bottom half of the computer screen, along with a photograph obtained from State’s Consular Consolidated Database. The inspector at the booth scans the foreign national’s fingerprints (left and right index fingers) and takes a digital photograph. This information is forwarded to the IDENT database, where it is checked against stored fingerprints in the IDENT lookout database. If the foreign national’s fingerprints are already in IDENT, the system performs a match (a comparison of the fingerprint taken during the primary inspection to the one on file) to confirm that the person submitting the fingerprints is the person on file. If no prints are currently in IDENT, the foreign national is enrolled in US-VISIT (i.e., biographic and biometric data are entered into IDENT). During this process, the inspector also questions the foreign national about the purpose of his or her travel and length of stay. The inspector adds the class of admission and duration of stay information into the Treasury Enforcement Communications Systems, and stamps the “admit until” date on the Form I-94. If the foreign national is ultimately determined to be inadmissible, the person is detained, lookouts are posted in the databases, and appropriate actions are taken. The status management process manages the foreign national’s temporary presence in the United States, including the adjudication of benefits applications and investigations into possible violations of immigration regulations. As part of this process, commercial air and sea carriers transmit departure manifests electronically for each departing passenger. These manifests are transmitted through APIS and shared with the Arrival Departure Information System (ADIS). ADIS matches entry and exit manifest data (i.e., each record showing a foreign national entering the United States is matched with a record showing the foreign national exiting the United States). ADIS also receives status information from the Computer Linked Application Information Management System and the Student Exchange Visitor Information System on foreign nationals. The exit process includes the carriers’ submission of electronic manifest data to APIS. This biographic information is transmitted to ADIS, where it is matched against entry information. At the 11 POEs where the exit solution is being implemented, the departure is processed by one of three exit methods. Within each port, one or more of the exit methods may be used. The three methods are as follows: Kiosk: At the kiosk, the traveler, guided by a workstation attendant if needed, scans the machine-readable travel documents, provides electronic fingerprints, and has a digital photograph taken. A receipt is printed to provide documentation of compliance with the exit process and to assist in compliance on the traveler’s next attempted entry to the country. After the receipt prints, the traveler proceeds to his or her departure gate. At the conclusion of the transaction, the collected information is transmitted to IDENT. Mobile device: At the departure gate, and just before the traveler boards the departure craft, either a workstation attendant or law enforcement officer scans the machine-readable travel documents, scans the traveler’s fingerprints (right and left index fingers), and takes a digital photograph. A receipt is printed to provide documentation of compliance with the exit process and to assist in compliance on the traveler’s next attempted entry to the country. The device wirelessly transmits the captured data in real time to IDENT via the Transportation Security Administration’s Data Operations Center. If the device is being operated by a workstation attendant, he or she provides a printed receipt to the traveler, and the traveler then boards the departure craft. If the mobile device is being operated by a law enforcement officer, the captured biographic and biometric information is checked in near real time against watch lists. Any potential match is returned to the device and displayed visually for the officer. If no match is found, the traveler is allowed to board the departure craft. Validator: Using a kiosk, the traveler, guided by a workstation attendant if needed, scans the machine-readable travel documents, provides electronic fingerprints, and has a digital photograph taken. As with the kiosk, a receipt is printed to provide documentation of compliance with the exit process and to assist in compliance on the traveler’s next attempted entry to the country. However, this receipt has biometrics (i.e., the traveler’s fingerprints and photograph) embedded on the receipt. At the conclusion of the transaction, the collected information is transmitted to IDENT. The traveler presents his or her receipt to the attendant or law enforcement officer at the gate or departure area, who scans the receipt using a mobile device. The traveler’s identity is verified against the biometric data embedded on the receipt. Once the traveler’s identity is verified, he or she is allowed to board the departure craft. The captured data are not transmitted in real time back to IDENT. Instead, the data are periodically uploaded through the kiosk to IDENT. An analysis capability is to provide for the continuous screening against watch lists of individuals enrolled in US-VISIT for appropriate reporting and action. As more entry and exit information becomes available, it is to be used for analysis of traffic volume and patterns as well as for risk assessments. The analysis is also to be used to support resource and staffing projections across POEs, strategic planning for integrated border management analysis performed by the intelligence community, and determination of travel use levels and expedited traveler programs. In addition to the contact named above, the following people made key contributions to this report: Deborah Davis, Assistant Director; Hal Brumm; Tonia Brown; Joanna Chan; Barbara Collier; Neil Doherty; Jennifer Echard; James Houtz; Scott Pettis; Karen Richey; and Karl Seifert. | The Department of Homeland Security (DHS) has established a program--the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT)--to collect, maintain, and share information, including biometric identifiers, on selected foreign nationals entering and exiting the United States. US-VISIT uses these identifiers (digital fingerscans and photographs) to screen persons against watch lists and to verify that a visitor is the person who was issued a visa or other travel document. Visitors are also to confirm their departure by having their visas or passports scanned and undergoing fingerscanning at selected air and sea ports of entry (POE). GAO has made many recommendations to improve the program, all of which DHS has agreed to implement. GAO was asked to report on DHS's progress in responding to 18 of these recommendations. The current status of DHS's implementation of the 18 recommendations is mixed, but progress in critical areas has been slow. DHS has implemented 2 of the recommendations: it defined program staff positions, roles, and responsibilities, and it hired an independent verification and validation contractor. It has also taken steps to implement the other recommendations, partially completing 11 and beginning to implement another 5. In September 2003, GAO reported that the program had not assessed the costs and benefits of Increment 1 (which provides entry capabilities to air and sea POEs) and recommended that the program determine whether proposed increments will produce mission value commensurate with cost. In the latest cost-benefit analysis, dated June 23, 2005, the program identified potential costs and benefits for three alternatives for an air and sea exit solution. However, the analysis does not meet key Office of Management and Budget criteria; for example, it does not include a complete uncertainty analysis, which helps to provide decision makers with perspective on the potential variability of the cost and benefit estimates should circumstances change. GAO reported in May 2004 and February 2005 that system testing was not based on well-defined test plans and recommended that before testing begins, the program develop and approve test plans meeting certain criteria. However, although the latest test plan did cover many required areas (such as the tests to be performed), it did not adequately trace between test cases and the requirements to be verified by testing. Without complete and traceable test plans, the risk is increased that the deployed system will not perform as intended. In May 2004, GAO reported that the program had not assessed its workforce and facility needs for Increment 2B (which extends entry capabilities to the 50 busiest land POEs) and recommended that it do so. Since then, the program evaluated the processing times to issue and process entry/exit forms at 3 of the 50 busiest POEs and concluded that the results showed that no additional staff and only minor facilities modifications were required. However, the scope of the evaluation was limited. Since then, DHS has deployed and implemented Increment 2B capabilities to these 50 POEs, making the collection of predeployment baseline data for these sites impractical. Nonetheless, other alternatives, such as surveying site officials about the increment's impacts, have yet to be explored. Until they are, the program may not be able to accurately project resource needs or make any needed modifications to achieve its goals of minimizing US-VISIT's impact on POE operations, which was the impetus for GAO's recommendation. DHS attributed the pace of progress to competing demands on time and resources. The longer that US-VISIT takes to implement the recommendations, the greater the risk that the program will not meet its stated goals on time and within budget. |
State departments of transportation and local governments are responsible for building and improving highways and other road infrastructure in the United States. The federal-aid highway program, which is administered by FHWA, provides funding for this purpose from the highway account of the federal Highway Trust Fund. FHWA distributes highway funds to the states through annual apportionments established by statutory formulas and by allocation of discretionary grants; in 2006, about $31 billion in federal-aid highway funding was available to states. Funds come through several different programs, each with specific uses and eligibility requirements, but states generally have broad discretion to choose the projects that will be funded with these moneys. After determining that projects meet federal requirements and that funds are available, FHWA enters into obligations for the projects selected by states. After states make expenditures on the projects, they apply to FHWA for reimbursement of the federal share of eligible costs. States supplement federal funds for highway programs—and provide required matching funds—with nonfederal revenues such as taxes and user fees. Constructing, maintaining, and operating public transportation systems are generally the responsibilities of local agencies, such as transit authorities or transit operators. Federal funds for public transportation are generally administered by FTA and are funded through a combination of general fund revenues and the mass transit account of the Highway Trust Fund. Recipients such as transit operators and states are apportioned annual formula program funds that may be used for capital expenses and, in the case of areas with populations under 200,000, for operating expenses. Transit operators and other recipients may also receive discretionary grants for capital expenditures such as vehicle purchases and system construction or expansion. In 2006, FTA provided about $8 billion in funding to transit agencies and states through its formula and discretionary grant programs. Federal transit funds generally remain with FTA until the transit operator is ready to use them. Additional funding for transit comes from state or local taxes and operating revenue such as passenger fares and parking fees. In the early 1990s, Congress decided that a flexible, intermodal approach to transportation programs was needed to address growing transportation needs in the face of budgetary constraints and the diversity of transportation priorities in different parts of the country. Enacted in December 1991, ISTEA sought to provide flexible, comprehensive solutions to transportation problems and focused more on intermodal approaches than previous acts had. Two of the programs created by this legislation were STP and CMAQ—also referred to here as flexible funding because they may be used on a range of projects including transit and highways. A portion of flexible funding is allocated to localities rather than states, allowing local authorities to select projects within their jurisdictions. The responsibility for project selection at this level usually falls to regional bodies such as metropolitan planning organizations (MPO), which are composed of representatives of local governments, transit operators, and other transportation stakeholders who collaborate on transportation planning. Federal law suballocates a portion of STP funds to urbanized areas 200,000 or greater in population; some states have chosen to further allocate flexible funding to these areas. Table 1 provides details on eligible uses for STP and CMAQ funds—which in 2006 constituted about one-quarter of the total federal-aid highway program— as well as guidelines on how these funds are apportioned. When states or urbanized areas use flexible funding on transit projects, they may leave the funds in the state’s FHWA account, in which case the state receives reimbursement from FHWA as costs are incurred. Alternatively, the state—usually in conjunction with the MPO or the local agency implementing the project—may request that these funds be transferred to FTA to be administered through one of several eligible FTA programs. Once funds are transferred to FTA, a transit operator or other recipient becomes the grantee for these funds. FTA funds apportioned directly to transit operators or states may be used for operating costs in areas under 200,000 in population; however, FHWA funds transferred into FTA formula programs may not be used for operating costs, except for CMAQ funds used for new or expanded services. Although state and local authorities have considerable discretion when choosing which transportation projects to fund with federal-aid program funds, federal laws and regulations require that projects proposed for highway and transit funding be based on comprehensive metropolitan and statewide transportation planning processes. State, regional, and local government agencies and transit operators must operate within these requirements to receive federal funds. The various planning tasks that states and MPOs must carry out include the following: involving stakeholders such as elected officials, public transit operators, environmental and historic preservation agencies, freight shippers, and others in the planning and project-selection processes. identifying overall goals and objectives to support transportation investment choices that consider factors such as projected population growth and economic changes, current and future transportation needs, maintenance and operation of existing transportation facilities, and preservation of the human and natural environments. evaluating different transportation alternatives through the collection and analysis of data. documenting future transportation needs through long-range transportation plans and short-range programs. Short-range programs, known as transportation improvement programs (TIP), at the local level, and state transportation improvement programs (STIP) at the state level, must include the scope of projects, estimated costs, and the source of funding. In order to receive federal funding, projects must be included in a STIP that demonstrates sufficient funds are available to implement the program. ensuring that the process for transportation planning and decision-making reflects a variety of planning factors such as environmental compliance, safety, security, system management and operations, and land use, among others. To help ensure that metropolitan transportation planning processes are being carried out in full compliance with federal laws and regulations, FHWA and FTA jointly review the planning process every 4 years in areas with populations of 200,000 or greater. While states have varied in the extent to which they have used STP and CMAQ funds for transit, some states have augmented their transit budgets significantly or made major transit investments using flexible funding. As part of our review, we looked both at the overall impact on federal highway and transit spending nationwide and at the types of transit projects on which flexible funding is most commonly used. Overall, from the enactment of ISTEA in late 1991 through 2006, the relative amount of flexible funding used for transit projects, either directly through FHWA or through transfer to FTA, has been low, averaging less than 3 percent of the total federal-aid highway program and 13 percent of available flexible funding. From 1992 through 2006, a total of $12 billion of flexible funding has been used for transit projects. The vast majority— more than 96 percent—of this funding was transferred from FHWA to FTA; the remaining amount was used for transit projects administered directly by FHWA. Flexible funding not used on transit was used on other eligible projects such as construction and operational improvement of roadways. Figure 2 shows the amount of flexible funding used on transit projects—including funds that were transferred to FTA and those that were administered directly by FHWA—in relation to the overall federal-aid highway program and to available flexible funding from 1992 to 2006. Other FHWA progr, inclding thoe for the contrction, recontrction nd improvement of highw nd ridgeFlexile fnding (STP nd CMAQ) The amount of flexible funding transferred to FTA increased markedly with passage of the Transportation Equity Act for the Twenty-First Century (TEA-21) in 1998, primarily because the act increased overall highway funding levels, according to DOT officials. The average annual amount of transferred funding increased from $630 million under ISTEA to $1.1 billion under TEA-21, when measured in inflation-adjusted 2007 dollars, and increased further to $1.2 billion during the first two years of SAFETEA-LU. Likewise, the proportion of available flexible funding transferred to FTA increased from about 11 percent during ISTEA to 14 percent and 15 percent under TEA-21 and SAFETEA-LU, respectively. Figure 3 shows both the annual transfer amount in nominal actual dollars and inflation-adjusted 2007 dollars to allow for comparison across time. The figure also shows the average transfer amount for each transportation authorization act in inflation-adjusted dollars. Individual states have transferred flexible funding to FTA for transit projects at varying rates. For example, while California transferred nearly 40 percent of its apportioned flexible funding for transit projects administered by FTA between 1992 and 2006, and 3 other states and the District of Columbia transferred at least 25 percent, 19 states transferred less than 2 percent of this flexible funding during the same period. Figure 4 illustrates the state-by-state proportion of flexible funding transferred to FTA for transit projects. Among the nine states included in our case-study review, we found that factors such as demographics, infrastructure, geography, and the availability of other funding sources had an effect on how much flexible funding the states used on transit. In states such as Wyoming and parts of Iowa and Kentucky, for example, population is dispersed over a wide area, and services such as shopping and health care facilities are often far from one another and from residential areas. Officials in these states said that such conditions do not lend themselves to efficient use of transit. Thus, Iowa state transportation officials noted, the population in Iowa is largely reliant on the automobile for transportation, and counties, which have discretion about how to use certain state transportation funds, lean heavily toward building roads. Another reason for states using a small proportion of flexible funding on transit can be that the state uses other revenues to support transit. For example, state transportation officials in Delaware, which has not transferred flexible funding for use on transit, told us that they believe state revenue sources—including the state’s gasoline tax—are sufficient to meet the needs of the state’s transit operators. Conversely, states that use a higher proportion of their flexible funding on transit tend to have large, congested urban areas that are served extensively by transit. Of the 8 urbanized areas included in our case-study review that are in states that use relatively more flexible funding on transit, 5 of them have transit operators that are among the largest 25 in the nation. One notable exception to this trend is the largely rural state of Vermont, which, because of the state’s commitment to providing bus services in communities throughout the state, spends a high proportion of its flexible funding on transit. The dollar amount of flexible funding transferred by states for use on FTA- administered transit projects varied, with 3 states—California, New York, and Pennsylvania—collectively accounting for more than half of the amount transferred from 1992 through 2006. In contrast, 3 states— Delaware, North Dakota, and South Dakota—had never transferred flexible funding for use on transit projects, and 10 other states transferred less than $1 million per year, on average. Figure 5 provides information on the amounts of flexible funding states have transferred from FHWA to FTA for use on transit projects since the enactment of ISTEA. Just as the amount of flexible funding transferred for transit projects varied by state, the effect those funds had on the amount of federal funding used on transit varied as well. For example, from 1992 to 2006, Vermont transferred a relatively small amount of flexible funding to FTA for use on transit projects, but those funds accounted for over 40 percent of the FTA funding used in Vermont. Similarly, in 3 other states, transferred flexible funding made up at least 20 percent of the total FTA funds used in each state, while, in contrast, this figure was less than 5 percent in 17 states. These latter states tended to have fewer large urban areas and lower population densities. Figure 6 shows the proportion of FTA funding in each state that came from transferred STP and CMAQ funds. From 1992 through 2006, nearly 80 percent—or $9.1 billion—of the flexible funding transferred to FTA was used by urbanized areas with populations of over 1 million (see fig. 7). For the flexible funding that remained with FHWA for use on transit projects, 45 percent was used in urbanized areas with a population of over 1 million, with the remaining portion used in smaller areas or on state-administered projects. Of the flexible funding transferred to FTA from 1992 through 2006, more than half was used on purchases of vehicles—both rail cars and motor vehicles such as buses—and on projects related to rail lines or bus lanes. The heaviest users of transferred flexible funding on transit—urbanized areas with populations of over 1 million—spent 55 percent on these types of projects. For example, in the Seattle area, flexible funding was used to purchase diesel-electric hybrid buses and for the development of the Sound Transit light rail line. Similarly, in the Northern Virginia region of the Washington, D.C., area, a regional transit operator used flexible funding for annual purchases of new buses to expand its fleet. Nationally, urbanized areas over 1 million in population used 14 percent of transferred flexible funding on passenger facilities such as pedestrian walkways, bus stops, and rail stations. Smaller urbanized and rural areas also used a significant amount—about 40 percent—of their transferred flexible funding on motor vehicle purchases and an additional 6 percent on bus and rail lines. For example, the transit agency in Des Moines, Iowa, has relied on flexible funding to pay for bus replacements, transferring approximately $2.5 million of its STP funds to FTA for this purpose over the last 10 years. Figure 8 provides detailed information about how large urbanized areas and smaller urbanized or rural areas used the flexible funding that they transferred to FTA. Regarding the “other” category, shown in figure 8, a substantial portion of this category is preventive maintenance and contracted services (i.e., transportation service provided to a public transit agency by a public or private transportation provider under contract). A competitive process was often used to select projects, particularly at the local level, and projects not selected this way were chosen based on state or local transportation plans and priorities. An advantage of flexible funding cited by officials in our case-study review was that because of its broad eligibility, it enables multimodal transportation planning and thereby allows states and localities to select projects best suited to their diverse needs. Of the 10 urbanized areas included in our case-study review that have decision-making authority for flexible funding, 7 selected projects for at least some of these funds using competitive processes in which all eligible project types were considered, including highway, transit, bikeway and pedestrian, and others. While the competitions varied somewhat from place to place, we found that common elements of most of these competitions included the following: a call for projects, during which potential project sponsors—such as transit operators, city or county governments, or nonprofit groups— submit formal project applications to the competition coordinator, typically the region’s MPO. project applications that consist of basic information on the project, including title, sponsor, summary description, location or service area, cost, and funding sources. an initial screening of project applications in which basic eligibility determinations are made, such as eligibility to receive federal funds, project readiness, availability of local matching funds, and compatibility with or inclusion in the region’s long-range transportation plans. a technical evaluation of the projects found to be basically eligible, typically carried out by a technical committee of the MPO using criteria established by the MPO. Some of the most common criteria are air quality impact, measured by the estimated emissions reductions of traffic flow improvement or congestion reduction; potential to enhance continuity of the transportation system or regional connectivity. a recommendation of projects based on the technical committee’s evaluation submitted to the MPO’s board of directors. In addition, according to federal requirements, all projects included in a region’s TIP, regardless of how they are selected, are subject to a public notification and comment period. Some of the urbanized areas included in our case study review also established project categories based on the needs and priorities of the region to allocate funds among certain uses such as road maintenance or capacity enhancement, bikeway and pedestrian facilities, or transit capital improvements. These categories tended to have specific eligibility and application requirements and evaluation criteria, as can be seen in the following examples: In the Virginia Beach, Virginia, area, six categories were used in the MPO’s competition for STP funds. The projects competing in the intermodal transportation category were evaluated on whether the project would establish opportunities for linkages between transportation modes and improve rail or vehicular access to freight facilities, among other criteria. In contrast, projects competing in the highway capacity category were evaluated on criteria such as potential impact on congestion levels, system continuity, and safety improvements. In Des Moines, Iowa, STP projects were awarded in four categories. Projects competing in the major construction category were evaluated based on their potential to increase future traffic volumes and their functional classification (e.g., principal arterial roads ranked higher than small, feeder roads), among other things. Projects competing in the alternative transportation category were evaluated based on congestion reduction, air quality benefit, and the fuel efficiency of the mode of transportation. On the state level, of the nine states included in our case-study review, four—Iowa, Kentucky, Vermont, and Virginia—awarded a portion of their flexible funding through a competitive process. Statewide competitions— typically sponsored by state departments of transportation—were similar to local competitions, although some of them required projects to be vetted at the local level before being submitted to the statewide competition. Although most of the urbanized areas included in our case-study review that have decision-making authority for flexible funding used competitions for at least some of these funds, they also selected some projects and programs based on local policy goals and priorities. Some examples of locally established priorities that we found in the urbanized areas included in our case-study review include the following: In the San Francisco area, transportation stakeholders projected a significant shortfall for transit capital expenditures over a 25-year period. The region’s MPO board of directors decided to make this a priority use for STP funds, allocating the funds to each transit operator based on its portion of the projected shortfall. In Pittsburgh, due to the age of the region’s roadways and transit systems, there was a heavy emphasis on the preventive maintenance of this infrastructure, with about 80 percent of all available funding—including flexible funding—being used for this purpose. Specific projects were selected based on continuous analysis of transportation infrastructure needs, the region’s long-range plan, and input from the public and the state’s transportation department. For most of the states in our case-study review, flexible funding that was neither suballocated to urbanized areas nor awarded competitively was, along with most other federal and state funding sources, used on projects identified through state transportation planning processes; these processes typically considered transportation priorities, conditions, and needs throughout the state. Because state departments of transportation are primarily responsible for building and maintaining roads, project selection at the state level tends to focus on roads, including construction of roadways and related projects to manage road usage such as intelligent transportation systems. For example, Kentucky’s transportation department uses STP funds and other available funding sources for priority road projects that the state identifies based on a number of factors, such as transportation problems across the state, need (based on a statewide needs analysis), and project eligibility. Looking at these considerations, the transportation department develops a list of projects and evaluates them alongside available funding sources, including both FHWA and state sources, to determine which projects will be funded with which sources. Similarly, Caltrans, the California state transportation department, applies statewide STP funding, along with other federal and state funding sources, to projects in its State Highway Operation and Protection Program, which is developed to address state priorities such as traffic safety and highway and bridge preservation. In contrast, some states in our case-study review set aside a portion of their flexible funding to be used for specific projects or programs. Following are three examples: Wyoming and Virginia both use statewide STP funds on specific categories of roads. Wyoming allocates these funds among county roads, roads in the state’s urban areas, and industrial and commercial roads such as those leading to mines. Virginia divides statewide STP funds among primary, urban, and secondary roads. The decisions about which projects to fund for these categories of roads are made by Virginia’s Commonwealth Transportation Board, the city or town, and the county board of supervisors, respectively. Pennsylvania’s transportation financial guidance designates $25 million of the state’s flexible funding to be set aside each year for use by the state’s transit agencies. (In 2006, the state’s total flexible funding apportionment was about $290 million.) The majority of the $25 million goes to the state’s two largest transit operators, Philadelphia’s Southeast Pennsylvania Transportation Authority and Pittsburgh’s Port Authority of Allegheny County. Virginia state law mandates that a percentage of its flexible funding— amounting to about $22 million each year, according to state officials—be used for public transportation. (In 2006, Virginia’s total flexible funding apportionment was about $196 million.) A portion of the $22 million must be used for track lease payments for a Northern Virginia commuter rail system; the remaining funds are spent on transit projects selected by the state, usually in rural and small urban areas. As a result of the broad eligibility of STP and CMAQ funds, states and urbanized areas can use a multimodal approach to transportation planning, selecting projects that they believe best address their transportation priorities—whether a road project, a transit project, or projects such as intelligent transportation systems or traffic demand management strategies. Accordingly, the transportation priorities that states and urbanized areas choose to address vary based on their differing needs and circumstances. Among the urbanized areas and states included in our case-study review that use a high proportion of flexible funding on transit, we found the following distinctive uses of these funds, illustrating how outcomes vary with state and local priorities: Constructing the Sound Transit System in Seattle. Sound Transit, established in 1995 to build a mass transit system serving the three counties in the Seattle region, is still in a capital-intensive phase, as it continues to complete the infrastructure for the fixed-route portion of the system, including construction of a light-rail line connecting Seattle with the Seattle-Tacoma airport and extending its commuter-rail service south of Tacoma. It has used more than $112 million in flexible funding for rail car purchases and rail line construction, among other things. In 2007, it was awarded $9 million in flexible funding to purchase the right-of-way for two light-rail stations. Providing new services in Virginia Beach. The Virginia Beach area, an urbanized area of about 1.3 million people in southeastern Virginia, has significant traffic congestion due to the northern and southern halves of the area being divided by the confluence of the Elizabeth and James Rivers, which is crossed by seven bridges and tunnels. The regional transit operator, Hampton Roads Transit, uses flexible funding to provide new services to help relieve traffic congestion. According to Hampton Roads Transit officials, obtaining local funding for regional projects can be difficult because cities within in the region are sometimes reluctant to pay for services in another city. In this way, officials said, flexible funding can better benefit the community by making new services possible. Rehabilitating Pennsylvania’s rail systems. At the end of 2004, transit systems in Pennsylvania were facing operating budget shortfalls because transit growth had outstripped the existing revenue sources. The state’s legislature adjourned before taking action to provide either long- or short- term transit funding. In light of this, a number of transit agencies began considering measures to reduce their costs by decreasing service and laying off staff and to increase income by raising fares. In an effort to avoid service cuts and fare increases, Pennsylvania’s governor proposed transferring more than $400 million of federal highway funds to FTA to be used on transit. For the transit agencies in Philadelphia, Pittsburgh, and other parts of the state to receive the funding, the MPOs in these areas had to vote to allocate the funds to transit. In Philadelphia and Pittsburgh, these additional funds were used on eligible capital expenses such as preventative maintenance, allowing other state funds to be used to cover operating deficits. Subsidizing rural transit services in Vermont. Vermont is a largely rural state with a small population, and, according to the transit officials we spoke with, has a small tax base on which to draw for funding services such as transit. The state, however, is committed to preserving its current quality of life—which includes low levels of pollution and congestion— and allowing its elderly population to “age in place,” meaning that senior citizens can remain in their homes and still have access to transportation for medical appointments, shopping, and other necessities. To further these goals, the state’s transportation department uses a significant amount of flexible funding on eligible capital expenses such as preventive maintenance to help support bus services in communities throughout the state. In the course of our case-study review, we asked state and local officials their views on the outcomes of flexible funding. Officials with the MPOs and state transportation departments we met with said that due to its broad, multimodal eligibility, flexible funding considerably benefits their ability to plan and fund their transportation programs, particularly because of the challenge of finding sufficient revenues to pay for transportation improvements. One specific advantage cited by a number of these officials was that flexible funding can serve as an additional funding source for transit. State officials in Vermont and Virginia noted that flexible funding makes it possible to provide bus service in small towns and rural areas through the funding of expenses such as bus purchases, bus facilities construction, and preventive maintenance. State and local officials in several states also pointed out that flexible funding is particularly beneficial for regional projects. For example, in Seattle, flexible funding is especially well-suited to meeting the region’s goal of connecting transportation hubs. Although there was wide agreement among these state and local officials that flexible funding is beneficial, officials from two states—California and Pennsylvania—also said that in the context of pressing needs on both the highway and transit sides, using flexible funding on transit may impact highway programs. In the words of one MPO official in Pennsylvania, using flexible funding on transit is “a zero-sum equation,” because, even though it provides much-needed resources for transit projects, it means that resources for the highway program are reduced an equal amount. Similarly, an official with the MPO in the Los Angeles area noted that many area freeways are in poor condition—a function of inadequate funding for transportation in general, and, to a small degree, the use of flexible funding on transit. Other state and local officials, however, said they did not believe using this funding for transit had negatively impacted roads, and that the larger problem is insufficient revenues for both highways and transit. Officials with Vermont’s state transportation department, for example, said that although there are insufficient funds for road maintenance in the state, they attributed this condition to a lack of state funding rather than the use of flexible funding on transit. We provided a draft of this report to DOT for review. DOT generally agreed with the report’s findings. We received comments and technical clarifications from FTA’s Office of Budget and Policy, Office of Program Management, and Office and Planning and Environment, and from FHWA’s Office of Planning, Environment, and Realty, which we incorporated in the report as appropriate. We also provided officials from the states and localities included in our case studies with an opportunity to review segments of the report pertaining to their jurisdictions. These officials provided technical clarifications, which we incorporated in the report as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Transportation, and the state and local officials with whom we spoke. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2843 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. To examine the procedures used to transfer flexible funding from the Federal Highway Administration (FHWA) to the Federal Transit Administration (FTA) we spoke with officials from FHWA and FTA, both in their Washington, D.C., headquarters and in field offices. We also reviewed guidance on the transfer process issued jointly by FHWA and FTA and examples of documentation used to process requests for transfers. When states or local planning bodies fund transit projects with funds from the Surface Transportation Program (STP) or the Congestion Mitigation and Air Quality Program (CMAQ), they have the option to transfer these funds to FTA for project administration or leave them with FHWA. The transit agency officials we spoke with said that when they are awarded STP or CMAQ funds for a project they are implementing, they generally prefer to transfer these funds to FTA for administration because of their familiarity with FTA’s personnel, grantmaking procedures, and requirements and because of FTA’s expertise in administering transit projects. Requests to transfer FHWA funding to FTA are submitted by state departments of transportation because the funding comes from state federal-aid highway apportionments. In deciding whether to approve transfer requests, FHWA checks to see if projects are eligible for flexible funding, if states have funding available for the transfer, and if the projects for which funding is being requested are included in the statewide transportation improvement program (a requirement for all projects receiving federal-aid highway or transit funds). When the transfer is carried out, budget authority—which permits an agency to incur financial obligations such as the awarding of grants—is transferred from FHWA to FTA, and the funds necessary to reimburse grantees for costs incurred is transferred from the highway account to the mass transit account of the Highway Trust Fund. DOT recently implemented an accounting change whereby the funds necessary to reimburse grantees are transferred to the mass transit account as grantees incur costs, rather than all at once when the transfer is approved. According to DOT officials, this change is intended to slow the decline of the highway account’s balance. After the budget authority has been transferred to FTA, FTA makes an apportionment in the grantee’s account using the grants management system. To obtain the transferred funds, grantees must have a grant application approved by FTA. The procedures for transferring funds were detailed in joint guidance issued by FHWA and FTA in 1999; the agencies are in the process of preparing updated joint guidance. Figure 1 provides more detail on the steps in the transfer process. Eligibility checks of projects receiving flexible funding occur before, during, and after the transfer process. Prior to states’ submitting transfer requests, FTA and FHWA participate in the statewide and metropolitan transportation planning processes and provide technical assistance on issues such as funding eligibility. After states submit requests to transfer funds, checks on project eligibility occur at FHWA division offices when state transfer requests are received, and at the FHWA Financial Management Office to ensure funds are available and requests meet transferability requirements. FTA’s subsequent review of grant applications includes checking project eligibility in greater detail. According to FHWA and FTA officials, the following checks occur to help ensure that the correct amount of funding and budget authority is transferred from FHWA to FTA: Recording of steps in the transfer process. FHWA records information on the amount of funds being requested, the type of funds (such as CMAQ or STP) and the state requesting the transfer, as well as dates of key steps in the transfer process. FTA also tracks key information on transfer requests, including the date of the letter requesting the transfer, the grantee receiving the funds, the description and FTA project number of the transit project receiving funds, the type of FHWA funding to be transferred, and the amount to be transferred. Reconciliation process. Before transfers are finalized, FHWA and FTA follow procedures to ensure the correct amounts are transferred. The FHWA Office of Budget reconciles transfer requests with a report generated by FMIS that documents the amounts and the program codes to be transferred, then provides this and other supporting information to the FTA Office of Budget. The FTA Office of Budget also reconciles transfer requests with information generated by FMIS. Before the FHWA Office of Budget requests that the FHWA Office of Finance move the funding through the Department of the Treasury, the amount to be transferred is agreed upon by FHWA and FTA. Records retention. Hard copy files for each transfer request received are maintained by FTA for 5 years and then archived; files are maintained by FHWA for 20 years. To determine the degree to which flexible funding has been used on transit and how this use varies across states and urbanized areas, we analyzed data from FTA and FHWA. We assessed the reliability of the data and found it was sufficiently reliable for the purposes of this report. These data included information about the funds transferred to FTA for project administration, funds remaining at FHWA for use on transit projects, the overall federal-aid highway program apportionments, and apportionments for the CMAQ and STP programs. We obtained information from FTA’s grants management system, called the Transportation Electronic Award Management (TEAM) system, regarding the amount of STP and CMAQ funds transferred to FTA for project administration. These data were provided on an annual basis, from fiscal years 1992 through 2006, allowing us to calculate the amounts transferred by year and the annual averages for each transportation authorization bill. Additional information was provided about the population of jurisdictions using these funds; the purpose for which funds were spent, such as vehicle purchases, busways, rail lines, or new service; and the proportion of FTA funding in each state that came from flexed funds. To identify transit spending remaining under FHWA administration, we requested that FHWA provide data from the Fiscal Management Information System (FMIS)—its project-tracking information system—for projects that state officials had coded as being transit related. We used additional documentation provided by FHWA officials to determine the source of federal funding (i.e., the appropriation bill) and information about spending by individual urbanized areas for the FHWA-administered transit projects. Using these data, we calculated the total amount of flexible funding spent on transit-related projects administered by FHWA during ISTEA, TEA-21, and SAFETEA-LU. We did not independently verify that all projects that states coded as having a transit component in FMIS in fact had a transit component. We also analyzed FHWA’s spending for transit projects by the population of the area implementing the project. In order to determine the total amount of flexible funding used on transit projects since 1992, we analyzed funding for transit projects administered by FHWA and funding transferred to FTA for project administration. We also compared the unadjusted total amounts with the overall federal-aid highway apportionments for fiscal years 1992 through 2006 to calculate the proportion of highway funding spent for transit projects during this period. To calculate the proportion of flexible funding spent on transit projects under FTA administration, we compared annual apportionment amounts for the programs to the amount transferred. Comparisons were done both on the national level and by state. We also used information from our case-study interviews (see below) to provide context for differences in the use of flexible funding among states and to identify examples of types of projects commonly using these funds. To determine how states and urbanized areas have made decisions about what projects to fund with flexible funding and what the outcomes of these decisions have been, we selected 9 states and 12 urbanized areas for case-study reviews. To select states, we used three measures to determine how states’ prior use of flexible funding on transit compared: (1) the absolute dollar amount of flexible funding transferred from FHWA to FTA for transit projects, (2) the proportion of available flexible funding transferred, and (3) the proportion of FTA funding in the state that came from transferred funds. We selected five states that ranked in the top 10 for at least two of these measures for site visits—California, Pennsylvania, Vermont, Virginia, and Washington. We also selected two states—Iowa and Kentucky—that were ranked among the lowest on these measures among states that had transferred funds at least five times since the enactment of TEA-21, and two other states—Delaware and Wyoming—that had either never transferred funds or done so fewer than five times in the same period. For these states, we conducted telephone interviews. In each of these states, we chose at least one urbanized area to include in the case study. In the states that used a relatively high amount of transferred flexible funding on transit, we selected urbanized areas that had used the largest proportion of the state’s flexible funding on transit; in states that transferred relatively little or no flexible funding for use on transit projects—because there were no urbanized areas that had used a significant amount of transferred flexible funding on transit—we selected the largest urbanized area in the state. In the cases of California, Pennsylvania, and Virginia, we included two urbanized areas in each state because each of these areas had used significant amounts of flexible funding for transit. These cases were selected using a nonprobability sample, and, consequently, the results cannot be used to make inferences about the entire population. Table 1 shows the states and urbanized areas included in our review. In each state included in our case-study review, we spoke with officials at the FHWA division in the state and at the FTA regional office with jurisdiction over the state, and with relevant officials in the state department of transportation. In the urbanized areas included in our case- study review, we spoke with officials from metropolitan planning organizations and transit agencies. We asked these officials about the state’s or locality’s decision-making process in developing transportation plans and programs and in choosing projects to receive flexible funding, the mechanics of transferring funds, specific projects funded using these funds, and the impact of flexible funding on transportation as a whole (both transit and nontransit). We collected and reviewed: (1) documentation from the case-study states and urbanized areas, including information on state and metropolitan planning processes, the criteria and procedures used in project selection competitions, and projects funded using flexible funding; (2) federal regulations and guidance related to transportation planning and the CMAQ and STP programs; and (3) prior reports on the use of flexible funding by states and urbanized areas. We also interviewed representatives of the following associations to obtain their views on flexible funding: the American Association of State Highway and Transportation Officials, the American Highway Users Alliance, the American Public Transportation Association, the American Road and Transportation Builders Association, the Association of Metropolitan Planning Organizations, and the Surface Transportation Policy Partnership. To obtain information on the procedures used to transfer budget authority and funds from FHWA to FTA, we interviewed officials involved in overseeing or carrying out the steps in the transfer process, including those with FTA’s Office of Budget, Office of Program Management, and Office of Planning and Environment; FHWA’s Office of Budget and Office of Financial Management; the Office of the Secretary of Transportation’s Office of Budget; the FTA regions with jurisdiction over the states included in our case-study review; and the FHWA divisions in these states. We also reviewed joint FTA-FHWA guidance on the procedures used to transfer funds. In addition to the contact named above, Ashley Alley, Amber Edwards, Edda Emmanuelli-Perez, Colin Fallon, Heather Halliwell, Carol Henn, Molly Laster, Faye Morrison, Joshua Ormond, Robert Owens, George Quinn, and Terry Richardson made key contributions to this report. | The Intermodal Surface Transportation Efficiency Act of 1991 introduced two highway programs--the Surface Transportation Program (STP) and the Congestion Mitigation and Air Quality Program (CMAQ)--that may be used on both highway and transit projects and that are referred to as "flexible funding" for the purposes of this report. GAO was asked to examine (1) the degree to which STP and CMAQ funding has been used on transit and how this use varies across states and urbanized areas, and (2) how states and urbanized areas decide which projects to fund with STP and CMAQ funding and what the outcomes of these decisions have been. To address these issues, GAO analyzed data on flexible funding used on transit projects from the Federal Transit Administration (FTA) and the Federal Highway Administration (FHWA) and spoke with officials in selected states and urbanized areas about their project-selection processes for flexible funding and the outcomes of these funding decisions. States and urbanized areas were selected based on their prior use of flexible funding. GAO is not making recommendations in this report. The Department of Transportation generally agreed with the report's findings and provided technical clarifications, which were incorporated in the report as appropriate. Since the 1991 creation of the two flexible funding programs this report examines--STP and CMAQ--$12 billion from these programs has been spent on transit projects, either directly through FHWA or through transfer to FTA. This spending on transit represents 13 percent of the apportionments for these programs since 1992 and 3 percent of the total federal-aid highway program. However, the amount of FTA funding used in some states has been augmented significantly by these funds; in four states, funds transferred from these programs to FTA made up 20 percent or more of total FTA expenditures. Nearly 80 percent of transferred funds have been used in urbanized areas with populations over one million, and the most common uses of these funds include purchases of transit vehicles such as buses and rail cars, and projects related to rail lines or bus lanes. The 9 states and 12 urbanized areas in our case study review had formal processes for selecting projects for flexible funding. Of these, 7 urbanized areas and 4 states selected projects for all or some of these funds through competitive processes in which projects for different transportation modes were evaluated and selected using established criteria and input from transportation stakeholders. States and urbanized areas that did not use competitions selected projects based on transportation priorities and plans. Regarding the outcomes of decisions on how to utilize flexible funding, state and local officials told us that the broad, multimodal eligibility of this funding program enhances their ability to fund their transportation priorities, particularly in light of the challenge of finding sufficient revenues to pay for transportation improvements. |
TSA is the primary federal agency responsible for overseeing the security of surface transportation systems, including developing a national strategy and implementing security programs. However, several other agencies, including DHS’s Federal Emergency Management Agency (FEMA) and the Department of Transportation’s (DOT) Federal Transit Administration (FTA) and Federal Railroad Administration (FRA), also play a role in helping to fund and secure these systems. Since it is not practical or feasible to protect all assets and systems against every possible terrorist threat, DHS has called for using risk-informed approaches to prioritize its security-related investments and for developing plans and allocating resources in a way that balances security and commerce. In June 2006, DHS issued the National Infrastructure Protection Plan (NIPP), which established a six-step risk management framework to establish national priorities, goals, and requirements for Critical Infrastructure and Key Resources protection so that federal funding and resources are applied in the most effective manner to deter threats, reduce vulnerabilities, and minimize the consequences of attacks and other incidents. The NIPP, updated in 2009, defines risk as a function of three elements: threat, vulnerability, and consequence. Threat is an indication of the likelihood that a specific type of attack will be initiated against a specific target or class of targets. Vulnerability is the probability that a particular attempted attack will succeed against a particular target or class of targets. Consequence is the effect of a successful attack. In May 2007, TSA issued the Transportation Systems Sector-Specific Plan (TS-SSP), which documents the risk management process to be used in carrying out the strategic priorities outlined in the NIPP. As required by Executive Order 13416, the TS-SSP also includes modal implementation plans or modal annexes that detail how TSA intends to achieve the sector’s goals and objectives for each of the six transportation modes using the systems- based risk management approach. To address the objectives and goals laid out in the TS-SSP, TSA uses various programs to secure transportation systems throughout the country, including Visible Intermodal Prevention and Response (VIPR) teams and Surface Transportation Security Inspectors (STSI). VIPR teams employ a variety of tactics to deter terrorism, including random high- visibility patrols at mass transit and passenger rail stations using, among other things, behavior-detection officers, canine detection teams, and explosive-detection technologies. STSIs, among other things, conduct on- site inspections of U.S. rail systems—including mass transit, passenger rail, and freight rail systems—to identify best security practices, evaluate security system performance, and discover and correct deficiencies and vulnerabilities in the rail industry’s security systems. In August 2007, the Implementing Recommendations of the 9/11 Commission Act (9/11 Commission Act) was signed into law, which included provisions that task DHS and other public and private stakeholders with security actions related to surface transportation security. Among other things, these provisions include mandates for developing and issuing reports on TSA’s strategy for securing public transportation, conducting and updating comprehensive security assessments for public transportation agencies, and ensuring that transportation modal security plans include threats, vulnerabilities, and consequences for transportation infrastructure assets including mass transit, railroads, highways, and pipelines. In March 2009, we reported that TSA has taken some actions called for by the NIPP’s risk management process, but has not conducted comprehensive risk assessments across aviation and four major surface transportation modes. In 2007, TSA initiated but later discontinued an effort to conduct a comprehensive risk assessment for the entire transportation sector, known as the National Transportation Sector Risk Analysis. Consequently, we recommended that TSA conduct comprehensive risk assessments for the transportation sector to produce a comparative analysis of risk across the entire transportation sector, which the agency could use to guide current and future investment decisions. DHS and TSA concurred with our recommendation, and in April 2010 TSA identified planned actions, including integrating the results of risk assessments into a comparative risk analysis across the transportation sector. TSA officials stated in April 2010 that the agency has revised its risk management framework, TS-SSP, and modal annexes. They added that these documents are undergoing final agency review. In addition, we have previously reported that while TSA has collected information related to threat, vulnerability, and consequence within the surface transportation modes, it has not conducted risk assessments that integrate these three components for individual modes. For example, we reported in June 2009 that TSA had not conducted its own risk assessment of mass transit and passenger rail systems that combined all three risk elements, as called for by the NIPP. Thus, we recommended that TSA conduct a comprehensive risk assessment that combines threat, vulnerability, and consequence. DHS concurred with this recommendation, and in February 2010, DHS officials said that TSA had undertaken a Transportation Systems Sector Risk Assessment that would incorporate all three elements of risk. In April 2010, TSA stated that this risk assessment is under review. Similarly, the Administration’s Transborder Security Interagency Policy Committee (IPC) Surface Transportation Subcommittee’s recently issued Surface Transportation Security Priority Assessment recognized that assessing transportation assets and infrastructure and ranking their criticality would help target the use of limited resources. Consequently, this subcommittee recommended that TSA identify appropriate methodologies to evaluate and rank surface transportation systems and critical infrastructure. We have also identified other opportunities to improve TSA’s risk management efforts for surface transportation. For example, in April 2009, we reported that TSA’s efforts to assess security threats to freight rail could be strengthened. Specifically, we noted that while TSA had developed a freight rail security strategy, the agency had focused almost exclusively on rail shipments of toxic inhalation hazards (TIH), such as chlorine and anhydrous ammonia, which can be fatal if inhaled, despite other federal and industry assessments having identified additional potential security threats, such as risks to bridges, tunnels, and control centers. We reported that although TSA’s focus on TIH has been a reasonable initial approach given the serious public harm these materials potentially pose to the public, there are other security threats for TSA to consider and evaluate as its freight rail strategy matures, including potential sabotage to critical infrastructure. We recommended that TSA expand its efforts to include all security threats in its freight rail security strategy. DHS concurred with this recommendation and has since reported that TSA has developed a Critical Infrastructure Risk Tool to measure the criticality and vulnerability of freight railroad bridges. As of April 2010, the agency has used this tool to assess 39 bridges, some of which transverse either the Mississippi or Missouri Rivers, and intends to assess 22 additional bridges by the end of fiscal year 2010. Further, we reported in June 2009 that the Transit Security Grant Program (TSGP) risk model includes all three elements of risk, but can be strengthened by measuring variations in vulnerability. DHS has held vulnerability constant, which limits the model’s overall ability to assess risk and more precisely allocate funds to transit agencies. We also found that although TSA allocated about 90 percent of funding to the highest-risk agencies, lower-risk agency awards were based on other factors in addition to risk, such as project quality. For example, a lower-risk agency with a high-quality project was more likely to receive funding than a higher-risk agency with a low-quality project. We recommended that DHS strengthen its methodology for determining risk by developing a cost- effective method for incorporating vulnerability information in its TSGP risk model. DHS concurred with the recommendation, and in April 2010 TSA stated that it is reevaluating the risk model for the fiscal year 2011 grant cycle. Further, TSA is evaluating the feasibility of incorporating an analysis of the current state of an asset, including its vulnerability, in determining fiscal year 2011 grant funding. Additionally, we are currently conducting an assessment of TSA’s efforts to help ensure pipeline security; the resulting report will include an evaluation of the extent to which TSA uses a risk management approach to help strengthen pipeline security. Our preliminary observations found that TSA has identified the 100 most-critical pipeline systems in the United States and produced a pipeline risk assessment model, consistent with the NIPP. Furthermore, the 9/11 Commission Act requires that risk assessment methodologies be used to prioritize actions to the highest-risk pipeline assets, and we found that TSA’s stated policy is to consider risk when scheduling Corporate Security Reviews—assessments of pipeline operators’ security plans. However, we found a weak statistical correlation between a pipeline system’s risk rank and the time elapsed between a first and subsequent review. In addition, we found that among the 15 highest risk-ranked pipeline systems, the time between a first and second Corporate Security Review ranged from 1 to 6 years for those systems that had undergone a second review. Further, as of April 2010, 2 systems among the top 15 had not undergone a second review despite more than 6 years passing since their first review. TSA officials told us that although a pipeline system’s relative risk ranking is the primary factor driving the agency’s decision of when to schedule a subsequent Corporate Security Review, it is not the only factor influencing this decision. They explained they also consider the geographical proximity of Corporate Security Review locations to each other in order to reduce travel time and costs, as well as the extent to which they have worked with pipeline operators through other efforts, such as their Critical Facility Inspection Program. Better prioritizing its reviews based on risk could help TSA ensure its resources are more efficiently allocated toward the highest-risk pipeline systems. We expect to issue this report by the end of this year. TSA has developed several initiatives to improve coordination with its federal, state, and private sector stakeholders. However, we have previously reported that TSA’s coordination efforts could be improved. For example, we reported in April 2009 that federal and industry stakeholders have taken a number of steps to coordinate their freight rail security efforts, such as implementing agreements to clarify roles and responsibilities and participating in various information-sharing mechanisms. However, federal coordination could be enhanced by more fully leveraging the resources of all relevant federal agencies, such as TSA and FRA. For example, we reported that TSA was not requesting data on deficiencies in security plans and training activities collected by FRA, which could be useful to TSA in developing regulations requiring high-risk rail carriers to develop and implement security plans. To improve coordination, we recommended that DHS work with federal partners such as FRA to ensure that all relevant information, including threat assessments, is shared. DHS concurred with this recommendation and stated that it planned to better define stakeholder roles and responsibilities to facilitate information sharing. Since we issued our report, DHS reported that TSA continues to share information with security partners, including meeting with FRA and the DHS Office of Infrastructure Protection to discuss coordination and develop strategies for sharing relevant assessment information and avoiding duplication. In addition, we reported in January 2009 that although several federal entities, including TSA and the U.S. Coast Guard, have efforts underway to assess the risk to highway infrastructure, these assessments have not been systematically coordinated among key federal partners. We further reported that enhanced coordination with federal partners could better enable TSA to determine the extent to which specific critical assets had been assessed and whether potential adjustments in its methodology were necessary to target remaining critical infrastructure assets. We recommended that to enhance collaboration among entities involved in securing highway infrastructure and to better leverage federal resources, DHS establish a mechanism to systematically coordinate risk assessment activities and share the results of these activities among the federal partners. DHS concurred with the recommendation. In February 2010, TSA officials indicated that the agency had met with other federal agencies that conduct security reviews of highway structures to identify existing data resources, establish a data-sharing system among key agencies, and discuss standards for future assessments. The Administration’s Surface Transportation Security Priority Assessment also highlighted the need for federal entities to coordinate their assessment efforts. That report included a recommendation to establish an integrated federal approach that consolidates capabilities in a unified effort for security assessments, audits, and inspections to produce more thorough evaluations and effective follow-up actions for reducing risk, enhancing security, and minimizing burdens on assessed surface transportation entities. We also reported in February 2009 that TSA, which has the primary federal responsibility for ensuring the security of the commercial vehicle sector, had taken actions to improve coordination with federal, state, and industry stakeholders with respect to commercial vehicle security. These actions included signing joint agreements with DOT and supporting the establishment of intergovernmental and industry councils. However, we also reported that additional opportunities exist to enhance security by more clearly defining stakeholder roles and responsibilities. For example, some state transportation officials stated that DHS and TSA had not clarified states’ roles and responsibilities in securing the transportation sector or communicated to them TSA’s strategy to secure commercial vehicles, which in some cases has caused delays in implementing state transportation security initiatives. Industry stakeholders also expressed concerns with respect to TSA communicating its strategy, roles, and responsibilities; leveraging industry expertise; and collaborating with industry representatives. As a result, we recommended that TSA establish a process to strengthen coordination with the commercia vehicle industry, including ensuring that the roles and responsibilities of industry and government are fully defined and clearly communicated, and assess its coordination efforts. DHS concurred with this recommendatio n and in April 2010 reported that its TS-SSP Highway Modal Annex is under s review and is expected to delineate methods to enhance communication and coordination with stakeholde rs. In accordance with Executive Order 13416 and requirements of the 9/11 Commission Act, DHS, through TSA, has developed national strategies for each surface transportation mode. However, we have previously reported the need for TSA to strengthen its evaluation of the results of its efforts through the use of targeted, measurable, and outcome-based performance measures. Our prior work has shown that long-term, action-oriented goals and a timeline with milestones can help track an organization’s progress toward its goals. The NIPP also provides that DHS should work with its security partners, including other federal agencies, state and local government representatives, and the private sector, to develop sector- specific metrics. Using performance measures and an evaluation of the effectiveness of surface transportation security initiatives can help provide TSA with more meaningful information from which to determine whether its strategies are achieving their intended results, and to target any needed improvements. For example, in January 2009, we reported that TSA’s completion of a Highway Security Modal Annex was an important first step in guiding national efforts to protect highway infrastructure, but it did not include performance goals and measures with which to assess the program’s overall progress toward securing highway infrastructure. As a result, we recommended that TSA establish a time-frame for developing performance goals and measures for monitoring the implementation of the annex’s goals, objectives, and activities. Similarly, in June 2009, we reported that TSA’s Mass Transit Modal Annex identified sectorwide goals that apply to all modes of transportation as well as subordinate objectives specific to mass transit and passenger rail systems, but did not contain measures or targets on the effectiveness of operations of the security programs identified in the annex. As a result, we recommended that TSA should, to the extent feasible, incorporate performance measures in future annex updates. DHS concurred with both of these recommendations. In February 2010, TSA indicated that the updated annex would incorporate performance measures among other characteristics we recommended, and as of April 2010, the annex is under review. We will continue to monitor TSA’s progress in addressing these recommendations. We also reported in April 2009 that three of the four performance measures in TSA’s Freight Rail Modal Annex to the TS-SSP did not identify specific targets to gauge the effectiveness of federal and industry programs in achieving the measures or the transportation-sector security goals outlined in the annex. We also reported that TSA was limited in its ability to measure the effect of federal and industry efforts on achieving the agency’s key performance measure for the freight rail program, which is to reduce the risk associated with the transportation of TIH in major cities identified as high-threat urban areas. This was because the agency was unable to obtain critical data necessary to consistently calculate cumulative results for this measure over the time period for which it calculated them—from 2005 to 2008. In particular, some baseline data needed to cumulatively calculate results for this measure were historical and could not be collected. As a result, the agency used a method for estimating risk for its baseline year that was different than what it used for calculating results for subsequent years. Consequently, to help ensure the strategic goals of the modal annex are met and that TSA is consistently and accurately measuring agency and industry performance in reducing the risk associated with TIH rail shipments in major cities, we recommended that TSA ensure that future updates (1) contain performance measures with defined targets that are linked to fulfilling goals and objectives; and (2) more systematically address specific milestones for completing activities and measuring progress toward meeting identified goals. We further recommended that TSA take steps to revise the baseline year associated with its TIH risk reduction performance measure to enable the agency to more accurately report results for this measure. DHS concurred with these recommendations and has indicated that it will incorporate them into future updates of its Freight Rail Modal Annex, which will be designed to more specifically address goal-oriented milestones and performance measures. In April 2010, TSA stated that the agency has revised its modal annexes and that these documents are undergoing final agency review. In addition to developing performance measures to assess the success of its security strategies, we have also identified the need for TSA to develop or enhance its performance measures for specific programs such as the TSGP, VIPR program, and pipeline security programs. Specifically, in June 2009, we reported that the TSGP lacked a plan and milestones for developing measures to track progress of achieving program goals. While FEMA—which administers the grants—reported that it was beginning to develop measures to better manage its portfolio of grants, TSA and FEMA had not collaborated to produce performance measures for assessing the effectiveness of TSGP-funded projects, such as how funding is used to help protect critical infrastructure and the traveling public from possible acts of terrorism. We recommended that TSA and FEMA collaborate in developing a plan and milestones for measuring the effectiveness of the TSGP and its administration. DHS concurred with our recommendation, and in November 2009, FEMA stated that it will take steps to develop a plan with milestones in coordination with TSA. Likewise, the Administration’s Surface Transportation Security Priority Assessment discussed the importance of establishing a measurable evaluation system to determine the effectiveness of surface transportation security grants and recommended that TSA coordinate with other federal agencies, including FEMA, to do so. In June 2009, we reported that TSA had measured the progress of its VIPR program in terms of the number of VIPR operations conducted, but had not yet developed measures or targets to report on the effectiveness of the operations themselves. TSA program officials reported, however, that they were planning to introduce additional performance measures no later than the first quarter of fiscal year 2010. They added that these measures would gather information on, among other things, (1) interagency collaboration by collecting performance feedback from federal, state, and local security, law enforcement, and transportation officials prior to and during VIPR deployments; and (2) stakeholder views on the effectiveness and value of VIPR deployment. In April 2010, TSA reported that the VIPR program introduced four performance measures for fiscal year 2010; these measures will be reported quarterly. TSA has also stated that it has identified performance targets for these measures, which it will revisit when baseline program data is available. As part of our ongoing review of TSA’s efforts to help ensure pipeline security, we are assessing the extent to which TSA has measured efforts to strengthen pipeline security. While our work has not been completed, our preliminary observations have identified that TSA has taken actions to measure progress as called for by the NIPP, but could better measure pipeline security improvements. More specifically, our preliminary observations have identified that effective performance measurement data could better inform decision makers of the extent to which pipeline security programs and activities have been able to reduce risk and better enable them to determine funding priorities within and across agencies. Also, developing additional performance measures—particularly outcome- based measures—that assess the effects of TSA’s efforts in strengthening pipeline security and are aligned with transportation-sector goals and pipeline security objectives could better enable TSA to evaluate security improvements in the pipeline industry. Our upcoming report that will be issued later this year will provide additional details. Over the past two years, TSA has reported having more than doubled the size of its Surface Transportation Security Inspection Program, expanding the program from 93 inspectors in June 2008 to 201 inspectors in April 2010. Inspectors have conducted baseline security reviews that assess, among other things, the overall security posture of mass transit and passenger rail agencies and the implementation of security plans, programs, and measures, and best practices. However, TSA has not completed a workforce plan to direct current and future inspection program needs as the program assumes new responsibilities associated with the implementation of certain provisions of the 9/11 Commission Act by passenger and freight rail systems. Since establishing the inspection program in 2005 to identify and reduce vulnerabilities to passenger rail and ensure compliance with passenger rail security directives, TSA has expanded the roles and responsibilities of surface inspectors to include additional surface transportation modes— including mass transit bus and freight rail—and participation in VIPR operations. For example, TSA reported that as of April 2010 its surface inspectors had, among other things, conducted security assessments of 142 mass transit and passenger rail agencies, including Amtrak, and over 1,350 site visits to mass transit and passenger rail stations to complete station profiles, which gather detailed information on a station’s physical security elements, geography, and emergency points of contact. However, we also reported that TSA faced challenges in the following areas: Balancing aviation and surface transportation priorities: We reported in June 2009 that TSA has reorganized its field unit and reporting structure since establishing the inspection program, and surface inspectors raised concerns about its effect. These reorganizations placed TSA’s surface inspectors under the command of Federal Security Directors and Assistant Federal Security Directors for Inspections—aviation-focused positions that historically have not had an active role in conducting surface transportation inspection duties. According to TSA, these changes were designed to support its pursuit of a multimodal workforce and ensure a more cohesive and streamlined approach to inspections. However, we noted that surface inspectors raised concerns that these changes had resulted in the surface transportation mission being diluted by TSA’s aviation mission. Among these concerns is that the surface inspectors were being assigned airport-related duties, while aviation inspectors had been assigned surface responsibilities that had affected performance in conducting follow-up inspections to determine progress mass transit and passenger rail systems had made in addressing previously- identified weaknesses. TSA officials reported that they had selected their current command structure because Federal Security Directors were best equipped to make full use of the security network in their geographical location because they frequently interacted with state and local law enforcement and mass transit operators, and were aware of vulnerabilities in these systems. Workforce Planning: At the time of our June 2009 report, TSA did not have a human capital or other workforce plan for its Surface Transportation Security Inspection Program, but the agency had plans to conduct a staffing study to identify the optimal workforce size to address its current and future program needs. TSA reported that it had initiated a study in January 2009, which, if completed, could provide TSA with a more reasonable basis for determining the surface inspector workforce needed to achieve its current and future workload needs. However, in March 2010, TSA officials told us that while they were continuing to work on the staffing study, TSA did not have a firm date for completion. Mr. Chairman this concludes my statement. I look forward to answering any questions that you or other members of the committee may have at this time. For further information on this testimony, please contact Steve Lord at (202) 512- 4379 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Jessica Lucas-Judy, Assistant Director; Jason Berman; Martene Bryan; Chris Currie; Vanessa Dillard; Chris Ferencik; Edward George; Dawn Hoff; Jeff Jensen; Valerie Kasindi; Lara Kaskie; Daniel Klabunde; Nancy Meyer; Jaclyn Nelson; Octavia Parks; Meg Ullengren; and Lori Weiss. 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. | Terrorist attacks on surface transportation facilities in Moscow, Mumbai, London, and Madrid caused casualties and highlighted the vulnerability of such systems. The Transportation Security Administration (TSA), within the Department of Homeland Security (DHS), is the primary federal agency responsible for security of transportation systems. This testimony focuses on the extent to which (1) DHS has used risk management in strengthening surface transportation security, (2) TSA has coordinated its strategy and efforts for securing surface transportation with stakeholders, (3) TSA has measured the effectiveness of its surface transportation security-improvement actions, and (4) TSA has made progress in deploying surface transportation security inspectors and related challenges it faces in doing so. GAO's statement is based on public GAO products issued from January to June 2009, selected updates from September 2009 to April 2010, and ongoing work on pipeline security. For the updates and ongoing work, GAO analyzed TSA's pipeline risk assessment model, reviewed relevant laws and program management documents, and interviewed TSA officials. DHS has taken actions to implement a risk management approach but could do more to inform resource allocation based on risk across the surface transportation sector--including the mass transit and passenger rail, freight rail, highway, and pipeline modes. For example, in March 2009, GAO reported that TSA had not conducted comprehensive risk assessments to compare risk across the entire transportation sector, which the agency could use to guide investment decisions, and recommended that TSA do so. TSA concurred, and in April 2010 noted planned actions. GAO has also made recommendations to strengthen risk assessments within individual modes, such as expanding TSA's efforts to include all security threats in its freight rail security strategy, including potential sabotage to bridges, tunnels, and other critical infrastructure. DHS concurred and is addressing the recommendations. TSA has generally improved coordination with key surface transportation stakeholders, but additional actions could enhance its efforts. For example, GAO reported in April 2009 that although federal and industry stakeholders have taken steps to coordinate their freight rail security efforts, TSA was not requesting another federal agency's data that could be useful in developing regulations for high-risk rail carriers. GAO recommended that DHS work with its federal partners to ensure that all relevant information, such as threat assessments, is shared. DHS concurred with this recommendation and recently stated that TSA has met with key federal stakeholders regarding sharing relevant assessment information and avoiding duplication. TSA has developed national strategies for each surface transportation mode, but using targeted, outcome-oriented performance measures could enable TSA to better monitor the effectiveness of these strategies and programs that support them. For example, GAO reported in June 2009 that TSA's mass transit strategy identified sectorwide goals, but did not contain measures or targets for program effectiveness. Such measures could help TSA track progress in securing transit and passenger rail systems. GAO also reported in April 2009 that TSA's freight rail security strategy could be strengthened by including targets for three of its four performance measures and revising its approach for the other measure, such as including more reliable baseline data to improve consistency in quantifying results. GAO recommended in both instances that TSA strengthen its performance measures. DHS concurred and noted planned actions. Preliminary findings from GAO's ongoing review of pipeline security show that TSA has taken some actions to monitor progress, but could better measure pipeline security improvements. GAO expects to issue a report by the end of 2010. GAO reported in June 2009 that TSA had more than doubled its surface transportation inspector workforce and expanded the roles and responsibilities of surface inspectors, but faced challenges balancing aviation and surface transportation priorities and had not completed a workforce plan to direct current and future program needs. TSA has initiated but not yet finished a staffing study to identify the optimal size of its inspector workforce. |
Recognizing the critical need to address the issue of nuclear waste disposal, the Congress enacted the Nuclear Waste Policy Act of 1982 to establish a comprehensive policy and program for the safe, permanent disposal of commercial spent fuel and other highly radioactive wastes in one or more mined geologic repositories. The act created the Office of Civilian Radioactive Waste Management within DOE to manage its nuclear waste program. Amendments to the act in 1987 directed DOE to investigate only the Yucca Mountain site. The Nuclear Waste Policy Act also set out important and complementary roles for other federal agencies: The Environmental Protection Agency (EPA) was required to establish health and safety standards for the disposal of wastes in repositories. EPA issued standards for the Yucca Mountain site in June 2001 that require a high probability of safety for at least 10,000 years. NRC is responsible for licensing and regulating repositories to ensure their compliance with EPA’s standards. One prerequisite to the secretary’s recommendation was obtaining NRC’s preliminary comments on the sufficiency of DOE’s site investigation for the purpose of a license application. NRC provided these comments on November 13, 2001. If the site is approved, then NRC, upon accepting a license application from DOE, has 3 to 4 years to review the application and decide whether to issue a license to construct, and then to operate, a repository at the site. The Nuclear Waste Technical Review Board (the board) reviews the technical and scientific validity of DOE’s activities associated with investigating the site and packaging and transporting wastes. The board must report its findings and recommendations to the Congress and the secretary of energy at least twice each year, but DOE is not required to implement these recommendations. DOE has designated the nuclear waste program, including the site investigation, as a “major” program that is subject to senior management’s attention and to its agencywide guidelines for managing such programs and projects. The guidelines require the development of a cost and schedule baseline, a system for managing changes to the baseline, and independent cost and schedule reviews. DOE is using a management contractor to carry out the work on the program. The contractor develops and maintains the baseline, but senior DOE managers must approve significant changes to cost or schedule estimates. In February 2001, DOE hired Bechtel SAIC Company, LLC (Bechtel), to manage the program and required the contractor to reassess the remaining technical work and the estimated schedule and cost to complete this work. DOE is not prepared to submit an acceptable license application to NRC within the statutory limits that would take effect if the site were approved. Specifically, DOE has entered into 293 agreements with NRC to gather and/or analyze additional technical information in preparation for a license application that NRC would accept. DOE is also continuing to address technical issues raised by the board. In September 2001, Bechtel concluded, after reassessing the remaining technical work, that DOE would not be ready to submit an acceptable license application to NRC until January 2006. DOE did not accept the 2006 date. Instead, it directed the contractor to prepare a new plan for submitting a license application to NRC by December 2004. DOE’s current plan is that, by the end of September 2002, Bechtel will develop, and DOE will review and approve, a new technical, cost, and schedule baseline for submitting a license application to NRC in December 2004. Moreover, while a site recommendation and a license application are separate processes, DOE will need to use essentially the same data for both. Also, the act states that the president’s recommendation to the Congress is that he considers the site qualified for an application to NRC for a license. The president’s recommendation also triggers an express statutory time frame that requires DOE to submit a license application to NRC within about 5 to 8 months. The 293 agreements that DOE and NRC have negotiated address areas of study within the program where NRC’s staff has determined that DOE needs to collect more scientific data and/or improve its technical assessment of the data. According to NRC, as of March 2002, DOE had satisfactorily completed work on 38 of these agreements and could resolve another 22 agreements by September 30 of this year. These 293 agreements generally relate to uncertainties about three aspects of the long-term performance of the proposed repository: (1) the expected lifetime of engineered barriers, particularly the waste containers; (2) the physical properties of the Yucca Mountain site; and (3) the supporting information for the mathematical models used to evaluate the performance of the planned repository at the site. The uncertainties related to engineered barriers revolve around the longevity of the waste containers that would be used to isolate the wastes. DOE currently expects that these containers would isolate the wastes from the environment for more than 10,000 years. Minimizing uncertainties about the container materials and the predicted performance of the waste containers over this long time period is especially critical because DOE’s estimates of the repository system’s performance depend heavily on the waste containers, in addition to the natural features of the site, to meet NRC’s licensing regulations and EPA’s health and safety standards. The uncertainties related to the physical characteristics of the site center on how the combination of heat, water, and chemical processes caused by the presence of nuclear waste in the repository would affect the flow of water through the repository. The NRC staff’s concerns about DOE’s mathematical models for assessing the performance of the repository primarily relate to validating the models; that is, presenting information to provide confidence that the models are valid for their intended use and verifying the information used in the models. Performance assessment is an analytical method that relies on computers to operate mathematical models to assess the performance of the repository against EPA’s health and safety standards, NRC’s licensing regulations, and DOE’s guidelines for determining if the Yucca Mountain site is suitable for a repository. DOE uses the data collected during site characterization activities to model how a repository’s natural and engineered features would perform at the site. According to DOE, the additional technical work surrounding the 293 agreements with NRC’s staff is an insignificant addition to the extensive amount of technical work already completed—including some 600 papers cited in one of its recently published reports and a substantial body of published analytic literature. DOE does not expect the results of the additional work to change its current performance assessment of a repository at Yucca Mountain. “lthough significant additional work is needed prior to the submission of a possible license application, we believe that agreements reached between DOE and NRC staff regarding the collection of additional information provide the basis for concluding that development of an acceptable license application is achievable.” The board has also consistently raised issues and concerns over DOE’s understanding of the expected lifetime of the waste containers, the significance of the uncertainties involved in the modeling of the scientific data, and the need for an evaluation and comparison of a repository design having a higher temperature with a design having a lower temperature. The board continues to reiterate these concerns in its reports. For example, in its most recent report to the Congress and the secretary of energy, issued on January 24, 2002, the board concluded that, when DOE’s technical and scientific work is taken as a whole, the technical basis for DOE’s repository performance estimates is “weak to moderate” at this time. The board added that gaps in data and basic understanding cause important uncertainties in the concepts and assumptions on which DOE’s performance estimates are now based; providing the board with limited confidence in current performance estimates generated by DOE performance assessment model. As recently as May 2001, DOE projected that it could submit a license application to NRC in 2003. It now appears, however, that DOE may not complete all of the additional technical work that it has agreed to do to prepare an acceptable license application until January 2006. In September 2001, Bechtel completed, at DOE’s direction, a detailed reassessment in an effort to reestablish a cost and schedule baseline. Bechtel estimated that DOE could complete the outstanding technical work agreed to with NRC and submit a license application in January 2006. This date, according to the contractor, was due to the cumulative effect of funding reductions in recent years that had produced a “…growing bow wave of incomplete work that is being pushed into the future.” Moreover, the contractor’s report said, the proposed schedule did not include any cost and schedule contingencies. The contractor’s estimate was based on guidance from DOE that, in part, directed the contractor to assume annual funding for the nuclear waste program of $410 million in fiscal year 2002, $455 million in fiscal year 2003, and $465 million in fiscal year 2004 and thereafter. DOE did not accept this estimate because, according to program officials, the estimate would extend the date for submitting a license application too far into the future. Instead, DOE accepted only the fiscal year 2002 portion of Bechtel’s detailed work plan and directed the contractor to prepare a new plan for submitting a license application to NRC by December 2004. Bechtel has prepared such a plan and the plan is under review by DOE. Although we have not reviewed the entire plan, we note that the plan (1) assumes that the program receives the $525 million in funds requested by the Administration for fiscal year 2003, which would be more than $100 million above the funds provided for fiscal year 2002, and (2) work on 10 of the department’s 293 agreements with NRC would not be complete by the target license application date of December 2004. Under the Nuclear Waste Policy Act, DOE’s site characterization activities are to provide information necessary to evaluate the Yucca Mountain site’s suitability for submitting a license application to NRC for placing a repository at the site. In implementing the act, DOE’s guidelines provide that the site will be suitable as a waste repository if the site is likely to meet the radiation protection standards that NRC would use to reach a licensing decision on the proposed repository. Thus, as stated in the preamble (introduction) to DOE’s guidelines, DOE expects to use essentially the same data for the site recommendation and the license application. In addition, the act specifies that, having received a site recommendation from the secretary, the president shall submit a recommendation of the site to the Congress if the president considers the site qualified for a license application. Under the process laid out in the Nuclear Waste Policy Act, once the secretary makes a site recommendation, there is no time limit under which the president must act on the secretary’s recommendation. However, when the president recommended, on February 15, that the Congress approve the site, specific statutory time frames were triggered for the next steps in the process. Figure 1 shows the approximate statutory time needed between a site recommendation and submission of a license application and the additional time needed for DOE to meet the conditions for an acceptable license application. The figure assumes that the Congress overrides the state’s disapproval of April 8, 2002. As shown in the figure, Nevada had 60 days—until April 16—to disapprove the site. The Congress now has 90 days (of continuous session) from that date in which to enact legislation overriding the state’s disapproval. If the Congress overrides the state’s disapproval and the site designation takes effect, the next step is for the secretary to submit a license application to NRC within 90 days after the site designation is effective. In total, these statutory time frames provide about 150 to 240 days, or about 5 to 8 months, from the time the president makes a recommendation to DOE’s submittal of a license application. On the basis of Bechtel’s September 2001 and current program reassessments, however, DOE would not be ready to submit a license application to NRC until January 2006 or December 2004, respectively. DOE states that it may be able to open a repository at Yucca Mountain in 2010. The department has based this expectation on submitting an acceptable license application to NRC in 2003, receiving NRC’s authorization to construct a repository in 2006, and constructing essential surface and underground facilities by 2010. However, Bechtel, in its September 2001 proposal for reestablishing technical, schedule, and cost baselines for the program, concluded that January 2006 is a more realistic date for submitting a license application. Because DOE objected to this proposed schedule, the contractor has now proposed a plan for submitting the application in December 2004. Because of uncertainty over when DOE may be able to open the repository, the department is exploring alternatives that might still permit it to begin accepting commercial spent fuel in 2010. An extension of the license application date to December 2004 or January 2006 would likely preclude DOE from achieving its long-standing goal of opening a repository in 2010. According to DOE’s May 2001 report on the program’s estimated cost, after submitting a license application in 2003, DOE estimates that it could receive an authorization to construct the repository in 2006 and complete the construction of enough surface and underground facilities to open the repository in 2010, or 7 years after submitting the license application. This 7-year estimate from submittal of the license application to the initial construction and operation of the repository assumes that NRC would grant an authorization to construct the facility in 3 years, followed by 4 years of construction. Assuming these same estimates of time, submitting a license application in the December 2004 to January 2006 time frame would extend the opening date for the repository until 2012 or 2013. Furthermore, opening the repository in 2012 or 2013 may be questionable for several reasons. First, a repository at Yucca Mountain would be a first- of-a-kind facility, meaning that any schedule projections may be optimistic. DOE has deferred its original target date for opening a repository from 1998 to 2003 to 2010. Second, although the Nuclear Waste Policy Act states that NRC has 3 years to decide on a construction license, a fourth year may be added if NRC certifies that it is necessary. Third, the 4-year construction time period that DOE’s current schedule allows may be too short. For example, a contractor hired by DOE to independently review the estimated costs and schedule for the nuclear waste program reported that the 4-year construction period was too optimistic and recommended that the construction phase be extended by a year-and-a- half. Bechtel anticipates a 5-year period of construction between the receipt of a construction authorization from NRC and the opening of the repository. A 4-year licensing period followed by 5 years of initial construction could extend the repository opening until about 2014 or 2015. Finally, these simple projections do not account for any other factors that could adversely affect this 7- to 9-year schedule for licensing, constructing, and opening the repository. Annual appropriations for the program in recent years have been less than $400 million. In contrast, according to DOE, it needs between $750 million and $1.5 billion in annual appropriations during most of the 7- to 9-year licensing and construction period in order to open the repository on that schedule. In its August 2001 report on alternative means for financing and managing the program, DOE stated that unless the program’s funding is increased, the budget might become the “determining factor” whether DOE will be able to accept wastes in 2010. In part, DOE’s desire to meet the 2010 goal is linked to the court decisions that DOE—under the Nuclear Waste Policy Act and as implemented by DOE’s contracts with owners of commercial spent fuel—is obligated to begin accepting spent fuel from contract holders not later than January 31, 1998, or be held liable for damages. Courts are currently assessing the amount of damages that DOE must pay to holders of spent fuel disposal contracts. Estimates of potential damages for the estimated 12-year delay from 1998 to 2010 range widely from the department’s estimate of about $2 billion to $3 billion to the nuclear industry’s estimate of at least $50 billion. The damage estimates are based, in part, on the expectation that DOE would begin accepting spent fuel from contract holders in 2010. The actual damages could be higher or lower, depending on when DOE begins accepting spent fuel. Because of the uncertainty of achieving the 2010 goal for opening the Yucca Mountain repository, DOE is examining alternative approaches that would permit it to meet the goal. For example, in a May 2001 report, DOE examined approaches that might permit it to begin accepting wastes at the repository site in 2010 while spreading out the construction of repository facilities over a longer time period. The report recommended storing wastes on the surface until the capacity to move wastes into the repository has been increased. Relatively modest-sized initial surface facilities to handle wastes could be expanded later to handle larger volumes of waste. Such an approach, according to the report, would permit partial construction and limited waste emplacement in the repository, at lower than earlier estimated annual costs, in advance of the more costly construction of the facility as originally planned. Also, by implementing a modular approach, DOE would be capable of accepting wastes at the repository earlier than if it constructed the repository described in the documents that the secretary used to support a site recommendation. DOE has also contracted with the National Research Council to provide recommendations on design and operating strategies for developing a geologic repository in stages, which is to include reviewing DOE’s modular approach. The council is addressing such issues as the (1) technical, policy, and societal objectives and risks for developing a staged repository; (2) effects of developing a staged repository on the safety and security of the facility and the effects on the cost and public acceptance of such a facility; and (3) strategies for developing a staged system, including the design, construction, operation, and closing of such a facility. In March 2002, the council published an interim report on the study in which it addresses a conceptual framework for a generic repository program. The Council plans to issue a final report this fall, in which it intends to provide specific suggestions for incorporating additional elements of staged repository development into DOE’s repository program. As of December 2001, DOE expected to submit the application to NRC in 2003. This date reflects a delay in the license application milestone date last approved by DOE in March 1997 that targeted March 2002 for submitting a license application. The 2003 date was not formally approved by DOE’s senior managers or incorporated into the program’s cost and schedule baseline, as required by the management procedures that were in effect for the program. At least three extensions for the license application date have been proposed and used by DOE in program documents, but none of these proposals have been approved as required. As a result, DOE does not have a baseline estimate of the program’s schedule and cost— including the late 2004 date in its fiscal year 2003 budget request—that is based on all the work that it expects to complete through the submission of a license application. DOE’s guidance for managing major programs and projects requires, among other things, that senior managers establish a baseline for managing the program or project. The baseline describes the program’s mission—in this case, the safe disposal of highly radioactive waste in a geologic repository—and the expected technical requirements, schedule, and cost to complete the program. Procedures for controlling changes to an approved baseline are designed to ensure that program managers consider the expected effects of adding, deleting, or modifying technical work, as well as the effects of unanticipated events, such as funding shortfalls, on the project’s mission and baseline. In this way, alternative courses of action can be assessed on the basis of each action’s potential effect on the baseline. DOE’s procedures for managing the nuclear waste program require that program managers revise the baseline, as appropriate, to reflect any significant changes to the program. After March 1997, according to DOE officials, they did not always follow these control procedures to account for proposed changes to the program’s baseline, including the changes proposed to extend the date for license application. According to these same officials, they stopped following the control procedures because the secretary of energy did not approve proposed extensions to the license application milestone. As a result, the official baseline did not accurately reflect the program’s cost and schedule to complete the remaining work necessary to submit a license application. In November 1999, the Yucca Mountain site investigation office proposed extending the license application milestone date by 10 months, from March to December 2002, to compensate for a $57.8 million drop in funding for fiscal year 2000. A proposed extension in the license application milestone required the approval of both the director of the nuclear waste program and the secretary of energy. Neither of these officials approved this proposed change nor was the baseline revised to reflect this change even though the director subsequently began reporting the December 2002 date in quarterly performance reports to the deputy secretary of energy. The site investigation office subsequently proposed two other extensions of the license application milestone, neither of which was approved by the program’s director or the secretary of energy or incorporated into the baseline for the program. Nevertheless, DOE began to use the proposed, but unapproved, milestone dates in both internal and external reports and communications, such as in congressional testimony delivered in May 2001. Because senior managers did not approve these proposed changes for incorporation into the baseline for the program, program managers did not adjust the program’s cost and schedule baseline. By not accounting for these and other changes to the program’s technical work, milestone dates, and estimated costs in the program’s baseline since March 1997, DOE has not had baseline estimates of all of the technical work that it expected to complete through submission of a license application and the estimated schedule and cost to complete this work. This condition includes the cost and schedule information contained in DOE’s budget request for fiscal year 2003. | The Department of Energy (DOE) has been investigating Yucca Mountain, Nevada, as a possible repository for highly radioactive nuclear waste. In February, the Secretary of Energy endorsed the Yucca Mountain site, and the President recommended that Congress approve the site. If the site is approved, DOE must apply to the Nuclear Regulatory Commission (NRC) for authorization to build a repository. If the site is not approved for a license application, or if NRC denies a construction license, the administration and Congress will have to consider other options. GAO concludes that DOE is unprepared to submit an acceptable license application to NRC within the statutory deadlines if the site is approved. On the basis of a reassessment done by DOE's managing contractor in September 2001, GAO believes that DOE would not have enough time to obtain a license from NRC and build and open the repository by 2010. DOE lacks a reliable estimate of when, and at what cost, a license application can be submitted or a repository can be opened. |
DOD’s counterdrug mission focuses on supporting local, state, federal, and foreign government agencies in addressing the illegal drug trade and narcotics-related terrorism. DOD conducts its mission in three primary areas: detecting and monitoring drug trafficking into the United States, sharing information on illegal drugs with U.S. and foreign government agencies, and building the counterdrug capacity of U.S. and foreign partners. The National Guard identifies three state-specific projects as comprising its counterdrug program—state plans, counterdrug schools, and counterthreat finance. The authority to provide funding for the first state project—state plans—began in 1989 when DOD was authorized by Congress under section 112 of Title 32 of the United States Code to fund the National Guard’s drug interdiction and counterdrug activities. Each participating state counterdrug program must develop an annual plan of activities, in coordination with the state’s Governor and Attorney General. In developing their plans, states use annual guidance issued by DOD outlining the department’s domestic counterdrug program priorities. Once the state plans have been developed, they are reviewed by National Guard counterdrug program officials, and are then sent to DOD for approval. National Guard policy states that state counterdrug programs can provide assistance to interagency partners in 5 mission areas: reconnaissance, technical support, general support, civil operations, and counterdrug training. In 2006, Congress provided authority to the Chief of the National Guard Bureau (NGB) to operate up to five counterdrug schools. These five schools, located in Florida, Iowa, Mississippi, Pennsylvania, and Washington, provide training in drug interdiction and counterdrug activities to personnel from federal agencies; state, local, and tribal law enforcement agencies; community-based organizations; and other non-federal governmental and private organizations. In 2011 the program added a third state project—counterthreat finance—to assist interagency partners with investigations of drug trafficking and transnational criminal organizations’ money laundering schemes. Appendix II provides funding information by project and appendix III provides details on the state plans’ activities and supported organizations. The National Guard counterdrug program is part of DOD’s larger counterdrug effort. Congress appropriates funds to DOD’s Drug Interdiction and Counterdrug Activities, Defense account, and DOD is authorized to transfer Drug Interdiction account funds to other armed services’ and defense agencies’ appropriation accounts. It is from this account that DOD funds the National Guard’s participation in domestic interdiction and counterdrug activities. In his fiscal year 2016 budget the President requested approximately $850.6 million for this account to support DOD-wide drug interdiction efforts. Budget data provided by DOD identify $87.9 million intended for the National Guard counterdrug program’s state-specific projects—a little more than 10 percent of the overall fiscal year 2016 Drug Interdiction account request. The National Guard counterdrug program budget data provided by DOD show that for fiscal years 2004 through 2014 the program’s total directed funding ranged between $219.3 million and $242.1 million–with a peak of $247 million in fiscal year 2013–but in fiscal year 2015 was reduced substantially. Congress appropriates funds into DOD’s Drug Interdiction account but through its committee reports provides direction to DOD on the specific amounts to allocate for the counterdrug program. Based on DOD data, in every year since fiscal year 2004, Congress has directed funding above DOD’s requested amount, keeping program amounts generally steady through 2014. In fiscal year 2013, when DOD began to reduce the amount of funding within the budget request for this program in order to prioritize funding for other DOD counterdrug programs, Congress directed program amounts generally comparable to those of prior years. Specifically, in fiscal year 2013, DOD requested $117 million for the National Guard counterdrug program, about a 40 percent decrease from the prior year’s request. From fiscal years 2013 to 2016, DOD reduced its budget request for counterdrug intelligence and technology support, as well as domestic efforts such as those supported by the National Guard more than international interdiction support activities. DOD officials stated that by decreasing requested funding for the counterdrug program they planned to address spending limits required by the Budget Control Act of 2011 and to fund counternarcotics programs in locations deemed a priority, such as Central and South America. According to DOD’s data, Congress directed $130 million more than requested in fiscal years 2013 and 2014. These additions offset DOD’s reduced request and kept overall counterdrug program funding generally steady. DOD’s data show that DOD’s budget request for the counterdrug program continued to decline from $112.1 million in fiscal year 2014 to $89.5 million in fiscal year 2015.In fiscal year 2015 Congress directed $86 million more than DOD requested for the program, ultimately leaving the program with a lower total funding of $175.5 million. Figure 1 details DOD’s budget data on the counterdrug program’s congressionally directed funding, including the DOD’s request and the increases above DOD’s request. According to DOD’s data, in recent years the program has not obligated all of the funding allocated to it from the Drug Interdiction account. In fiscal years 2004 through 2010 the program obligated at least 95 percent of its allocation. However, from fiscal years 2011 through 2014 the program’s obligations fluctuated between 83 percent and 96 percent of DOD’s allocations, partly due to the timing and amount of allocations received by the program. Funds transferred or allocated from the Drug Interdiction account to various other DOD drug interdiction accounts or programs, including the National Guard program, can be transferred back to the account upon a determination that all or part of the funds are not necessary and remain unobligated. Once funds are returned to the Drug Interdiction account, they are available for reallocation to other DOD counterdrug programs for obligation. Figure 2 details the counterdrug program’s obligations from fiscal years 2004 through 2014. NGB and state counterdrug programs officials stated that DOD’s internal transfer process for the Drug Interdiction account causes delays when funds become available for the program, thereby impacting the program’s ability to obligate funds for planned activities. For example, state program officials stated that in many cases the program cannot provide long-term analytical support, such as investigative and counterthreat finance analysts, throughout the year, and must wait for additional funding before assigning personnel. In some instances, the program can offer partial-year support, but some interagency partners may not accept support for only part of the year because it is difficult for them to provide the necessary training and access to appropriate databases necessary for investigative case work to be assigned before the fiscal year ends and the funding for the position is no longer available. DOD is examining whether it can improve upon the transfer process in order to reduce delays. According to DOD’s data, DOD has reallocated some of the National Guard counterdrug program’s unobligated funds that were returned to the Drug Interdiction account to other DOD counterdrug programs. Specifically, in fiscal years 2013 and 2014, DOD reallocated a total of $51.8 million of amounts returned to the Drug Interdiction account from the National Guard’s counterdrug program to counternarcotic capacity building efforts in the U.S. Africa Command and U.S. Southern Command areas of responsibility. The NGB has developed performance measures to report on its counterdrug program; however, we found that the information collected is not used to evaluate and inform funding for state-level programs or oversee the counterdrug schools’ training. Without performance information to inform funding decisions for state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program achieves its desired results and uses its resources most efficiently. In 2012 the Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats issued the Counternarcotics and Global Threats Performance Metrics System Standard Operating Procedures to be used in the development and documentation of performance metrics for all DOD counternarcotics activities. In response to the guidance, National Guard counterdrug program officials stated that they developed a set of performance measures for use by their program. In fiscal year 2015 the counterdrug program included 26 performance measures that officials stated they used to evaluate the counterdrug program and report on its aggregate performance. These measures include indicators such as the number of cases supported, analytic products produced, students trained, mobile training courses delivered, and reconnaissance hours flown. Appendix V provides details on each of the 26 measures. Our review of the counterdrug program’s fiscal year 2015 performance measures against key attributes of successful performance measures identified by GAO found that the set of measures provided information across the program’s broad goals, measured three of the program’s five core activities, and had limited overlap with each other. We also found that the individual performance measures were linked to the overall objectives of the program and were focused on measurable goals. Some key attributes, such as a clarity, reliability, and objectivity, were reflected to varying degrees, but we found that the National Guard had actions underway to better define and document the program’s individual performance measures to improve the clarity and reliability of those individual measures. In February 2015 the National Guard officials completed the Fiscal Year 2015-2016 Counterdrug Analyst Performance Metrics Guide and stated that they were drafting guides for other program activities. We found that the NGB does not use the performance information it collects to help evaluate and inform funding for state-level programs and oversee the type of training offered by counterdrug schools. We have previously reported that setting useful performance measures can assist oversight; with them, program managers can monitor and evaluate the performance of the program’s activities, track how the activities contribute to attaining the program’s goals, or identify potential problems and the need for corrective measures.According to leading practices for results- oriented management, to ensure that performance information will be both useful and used in decision making throughout the organization, agencies need to consider users’ differing policy and management information needs. Performance measures should be selected specifically on the basis of their ability to inform the decisions made at each organizational level, and they should be appropriate to the responsibilities and control at each level. NGB officials stated that they are using performance information to report on the program’s aggregate performance to DOD and to respond to other requests for information, such as regarding whom the program supports. DOD officials further stated that they use performance information on an ad hoc basis to inform the funding request for the Drug Interdiction transfer account, but that they do not collect information that could be used to evaluate the effectiveness of individual state-level programs or could be used in decision making about funding distributions to states. Such information could include a measure of the quality of the support provided by the National Guard to interagency partners, among other things. Instead, NBG officials were making funding distribution decisions for individual state programs based solely on assessments of threat. According to NGB officials, in 2012 they began using a model to determine the severity of the drug threat in each state and using the assessments of threat to determine funding levels for state counterdrug programs to implement their plans. NGB officials stated that to employ the threat-based resourcing model, NGB uses statistics from national- level databases to develop a distribution percentage for each state that reflects its relative drug threat. This percentage is then applied to the funding provided to the National Guard’s counterdrug program. In fiscal year 2015 the amount distributed to the states was $146.1 million. Table 1 shows the distribution percentage to the states and territories, and table 8 in appendix VI provides a detailed breakout by state. Moreover, during the course of our review, we found that the performance information collected did not assist the DOD Counternarcotic Program to oversee the type of training offered by the counterdrug schools. Specifically, the performance measures employed by the NGB focused on the number of students trained and the number of courses available, among other aspects. The officials stated these measures were not useful in the evaluation of the counterdrug school’s training activities because they did not provide information on the type of training being offered, such as whether it had a counterdrug focus. In addition, DOD Counternarcotics Program officials acknowledged that they did not have a full understanding of the counterdrug schools’ activities. To improve their oversight of the schools, DOD Counternarcotics Program officials began a review in December 2014 of the counterdrug schools’ activities to assess their training efforts. In May 2015, based on the preliminary findings of the review, the DOD Counternarcotics Program included guidance in its memorandum, Preparation of the Fiscal Year 2016 National Guard State Drug Interdiction and Counterdrug Activities Plan, that clarified the mission of the counterdrug schools and the department’s priorities for their training, including that all training offered be explicitly linked to counterdrug efforts. As a result, the counterdrug schools are required to submit annual training plans that detail course offerings for review by the NGB and DOD to ensure that the training is focused on DOD’s priorities. However, the guidance did not include any changes to the performance information that would be collected by the NGB on the counterdrug schools. We continue to believe that collecting additional performance information, such as on the type of training offered, could help inform evaluations and identify any need for corrective actions in the future for the counterdrug schools. According to NGB officials, their current performance measures were developed in response to DOD guidance to report on the program’s aggregate performance to support DOD’s annual performance summary report to ONDCP. NGB officials stated that the guidance did not specifically require them to assess the performance of state-level programs; therefore, they did not fully consider the types of measures or information that would be useful to evaluate the effectiveness of individual state-level programs and oversee the counterdrug schools. NGB officials stated that their performance measures were evolving and they believed incorporating performance information in future funding distribution decisions for state programs would be helpful. Officials stated that they were working to develop an approach that uses performance information to inform future funding decisions. Without performance information to evaluate state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program achieves its desired results and uses its resources most efficiently. The National Guard’s counterdrug program was established more than 25 years ago to assist efforts of the Governors of 50 states, the District of Columbia, and three U.S. territories in addressing illicit drug production, trade, and consumption. In recent years DOD has sought to focus its counterdrug efforts on international interdiction support activities with less emphasis on other activities including supporting domestic efforts like the National Guard’s counterdrug program. Congress has resisted the reductions to domestic efforts, and has directed increased funding to the program. Given the resources that the program offers to individual states and the interagency partners it supports, it is important to ensure that the program uses these resources efficiently and effectively. While threat is an important factor to consider in funding distributions, performance information can also be used to better inform such decisions. DOD and NGB have taken steps to develop performance measures, but DOD has used performance information only in an ad hoc basis to inform the funding request for the Drug Interdiction transfer account, and has not used performance information to evaluate the effectiveness of individual state programs or to oversee training offered by the counterdrug schools. Therefore, the effectiveness of state efforts is not being considered in DOD’s funding distribution decisions, and useful information is not being collected to support oversight of the counterdrug schools’ training. Without an approach that enables decision makers to objectively judge the performance of all elements of the program, neither DOD nor Congress will have assurance that the counterdrug program is achieving its goals in an effective manner. To ensure that resources are being efficiently applied to meet the National Guard counterdrug program’s objectives, we recommend that the Secretary of Defense direct the National Guard Bureau in consultation with the Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats to take the following two actions: Identify additional information needed to evaluate the performance of the state programs and oversee counterdrug schools’ training; and Subsequently collect and use performance information to help inform funding distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools. In the written comments on a draft of this report, DOD concurred with our two recommendations and identified specific steps it planned to take to address them. With respect to the first recommendation to identify additional information needed to evaluate the performance of state programs and to oversee the counterdrug schools’ training, DOD stated that it will hold discussions with the counterdrug program’s stakeholders to reassess the current performance criteria and to identify new performance criteria to allow it to assess the support the program provides. DOD then will evaluate the criteria to ensure it is reflective of the current information needs of the program both internally and externally and meets national objectives. These steps, once implemented, should help DOD obtain useful information to better inform decision making and to conduct oversight of the program and would satisfy the intent of our recommendation. With respect to the second recommendation to collect and use performance information to help inform funding-distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools, DOD stated that it will apply the criteria it identifies to evaluate the effectiveness of each state program to provide support and to meet its objectives. Furthermore, DOD stated that it would take steps to assist states with any needed corrective- action plans. These steps, once implemented, should help to ensure that the program uses resources efficiently and effectively and would satisfy the intent of our recommendation. DOD’s comments are printed in their entirety in appendix VII. DOD also provided technical comments, which we incorporated into the report as appropriate. We also provided a draft of this report to DOJ, DHS, and ONDCP for review and comment. DOJ, DHS, and ONDCP officials provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Homeland Security, the Attorney General of the United States, and the Director of National Drug Control Policy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3489 or [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. To address our objectives, we reviewed documentation and interviewed officials from the Department of Defense (DOD) who oversee and manage the National Guard’s counterdrug program, select state counterdrug programs, and select interagency partners that receive support from state counterdrug programs. Our analysis focused on the state-level operations of the National Guard’s counterdrug program, which includes three state-specific projects: 1) state plans, 2) counterdrug schools, and 3) counterthreat finance. We excluded any counterdrug program projects that were specific to federal operations. Also, we used a nongeneralizable case study approach to obtain the perspectives of state counterdrug program officials and interagency partners receiving support from the program. Specifically, we selected 8 of the 53 participating states and territories identifying 2 states within each of the four counterdrug program regions (selecting 1 state with high and 1 state with low drug threat assessments) that also had a counterdrug school or an international boundary. The 8 states that we included in our review were: Connecticut, Florida, Iowa, Mississippi, Pennsylvania, Texas, Utah, and Washington. In the states selected for case study, we interviewed state counterdrug program officials and officials from the following interagency partners, where applicable: High Intensity Drug Trafficking Areas (HIDTA), Drug Enforcement Administration, Customs and Border Protection, and U.S. Immigration and Customs Enforcement’s Homeland Security Investigations. We selected interagency partners based on their receiving support from the counterdrug program and on logistics associated with travel. In addition, we obtained and analyzed information fiscal years 2011 through 2014 from a National Guard counterdrug program database that included descriptive statistics of the number of staff days by mission category, support activities, and supported organization. To ensure the accuracy and reliability of the information from the database, we took steps to review the data fields for consistency and missing data; we found that these data were sufficiently reliable for the purposes of the audit. To identify the changes in funding for the National Guard counterdrug program, we conducted an analysis of relevant appropriations and program budget-related documents provided by DOD for fiscal years 2004 through 2015. We began our analysis with fiscal year 2004 data to ensure that our review included data covering at least a 10-year period. To ensure the reliability of our data, we reviewed documentation on funding distributions and financial management policy and interviewed knowledgeable officials about DOD’s Drug Interdiction and Counterdrug Activities account, and about how counterdrug program funds are transferred from the account. We also reviewed financial documentation and interviewed DOD, counterdrug program, and interagency partner officials to obtain information on obligations of available funding. We determined that the data were sufficiently reliable for the purposes of this audit. To assess the extent to which the performance information is used to evaluate the counterdrug program’s activities, we reviewed documentation and interviewed counterdrug officials about program activities, types of performance information collected, and funding levels for individual state counterdrug programs. First, we evaluated the counterdrug program’s 26 fiscal year 2015 performance measures against nine key attributes of successful performance established by GAO. Next, we evaluated the counterdrug program’s use of performance information against leading practices for results-oriented management that help agencies develop useful performance measures and use performance information for management decision making as identified by GAO through a review of literature and interviews with experts and staff from five U.S. agencies. Specifically, we interviewed officials from: National Guard Bureau Counterdrug Program o Connecticut Counterdrug Program o Florida Counterdrug Program Multijurisdictional Task Force Training Center Midwest Counterdrug Training Center Regional Counterdrug Training Academy Northeast Counterdrug Training Center o Texas Counterdrug Program o Utah Counterdrug Program o Washington Counterdrug Program Western Region Counterdrug Training Center National Guard Bureau Budget Execution Office Deputy Assistant Secretary of Defense for Counternarcotics and Office of the Undersecretary of Defense, Comptroller Drug Enforcement Administration (DEA) o DEA Miami Division o DEA Houston Division o DEA Philadelphia Division o DEA Denver Division o DEA New Orleans Division o DEA Seattle Division o DEA St. Louis Division o DEA New England Division o DEA Office of Training Federal Bureau of Investigation United States Marshals Service Executive Office for United States Attorneys Department of Homeland Security: Federal Law Enforcement Training Centers Homeland Security Investigations (HSI) o HSI Special Agent in Charge, Miami, Florida o HSI Special Agent in Charge, Seattle, Washington o HSI Special Agent in Charge, Houston, Texas Customs and Border Protection (CBP) o CBP, Miami, Florida – Sector Intelligence Unit o CBP, Spokane, Washington – Oroville Station o CBP, Spokane, Washington – Sector Intelligence Unit o CBP, Laredo, Texas – Special Operation Detachment United States Coast Guard High Intensity Drug Trafficking Areas: North Florida HIDTA South Florida HIDTA Rocky Mountain HIDTA Houston HIDTA Philadelphia/Camden HIDTA New England HIDTA Gulf Coast HIDTA Northwest HIDTA Midwest HIDTA Office of National Drug Control Policy We conducted this performance audit from August 2014 to October 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The National Guard identifies three state-specific projects as comprising its counterdrug program—state plans, counterdrug schools, and counterthreat finance. Table 2 provides the obligations by each state project. The National Guard’s state plans include 15 support activities, which are grouped into five broad mission categories, as shown in table 3. The National Guard counterdrug program collects information on the activities and supported organizations and uses staff days to measure its resource investment. Our analysis of this information found that from fiscal years 2011 through 2014 the state plans invested most of their staff days in the mission categories of technical support and reconnaissance. During this period, the number of staff days invested in civil operations decreased, as shown in figure 3. Of the 15 support activities, investigative case and analyst support was the support activity most frequently provided from fiscal years 2011 through 2014, as shown in table 4. Among the various categories of supported organizations, law enforcement received the most support from the state plans, as shown in table 5. Lastly, the federal agencies to which state plans provided the most support were the Department of Justice and Department of Homeland Security. The specific components that received the most support included the Drug Enforcement Administration, Customs and Border Protection, and Immigration and Customs Enforcement, as shown in table 6. After Congress appropriates amounts to the Drug Interdiction account, there are multiple steps by various organizations before the funds are received by each individual state counterdrug program. To begin each transfer process, DOD Counternarcotic Program officials prepare and submit to the Office of the Under Secretary of Defense (Comptroller) a DD1415-3, which details the allocation of funds by appropriation or budget activity account for each program. If no defense appropriations act has been passed and DOD is operating under a continuing resolution, amounts transferred are based on a rate-per-day formula developed by DOD. Once a defense appropriation act is enacted, the Comptroller is required to submit to Congress the department’s intended budget execution based on the appropriation act and congressional directions as expressed in House and Senate Appropriation committee reports. This report, which DOD calls the base for reprogramming and transfer authorities (DD1414), is to be submitted no later than 60 days from the enactment of an appropriation. After this baseline is submitted, Comptroller officials review and approve the DD1415-3 and forward it to the Office of Management and Budget. Once approved by the Office of Management and Budget, the Comptroller issues a funding authorization document to transfer funds to the military services appropriation accounts (such as military personnel or operation and maintenance). The military services then transfer funds to appropriation accounts managed by Army National Guard and Air National Guard, which, in turn, distribute the funds onto each state National Guard participating in the program. Figure 4 outlines the fund transfer process to the counterdrug program. The National Guard Bureau’s Counterdrug Program office coordinates the process involving the DOD Counternarcotic Program, the Army and Air National Guard budget and financial management offices, and the individual state counterdrug programs. In fiscal year 2015 the counterdrug program officials used 26 performance measures to report on the program’s aggregate performance to DOD and respond to requests for information, as shown in table 7. Each state within the counterdrug program develops an annual plan of activities, in coordination with the state’s Governor and Attorney General, that identifies its counterdrug priorities and how it intends to obligate its available funds. To develop these plans, states use annual guidance from DOD that identifies approved activities for the counterdrug program. For instance, investigative case support, ground and aerial reconnaissance, and counterthreat finance analysis are approved activities. The threat-based resource model uses 22 variables to assess the drug threat across the 53 counterdrug programs. Almost half of the variables are based on information from the National Seizure System database. Other variables are based on information from federal agencies such as the Substance Abuse and Mental Health Services Administration and the Federal Bureau of Investigation. To ensure that every state has a viable counterdrug program, the Chief of the National Guard Bureau established $500,000 as the minimum level of funding for each state. According to counterdrug program officials, this amount enables all the states to maintain some capability to address drug threats while limiting the impact on states with higher threats. Table 8 provides details on the state plans distribution percentages by state and territories for fiscal year 2015. The amount of funding each state receives depends on that state’s distribution percentage and available funds for the state plans project. Table 9 details the funding distributed to each state and territory in fiscal years 2014 and 2015. In addition to the contact named above, Rich Geiger (Assistant Director), Tom Jessor, Linda S. Keefer, Susan C. Langley, Amie Steele Lesser, Felicia M. Lopez, Tobin J. McMurdie, Carol D. Petersen, Richard Powelson, Caitlin N. Rice, Michael D. Silver, Sabrina C. Streagle, and Cheryl A. Weissman made key contributions to this report. Budget Issues: Effects of Budget Uncertainty From Continuing Resolutions on Agency Operations. GAO-13-464T. Washington D.C.: March 13, 2013. Drug Control: Initial Review of the National Strategy and Drug Abuse Prevention and Treatment Programs. GAO-12-744R. Washington D.C.: July 6, 2012. Office of National Drug Control Policy: Agencies View the Budget Process as Useful for Identifying Priorities, but Challenges Exist. GAO-11-261R. Washington D.C.: May 2, 2011. Drug Control: DOD Needs to Improve Its Performance Measurement System to Better Manage and Oversee Its Counternarcotics Activities. GAO-10-835. Washington D.C.: July 21, 2010. Preliminary Observations on the Department of Defense’s Counternarcotics Performance Measurement System. GAO-10-594R. Washington D.C.: April 30, 2010. Continuing Resolutions: Uncertainty Limited Management Options and Increased Workload in Selected Agencies. GAO-09-879. Washington D.C.: September 24, 2009. | Since 1989 the National Guard has received hundreds of millions of dollars to help enhance the effectiveness of state-level counterdrug efforts by providing military support to assist interagency partners with their counterdrug activities. The program funds the drug interdiction priorities of each state Governor; counterdrug-related training to interagency partners at five counterdrug schools; and state-level counterthreat finance investigations, all of which are part of DOD's broader counterdrug efforts. Senate Report 113-176 included a provision for GAO to conduct an assessment of the state operations of the National Guard's counterdrug program. This report: (1) identifies the changes in funding for the program since fiscal year 2004, and (2) assesses the extent to which performance information is used to evaluate the program's activities. GAO analyzed the program's budgets and obligations data, performance measures, and program guidance, and interviewed knowledgeable officials. The National Guard Bureau (NGB) counterdrug program's budget data show that funding has ranged from about $219.3 million to $242.1 million in fiscal years 2004 through 2014–with a peak of $247 million in fiscal year 2013–but in fiscal year 2015 funding was reduced substantially. Based on Department of Defense (DOD) data, every year since 2004 Congress has directed funding above the requested amount, thus keeping program amounts steady through 2014. In fiscal year 2013, DOD reported requesting $117 million for the program, about a 40 percent decrease from the prior year's request. While DOD reduced its request, however, Congress in fiscal years 2013 and 2014 directed funding at generally comparable amounts from prior years. In fiscal year 2015 Congress directed less of an increase above DOD's request, leaving the program with lower total funding of $175.5 million. The NGB has developed performance measures to report on its counterdrug program; however, the information collected is not used to evaluate and inform funding for state-level programs or oversee the counterdrug schools' training. GAO has previously reported that setting useful measures is important for oversight; without them, managers cannot monitor and evaluate the performance of programs' activities. NGB officials stated that they developed the current measures in response to DOD guidance to report on the program's aggregate performance and did not fully consider the types of measures or information that would be useful to evaluate individual state-level programs and oversee the counterdrug schools. Without collecting and using useful performance information to evaluate state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program is achieving its desired results and is distributing its funding most efficiently. GAO recommends that DOD (1) identify additional information needed to evaluate the performance of state programs and oversee counterdrug schools' training; and (2) subsequently collect and use performance information to help inform funding distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools. DOD concurred with GAO's recommendations. |
SAFETEA-LU authorized over $45 billion for federal transit programs, including $8 billion for the New Starts program, from fiscal years 2005 through 2009. Under the New Starts program, FTA identifies and recommends fixed-guideway transit projects for funding—including heavy, light, and commuter rail; ferry; and certain bus projects (such as bus rapid transit). SAFETEA-LU also made changes to the New Starts program, including changes to its evaluation and rating process. FTA already has implemented some of these changes and has undertaken efforts to address the remaining changes. FTA generally funds New Starts projects through FFGAs, which establish the terms and conditions for federal participation in a New Starts project. FFGAs 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. For a project to obtain an FFGA, it must progress through a local or regional review of alternatives and meet a number of federal requirements, including requirements for information used in the New Starts evaluation and rating process (see fig. 1). As required by federal statute, 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 options, such as rail lines or bus routes, in a specific corridor versus in a region. 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, the project sponsor submits an application to FTA for the project to enter the preliminary engineering phase. When this phase is completed and federal environmental requirements are satisfied, FTA may approve the project’s advancement into final design, after which FTA may approve the project for an FFGA and proceed to construction, as provided for in statute. FTA oversees grantees’ management of projects from the preliminary engineering phase through the construction phase and evaluates the projects for advancement into each phase of the process. FTA also evaluates the projects annually for the New Starts report to Congress. To help inform administration and congressional decisions about which projects should receive federal funds, FTA assigns ratings on the basis of various statutorily defined evaluation criteria—including both local financial commitment and project justification criteria—and then assigns an overall rating (see fig. 2). These evaluation criteria 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. FTA assigns the proposed project a rating for each criterion and then assigns a summary rating for local financial commitment and project justification. Lastly, FTA develops an overall project rating. Projects are rated at several points during the New Starts process—as part of the evaluation for entry into the preliminary engineering and the final design phases, and yearly for inclusion in the New Starts annual report to Congress. As required by statute, the administration uses the FTA evaluation and rating process, along with the phase of development of New Starts projects, to decide which projects to recommend to Congress for funding. Although many projects receive a summary rating that would make them eligible for an FFGA, only a few are proposed for an FFGA in a given fiscal year. FTA proposes a project for an FFGA when it believes that the project will be able to meet the following conditions during the fiscal year for which funding is proposed: All nonfederal project funding must be committed and available for the project. The project must be in the final design phase and have progressed far enough for uncertainties about costs, benefits, and impacts (i.e., environmental or financial) to be minimized. The project must meet FTA’s tests for readiness and technical capacity, which confirm that there are no remaining cost, project scope, or local financial commitment issues. SAFETEA-LU introduced a number of changes to the New Starts program, including some that affect the evaluation and rating process that we have previously described in figure 1. For example, SAFETEA-LU added economic development to the list of evaluation criteria that FTA must use in evaluating and rating New Starts projects and required FTA to issue notice and guidance each time significant changes are made to the program. SAFETEA-LU also established the Small Starts program, a new capital investment grant program, simplifying the requirements imposed for those seeking funding for lower-cost projects, such as bus rapid transit, streetcar, and commuter rail projects. This program is intended to advance smaller-scale projects through an expedited and streamlined evaluation and rating process. Small Starts projects require less than $75 million in federal funding and have a total cost of less than $250 million. According to FTA’s guidance, Small Starts projects must also (1) meet the definition of a fixed guideway for at least 50 percent of the project length in the peak period or (2) be a corridor-based bus project with the following minimum elements: traffic signal priority/preemption, to the extent, if any, that there are traffic signals on the corridor; low-floor vehicles or level boarding; branding of the proposed service; and 10-minute peak/15-minute off-peak running times (i.e., headways) or better while operating at least 14 hours per weekday. FTA has also subsequently introduced a separate eligibility category within the Small Starts program for “Very Small Starts” projects. Small Starts projects that qualify as Very Small Starts are simple, low-cost projects that FTA has determined qualify for a simplified evaluation and rating process. These projects must meet the same eligibility requirements as Small Starts projects and be located in corridors with more than 3,000 existing riders per average weekday who will benefit from the proposed project. In addition, the projects must have a total capital cost of less than $50 million (for all project elements) and a per-mile cost of less than $3 million, excluding rolling stock (e.g., train cars). FTA evaluates Small Starts and Very Small Starts projects using various financial and project justification criteria, including cost-effectiveness and land use. For Small Starts and Very Small Starts, SAFETEA-LU condensed the New Starts processes used for large projects. Preliminary engineering and final design are combined into one phase, referred to as “project development.” FTA may recommend proposed Small Starts and Very Small Starts for funding after such projects have been approved to enter into project development, are “ready” to implement their proposed project, and continue to be rated at least “medium” for both project justification and local financial commitment. FTA intends to provide funding for Small Starts and Very Small Starts projects through project construction grant agreements (PCGA), which are similar to FFGAs (see fig. 3). FTA evaluated and rated 18 New Starts, Small Starts, and Very Small Starts projects for funding during the fiscal year 2008 evaluation cycle. Of the 14 New Starts projects that FTA evaluated and rated, FTA recommended to Congress funding for 10 projects, including 2 new projects, 2 pending projects, and 6 “other” projects. FTA also evaluated and rated 4 Small Starts and Very Small Starts applications, and recommended all of these projects for funding. The fiscal year 2008 President’s budget requests $1.40 billion in New Starts funding, including $100 million for the Small Starts program. Although SAFETEA-LU authorized $200 million each year for the Small Starts program, no funds have yet been allocated to the program, due, in part, to its newness. FTA’s Annual Report on New Starts: Proposed Allocations of Funds for Fiscal Year 2008 (annual report) identified 19 New Starts projects in preliminary engineering and final design. FTA evaluated and rated 14 of these projects, rating 2 as “high,” 12 as “medium,” and none as “low.” Five additional projects were statutorily exempt from being rated because their sponsors requested less than $25 million in federal funding. FTA recommended 10 New Starts projects for funding. Specifically, FTA recommended 2 New Starts projects for proposed FFGAs. The total capital cost of these 2 projects is estimated to be $6.30 billion, with the total federal New Starts share expected to about one-third of this total. In addition, FTA recommended funding for 2 projects with pending FFGAs. The total capital cost of these 2 projects is estimated to be $1.13 billion, and the total federal New Starts share is expected to be about one-half of the total cost. FTA also recommended reserving $72.08 million in New Starts funding for 6 “other” projects. FTA selected these “other” projects using the decision rules that the projects have a “medium” or higher rating; have a “medium” or higher cost-effectiveness rating; and is expected to advance to final design as of June 2008. According to FTA, no other project in preliminary engineering or final design met these decision rules. Similar to last year, FTA did not specify how much would be set aside for the 6 “other” New Starts projects because it wanted to ensure that the projects were moving forward as anticipated before making specific funding recommendations to Congress. 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 expect that all 6 “other” projects will be recommended for funding in fiscal year 2008 (see table 1). In the fall of 2006, FTA received 12 Small Starts and Very Small Starts requests to enter project development for the fiscal year 2008 evaluation cycle. A majority of these Small Starts and Very Small Starts requests to enter project development were from project sponsors in the western and southern regions of the country and all but 2 were for bus rapid transit projects. FTA determined that only 1 Small Starts project and 3 Very Small Starts projects were complete, ready, and eligible to be approved into project development. FTA subsequently proposed these projects for a PCGA. We found that the reasons for ineligible projects and incomplete applications ranged from unclear program guidance to inconsistent information provided by FTA. (See table 2 for more information on the Small Starts and Very Small Starts projects for fiscal year 2008.) FTA evaluated and rated the 4 Small Starts and Very Small Starts projects that were eligible and had complete applications. All 4 of these projects received a “medium” rating. FTA approved the 4 Small Starts and Very Small Starts projects for advancement into the project development phase on the basis of its review, evaluation, and rating of their applications. The total capital cost of these projects is estimated to be $118.4 million, and the total Small Starts, including Very Small Starts, share is expected to be $84.9 million. FTA has also recommended that $48.2 million be allocated for “other” Small Starts projects that were not ready for advancement into project development at the time applications were due, but that may be ready for advancement later in fiscal year 2008. The administration’s fiscal year 2008 budget proposal requests that $1.40 billion be made available for the New Starts program. This amount is $166 million less than the program’s fiscal year 2007 appropriation. Figure 4 illustrates the planned uses of the administration’s proposed fiscal year 2008 budget for New Starts, including the following: $863.74 million would be shared among the 11 New Starts projects with $120 million would be shared between the 2 New Starts projects with $210 million would be shared between the 2 New Starts projects proposed $72.08 million would be shared by as many as 6 “other” New Starts projects to continue their development, and $100 million would be used for new Small Starts and Very Small Starts projects. Although SAFETEA-LU authorized $200 million for the Small Starts program each year from fiscal years 2006 through 2009, no funding for the program has been allocated to date. For fiscal year 2007, the administration’s budget proposal requested $100 million for the Small Starts program. Of the $1.57 billion allocated to the New Starts program for fiscal year 2007, no funding was appropriated for Small Starts projects. The administration’s budget proposal for fiscal year 2008 also requests $100 million for the Small Starts program. FTA officials told us that they requested less than the authorized amounts for the Small Starts program for both fiscal years 2007 and 2008 because it has taken time for them to establish the program, and because they did not receive as many Small Starts applications as expected. SAFETEA-LU requires FTA to make several changes to the New Starts evaluation and rating process, including adding economic development as an evaluation criterion and changing the rating scale. FTA is in the process of implementing these changes. For example, table 3 describes the act’s changes to the evaluation and rating process and the status of their implementation, as of July 2007. Although FTA has taken steps to implement changes required by SAFETEA-LU, the project sponsors we interviewed frequently expressed concern that FTA has not yet fully incorporated economic development into its evaluation. Specifically, FTA currently assigns a weight of 50 percent each to cost-effectiveness and land use to calculate a project’s overall rating. The other four statutorily defined criteria, including economic development, mobility improvements, operating efficiencies, and environmental benefits, are not weighted. As described in table 3, to reflect SAFETEA-LU’s increased emphasis on economic development, FTA has encouraged project sponsors to submit information that they believe demonstrates the impact of their proposed transit investments on economic development. According to FTA, this information is considered as an “other factor” in the evaluation process, but is not weighted. However, FTA officials told us that few project sponsors submit information on their projects’ economic development benefits for consideration as an “other factor.” We previously reported that FTA’s reliance on two evaluation criteria to calculate a project’s overall rating is drifting away from the multiple-measure evaluation and rating process outlined in statute and current New Starts regulations. Thus, we recommended that FTA (1) improve the measures used to evaluate New Starts projects so that all of the statutorily defined criteria can be used in determining a project’s overall rating or (2) provide a crosswalk in the regulations showing clear linkages between the criteria outlined in the statute and the criteria and measures used in the evaluation and rating process in the upcoming rulemaking process. Many of the project sponsors and all of the industry groups we interviewed also stated that they believe certain types of projects are penalized in the evaluation and rating process because of the weights assigned to the different evaluation criteria. Specifically, the project sponsors and industry groups said that by not weighting economic development, the evaluation and rating process does not consider an important benefit of some transit projects. They also expressed concern that the measure FTA uses to determine cost-effectiveness does not adequately capture the benefits of certain types of fixed-guideway projects—such as streetcars—that have shorter systems and provide enhanced access to a dense urban core, rather than transport commuters from longer distances (e.g., light or heavy rail). Project sponsors and an industry group we interviewed further noted that FTA’s cost-effectiveness measure has influenced some project sponsors to change their project designs from more traditional fixed-guideway systems (e.g., light rail or streetcars) to bus rapid transit, expressly to receive a more favorable cost- effectiveness rating from FTA. According to FTA officials, they understand the importance of economic development to the transit community and the concerns raised by project sponsors, and said they are currently working to develop an appropriate economic development measure. FTA is currently soliciting input from industry groups on how to measure economic development, studying possible options, and planning to describe how it will incorporate economic development into the project justification criteria in its upcoming rulemaking. FTA officials also stated that incorporating economic development into the evaluation process before issuing a regulation could potentially create significant uncertainty about the evaluation and rating process for project sponsors. Furthermore, they agreed with our previous recommendation that this issue should be addressed as part of their upcoming rulemaking, which they expect to be completed in April 2008. As part of its upcoming rulemaking, FTA will also conduct several outreach efforts with project sponsors and industry groups. FTA officials noted that they have had difficulty developing an economic development measure that both accurately measures benefits and distinguishes competing projects. For example, FTA officials said that separating economic development benefits from land-use benefits— another New Starts evaluation criterion—is difficult. In addition, these officials noted that many economic development benefits result from direct benefits (e.g., travel time savings). Therefore, including economic development benefits in the evaluation could lead to double-counting the benefits FTA already measures and uses to evaluate projects. Furthermore, FTA officials noted that some economic development impacts may represent transfers between regions, rather than a net benefit for the nation, thereby raising questions about the usefulness of these benefits for a national comparison of projects. We have also reported on many of the same challenges of measuring and forecasting indirect benefits, such as economic development and land-use impacts. For example, we noted that certain benefits are often double-counted when transportation projects are evaluated. We also noted that indirect benefits, such as economic development, may be more correctly considered transfers of direct user benefits or of economic activity from one area to another. Therefore, estimating and adding such indirect benefits to direct benefits could constitute double-counting and lead to overestimating a project’s benefits. Despite these challenges, we have previously reported that it is important to consider economic development and land-use impacts, since they often drive local transportation investment choices. The number of projects in the New Starts pipeline has decreased since the fiscal year 2001 evaluation and rating cycle, and the types of projects in the pipeline have changed. FTA and project sponsors attributed these changes to different factors, with FTA officials citing their increased scrutiny of applications and projects, and the project sponsors pointing to the complex, time-consuming, and costly nature of the New Starts process. FTA is considering different ideas on how to improve the New Starts process, some of which may address the concerns identified by project sponsors. Since the fiscal year 2001 evaluation cycle, the number of projects in the New Starts pipeline—which includes projects that are in the preliminary engineering or final design phases—has decreased by more than one-half, from 48 projects in the fiscal year 2001 evaluation cycle to 19 projects in the fiscal year 2008 evaluation cycle. Similarly, the number of projects FTA has evaluated, rated, and recommended for New Starts FFGAs has decreased since the fiscal year 2001 evaluation and rating cycle. Specifically, as shown in table 4, the number of projects that FTA evaluated and rated decreased by about two-thirds, from 41 projects to 14 projects. Although the number of projects in the New Starts pipeline has decreased, the amount of funding FTA has requested for the program remained relatively the same, while the average dollar amount per FFGA has increased since fiscal year 2001. Adjusted to current dollars, FTA has requested nearly the same funding amounts for the program during this time frame, having requested $1.22 billion in fiscal year 2001 and $1.37 billion in fiscal year 2008. Twelve projects were recommended for FFGAs in fiscal year 2001, while only 2 were recommended for fiscal year 2008. However, in the fiscal years between 2001 and 2008, the number of projects recommended for FFGAs varied from as many as 5 to as few as 2 for any given fiscal year. Furthermore, we found that the average dollar amount requested for proposed FFGAs has increased since fiscal year 2001. When adjusted to current dollars, the average dollar amount of an FFGA proposed in fiscal year 2001 was about $20 million, but for fiscal year 2008 it was $103 million (see table 5). The composition of the pipeline—that is, the types of projects in the pipeline—has also changed since the fiscal year 2001 evaluation cycle. During fiscal years 2001 through 2007, light rail and commuter rail were the more prevalent modes for projects in the pipeline. In fiscal year 2008, bus rapid transit became the most common transit mode for projects in the New Starts pipeline (see fig. 5). The increase in bus rapid transit projects is likely due to a number of factors, including foreign countries’ positive experiences with this type of transit system. To be eligible, a corridor-based bus project must (1) operate in a separate right-of-way dedicated for public transit use for a substantial portion of the project or (2) represent a substantial investment in a defined corridor. Furthermore, medium and smaller project sponsors may be expressing more interest in the New Starts program, including Small Starts, because bus rapid transit may serve as a more affordable and cost-effective alternative to other fixed-guideway options. Although bus rapid transit projects are now more common than commuter or light rail projects, they represent a small amount of the total cost for all projects in the pipeline. We found that bus rapid transit accounts for about 12 percent of the total cost of all projects in the New Starts pipeline, while commuter rail (36 percent), heavy rail (30 percent), and light rail (22 percent) account for greater shares—which is not surprising, given that bus rapid transit projects are often less expensive than rail projects. However, although bus rapid transit projects account for a smaller share of the total costs, we found that project sponsors seek higher funding shares for these projects. In fiscal year 2008, project sponsors sought, on average, New Starts funding to cover about 58 percent of the total cost of bus rapid transit projects, whereas they sought about 49 percent for commuter rail projects, about 50 percent for light rail projects, and about 38 percent for heavy rail projects. FTA and project sponsors identified different factors for the decrease in the New Starts pipeline. FTA officials cited their increased scrutiny of applications to help ensure that only the strongest projects enter the pipeline, and said they had taken steps to remove projects from the pipeline that were inactive, not advancing, or did not adequately address identified problems. According to FTA officials, these projects consume FTA oversight resources and congressional funding without demonstrating evidence of progress. FTA officials said they believed projects had been progressing slowly through the pipeline in recent years and, therefore, needed encouragement to move forward or be removed from the pipeline. Along these lines, since fiscal year 2004, FTA has issued warnings to project sponsors that alert them to specific project deficiencies that must be corrected by a specified date for the project to advance through the pipeline. If the deficiency is not corrected, FTA removes the project from the pipeline. To date, FTA has issued warnings for 13 projects. Three projects have only recently received a warning and their status is to be determined; 3 projects have adequately addressed the deficiency identified by FTA; 1 project was removed by FTA for failing to address the identified deficiency; and 6 projects were withdrawn from the pipeline by the project sponsors. FTA officials told us that project sponsors are generally aware of FTA’s efforts to better manage projects in the pipeline. Although FTA has taken steps to remove inactive or stalled projects from the pipeline, FTA officials noted that most projects have been withdrawn by their project sponsors, not FTA. According to FTA data, 23 projects were withdrawn from the New Starts pipeline between calendar years 2001 and 2007. Of these, 16 projects were withdrawn from the pipeline at the request of project sponsors; 6 were removed from the pipeline in response to efforts initiated by FTA; and 1 was removed from the pipeline at congressional direction. Of the 16 projects that were withdrawn by project sponsors, the most common reasons were that the project was either reconfigured (the project scope or design was significantly changed) or reconsidered, or that the local financial commitment was not demonstrated. Similarly, FTA initiated the removal of 4 of 6 projects for lack of local financial commitments, often demonstrated by a failed referendum at the local level. Of the 23 projects withdrawn from the New Starts pipeline, 3 were expected to reenter the pipeline at a later date. The project sponsors we interviewed provided other reasons for the decrease in the number of projects in the New Starts pipeline. The most common reasons cited by project sponsors were that the New Starts process is too complex, costly, and time-consuming: Complexity and cost of the New Starts process: The majority of project sponsors we interviewed told us that the complexity of the requirements— including those for financial commitment projections and travel forecasts, which require extensive analysis and economic modeling—creates disincentives to entering the New Starts pipeline. Sponsors also told us that the expense involved in fulfilling the application requirements, including the costs of hiring additional staff and private grant consultants, discourages some project sponsors with fewer resources from applying for New Starts funding. Furthermore, concerns about the cost of applying to the New Starts program come at a time when project sponsors expect to receive less funding for their projects from the program. Specifically, for recently completed transit projects that received an FFGA, the project sponsors we surveyed reported that, on average, the federal government funded approximately 60 percent of the total project costs via the New Starts program. For ongoing projects, sponsors reported that they expect to receive an average of about 50 percent of the total project costs from the New Starts program. Time required to complete the New Starts process: More than one-half of the project sponsors we interviewed said that the application process is time-consuming or leads to project delays, although sponsors could not provide specifics on how long various components of the process contributed to a specific delay. One project sponsor told us that constructing a project with New Starts funding (as opposed to without such funding) delays the timeline for the project by as much as several years, which in turn leads to increased project costs since inflation and expenses from labor and materials increase with the delay. The lengthy nature of the New Starts process is due, at least in part, to the rigorous and systematic evaluation and rating process established by law—which, as we have previously noted, could serve as a model for other transportation programs. In addition, FTA officials noted that most project delays are caused by the project sponsor, not FTA. These delays are attributable to the sponsor’s inability to obtain local funding commitments, local decisions to significantly modify the project’s scope or alignment, or unanticipated environmental impacts. Other reasons for the decrease in the pipeline that were cited by the project sponsors we interviewed include that the project sponsors are finding alternative sources of funding, such as other federal funds or state, local, or private funding. One project sponsor remarked that sponsors try to avoid the New Starts process by obtaining a congressional designation, so that they can skip the New Starts application process and construct their project more quickly. In addition, three other project sponsors said that since the New Starts process is well-established and outcomes are predictable, potential project sponsors do not even apply to enter the pipeline because they realize their projects will not fare well against the New Starts criteria and, thus, are unlikely to receive New Starts funding. Our survey found similar reasons that project sponsors provided for the decline in the New Starts pipeline. Among the project sponsors we surveyed with completed transit projects, the most common reasons given for not applying to the New Starts program were that the process is lengthy or that the sponsor wanted to move the project along faster than could be done in the New Starts process. About two-thirds of these project sponsors reported that their most recent project was eligible for New Starts funding, yet more than one-fourth of them did not apply to the program. Instead, these project sponsors reported using other federal funding and state, local, and private funding—with other federal and local funding the most commonly used and private funding the least commonly used—to fund their most recently completed project. In addition, we found that almost two-thirds of the large project sponsors we surveyed applied to the New Starts program for their most recently completed project, while only about one-third of medium and smaller project sponsors applied. Other reasons these project sponsors cited for not applying to the program include sufficient funding from other sources to complete the project, concern about jeopardizing other projects in the pipeline, time and resources needed to complete application each year are too great, and difficulty in understanding and completing the process and in understanding the program’s eligibility requirements. FTA is considering and implementing different means of improving the New Starts process—many of which would address the concerns identified by project sponsors. For example, FTA has recognized that the process can be lengthy, and in 2006 FTA commissioned a study to examine, among other issues, opportunities for accelerating and simplifying its implementation of the New Starts program. According to FTA officials, one of the study’s recommendations was to use project development agreements to solidify New Starts project schedules and improve FTA’s timeline for reviews. FTA officials told us that they are pursuing this recommendation, and have already implemented project schedules for three New Starts projects in the pipeline. Other key recommendations for FTA contained in the study include developing a simple “road map” that concisely identifies requirements for navigating through preliminary engineering and final design, more clearly defining entry criteria for each phase of the process, simplifying the travel forecasting modeling, and clarifying and consistently implementing the New Starts technical guidance and policies. The FTA Administrator has publicly stated that FTA will continue to look for ways to further improve the program. In June 2007, FTA issued in the Federal Register a number of changes to the New Starts and Small Starts processes, including streamlining through the elimination of a number of reporting requirements. For example, FTA will no longer require project sponsors to submit information on operating efficiencies and environmental benefits, nor will they be required to submit information for evaluation for FTA’s annual report if their project is not likely to be ready for a funding recommendation. In addition, the resubmission of information on land-use patterns for the annual report will now be optional for project sponsors. Other changes to the processes include expanding the evaluation criteria to a five-tiered rating scale, and considering a project’s innovative contractual agreements in the evaluation and rating of the operating finance plan for projects. The guidance also states that under the evaluation of “other factors,” if a project is a principal element of a congestion management strategy, this could increase a project’s overall rating. Projects could also increase their overall rating by reporting economic development; therefore, FTA encourages project sponsors to submit such information. Our survey and interviews of project sponsors indicated that there will likely be a future demand for New Starts funding. Survey respondents told us that they plan to seek New Starts funding for 101 of 141 future planned New Starts, Small Starts, and Very Small Starts transit projects. While FTA has taken steps to streamline the Small Starts program as envisioned by SAFETEA-LU, project sponsors find the application process to be time- consuming and too costly to complete. In addition, project sponsors we interviewed, especially those that have never applied for New Starts funding, find the Small Starts interim guidance difficult to understand and would like more assistance from FTA on how to complete the application process. Our survey of project sponsors indicated that there is likely to be a future demand for New Starts funding. About 46 percent (77 of 168) of the project sponsors we surveyed reported that they had a total of 141 planned transit projects, which we defined as projects currently undergoing an alternatives analysis or other corridor-based planning study. According to the project sponsors, they will likely seek New Starts funding for almost three-fourths (72 percent, or 101) of these 141 planned New Starts, Small Starts, and Very Small Starts projects. More specifically, they will likely seek New Starts funding for 57 of the planned New Starts projects, 30 of the planned Small Starts projects, and 14 of the planned Very Small Starts projects (see fig. 6). Although the project sponsors we surveyed indicated that they were considering a range of alternative project types in their planning, the most commonly cited alternatives were bus rapid transit and light rail. All of the Small Starts and Very Small Starts project sponsors we interviewed viewed the new Small Starts program favorably. These project sponsors told us that they appreciated the emphasis FTA has placed on smaller transit projects through its new programs and the steps FTA has taken to streamline the application process for the programs. The project sponsors also told us that the Small Starts program, including the Very Small Starts eligibility category, address a critical and unmet funding need, and that they believe their projects will be more competitive under these programs because they are vying for funding with projects and agencies of similar size. FTA officials told us that they have been responsive in providing assistance on the program when contacted. Our survey results also indicated that, through its Small Starts program, FTA is attracting more project sponsors than before, including those that have not previously applied for the New Starts program and also those that would not otherwise be applying for New Starts funds. For example, of the 30 project sponsors that intend to seek New Starts funding for their planned Small Starts and Very Small Starts projects, 13 have not previously applied for New Starts funding. Project sponsors also indicated that the Small Starts program, including the eligibility category for Very Small Starts projects, has influenced how they plan for their ongoing projects, which are projects that have completed the alternatives analysis phase and have moved forward into the later stages of development, such as preliminary engineering or final design. Of the ongoing Small Starts and Very Small Starts projects for which respondents indicated they would be requesting New Starts funding, project sponsors definitively reported that they would have sought New Starts funding for only about one-quarter of those ongoing projects if the Small Starts program, including the eligibility category for Very Small Starts projects, had not been established. In implementing the Small Starts program, FTA has taken steps to streamline the application and evaluation and rating processes for smaller- scale transit projects, as envisioned by SAFETEA-LU. According to our analysis of the numbers and types of requirements for the New Starts and Small Starts application processes, the Small Starts process has fewer requirements. For example, in the categories of travel forecasting, project justification, and local financial commitment, the number of requirements was reduced. FTA also established a simplified financial evaluation process for Small Starts, which reduced the reporting burden for qualified projects. In addition, FTA allows simplified methods for travel forecasts that predict transportation benefits, and it reduced the number of requirements for the Small Starts application process. For example, the Small Starts application process is about one-quarter fewer requirements than those for the New Starts program. FTA also established the Very Small Starts process, which has even fewer application requirements than the Small Starts program. This process expedites the reporting, evaluation, and advancement of simple and inexpensive projects. FTA’s steps have greatly reduced the amount of information to be submitted for each of the specific requirements (see table 6). Despite these efforts, many of the project sponsors we interviewed find the Small Starts application process time-consuming and too costly to complete, and would like to see FTA further streamline the process. Frequently, project sponsors said that the current Small Starts application process takes as long and costs as much to complete as the New Starts application process, even though the planned projects cost less. For example, a project sponsor that applied to the Small Starts program told us that FTA asks applicants to submit templates used in the New Starts application process that call for information not relevant for a Small Starts project, such as travel forecasts beyond the opening year, which are not required for the Small Starts program. The project sponsor suggested that FTA develop a separate set of templates for the Small Starts program that would ask only for Small Starts-related information. FTA officials told us that in these cases, they would not expect project sponsors to provide the additional information that is not required. Another project sponsor we interviewed told us that although FTA tried to streamline the process by requiring ridership projections only for the opening year of Small Starts projects, the environmental impact statement still mandates the development of multiyear ridership projections. Such extensive ridership projections take a considerable amount of work, staff time, and funding to produce. FTA officials explained to us that the level of ridership projections required is dependent on the nature of the project. Several other project sponsors that applied to the Small Starts program, including sponsors that used the Very Small Starts process, expressed additional concerns about having to provide duplicate information, such as project finance and capital cost data that can be found in other required worksheets. FTA officials do not believe that such duplicate information is burdensome for project sponsors to submit. Nonetheless, smaller-sized entities that lack New Starts experience, in-house expertise, and resources may find the process burdensome. In reviewing the Small Starts application process requirements, we also found that the application is not always tailored for Small Starts applicants and, in several instances, requests duplicate information. FTA officials acknowledged that the Small Starts application process could be further streamlined and said that they are working to decrease the burden by, for example, reducing land-use reporting requirements, simplifying the rating process, and developing specific Small Starts templates. However, FTA officials noted that some requirements are statutorily defined or reflect industry-established planning principles. For example, federal statute requires that projects, even Small Starts projects, emerge from an alternatives analysis that considers various options to address the transportation problem at hand. Therefore, only certain aspects of the process can be streamlined. The project sponsors we interviewed, especially those that have never applied for New Starts funding, would like more assistance from FTA in completing the application process because some find the interim guidance difficult to understand. Before the Small Starts and Very Small Starts application deadline, FTA provided initial outreach to applicants. Despite this outreach, 8 of the 12 applications were incomplete or sought funding for ineligible projects. In some cases, the project sponsors that submitted these applications had no past experience with the New Starts process, limiting their familiarity with the information required for the application. To help address this issue, FTA officials told us that, in one instance, they provided a Very Small Starts project sponsor with a copy of a submitted application from another project sponsor (with New Starts program experience) to use as a guide. The Very Small Starts project sponsor found the application to be helpful in preparing its own application. FTA officials told us that they plan to host an informal meeting of potential Small Starts project sponsors later this calendar year. In addition, some project sponsors did not understand what constitutes an eligible project. For example, one project sponsor we interviewed submitted an application for the construction of a new station. However, FTA officials told us that the construction of a station did not meet the definition of a corridor-based project, as required. Another project sponsor we interviewed told us that it believed FTA deemed its two Small Starts and Very Small Starts projects ineligible because service was already being provided on the proposed route (and, therefore, the proposed service would not be new). In response, FTA officials told us that these projects were in fact ineligible because they already had incremental developments, including some of the elements FTA requires for Small Starts and Very Small Starts projects, such as traffic signal priority or preemption and branding of the proposed service. Yet, these project sponsors were unaware that the incorporation of some of these elements into their existing service rendered their project ineligible. We found that although FTA’s Small Starts guidance outlines the elements required for a project to receive funding, it does not explicitly state that projects that have already begun to incrementally incorporate these elements are ineligible. When we discussed this concern with FTA officials, they told us that they might consider asking project sponsors to demonstrate the cost- effectiveness of the preexisting elements to allow for such projects to be eligible for Small Starts funding. The project sponsors we interviewed said they need more consistent, reliable information from FTA. We found that on several occasions, FTA headquarters and regional offices provided project sponsors with inconsistent information, which contributed to the sponsors’ submitting applications for ineligible projects and submitting incomplete applications. For example, two project sponsors said they thought their projects were eligible after talking with FTA regional officials. However, after submitting their applications, these project sponsors learned from FTA headquarters officials that their projects were ineligible. Furthermore, one project sponsor stated that officials from a regional FTA office said there was no need to submit a separate application for the Small Starts program, since the sponsor had previously applied to the New Starts program. Rather, FTA regional officials said the project sponsor needed to submit only a few additional pieces of information. However, after the project sponsor sent this information, along with a letter to FTA requesting that the application be transferred from the New Starts program to the Small Starts program, FTA headquarters officials responded that the application was incomplete. The study of the New Starts process that FTA recently commissioned found similar inconsistencies in the information provided by officials in its regional offices and headquarters. Therefore, the study recommended that FTA develop internal standard operating procedures for New Starts staff that formalize the duties and responsibilities for each position. In addition, the study recommended implementing Web-based technology to standardize the communication and enforcement of policies across the program, and having FTA establish a formal policy for responding to every project sponsor’s correspondence with a formal response or written notification. FTA officials told us that they understand the need to ensure consistent information, and that they are already working on developing standard operating procedures for New Starts staff, as recommended in the study. The recent decrease in the New Starts pipeline does not appear to be a reflection of diminishing interest in the program. In fact, our survey showed that there will likely be substantial demand for New Starts funding in the future if most potential project sponsors follow through on their plans for new transit projects. Rather, the decrease is likely due to a combination of factors, including FTA’s increased scrutiny of projects, project sponsors’ perceptions of the process as lengthy and too complex, and project sponsors’ uncertainty given the recent changes made to the New Starts program. As FTA moves forward with the rulemaking process for New Starts and Small Starts, it will have to balance both the need to make the programs accessible to a range of project sponsors—both large and small agencies—and the need to maintain the rigor of the evaluation and rating process. Although project sponsors expressed substantial interest in both the New Starts and the Small Starts programs, they also identified a number of ways to improve the programs. In particular, project sponsors raised specific concerns about the Small Starts program. Because the Small Starts program is in its first few years of implementation, it is not surprising that it may experience growing pains. Some of the project sponsors may find their concerns about the program addressed as they become more familiar and comfortable with it and as a number of implementation details are finalized through the upcoming rulemaking process. However, we believe that the relatively low number of Small Starts applications received to date and the number of project sponsors submitting ineligible applications due to unclear guidance suggest that additional FTA action is warranted, including further streamlining the Small Starts program, providing additional information about the program through training and a working group, and clarifying eligibility guidance. Although FTA has taken some steps to further streamline the Small Starts program, continued refinement is needed to ensure a simplified and expedited evaluation process. FTA’s upcoming rulemaking, including the associated outreach efforts, will provide an opportunity for FTA to continue to streamline the Small Starts program, provide additional training, and clarify guidance. To improve the Small Starts program, we are recommending that the Secretary of Transportation direct the FTA Administrator to take the following three actions: To increase awareness and information sharing about the Small Starts, including Very Small Starts, application process, FTA should conduct training (in-person, Web-based, or both) for potential applicants and facilitate the development of a working group or community of practice. To ensure that project sponsors better understand the types of corridor bus projects that are eligible for Small Starts funding, FTA should clarify in its Small Starts program guidance that bus rapid transit projects cannot already include any of the required elements for eligibility, or if they do, must demonstrate the cost-effectiveness of the preexisting elements. To ensure that the Small Starts program provides a streamlined application process as envisioned by SAFETEA-LU, FTA should continue to refine this process as outlined in the Small Starts program guidance. Examples of refinements include collapsing the project finance or cost worksheets to minimize the duplication of data to be submitted and providing specific guidance on how, when applicable, Small Starts applicants can conduct a simplified alternatives analysis. We provided DOT, including FTA, with a draft copy of this report for review and comment. DOT generally agreed with the report’s findings and conclusions, and agreed to consider our recommendations. DOT also provided technical clarifications, which we incorporated as appropriate. We are sending copies of this report to the 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 on (202) 512-2834 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. Individuals making key contributions to this report are listed in appendix II. To address our objectives, we reviewed the Federal Transit Administration’s (FTA) guidance on the New Starts and Small Starts programs; the Advanced Notice of Proposed Rule Making for Small Starts; and the provisions of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users and prior law that address the New Starts program. We reviewed this legislation to identify changes that have occurred in the New Starts program and to gather information on FTA’s new Small Starts program, which we used, in part, to analyze the quantitative differences in application requirements between this program and the New Starts program. Furthermore, we reviewed the FTA’s Annual Reports on New Starts for fiscal years 2001 through 2008 to determine trends in the New Starts pipeline (those projects in preliminary engineering and final design) for each year, including the number of projects evaluated, rated, and recommended for funding; the modes of projects in the pipeline; and the amount of New Starts funding requested for projects, and the total costs of proposed projects. We also interviewed FTA officials and industry associations to gain their insights on past, current, and future aspects of the programs. We interviewed FTA officials who work extensively with the New Starts and Small Starts programs to gain a better understanding of the programs. In addition, we interviewed three industry associations that represent project sponsors that participate closely in these programs: the American Public Transportation Association, the New Starts Working Group, and Reconnecting America. Furthermore, we attended an American Public Transportation Association legislative workshop to learn about the New Starts and Small Starts programs, including New Starts project planning and evaluation process, and Small Starts interim guidance and rulemaking. We also interviewed 15 project sponsors, including all 10 sponsors that applied for the Small Starts program (including Very Small Starts applicants) for the fiscal year 2008 evaluation cycle. We interviewed the project sponsors to gather information on their past experiences with the New Starts and Small Starts programs, and their potential future use of these programs. The 10 project sponsors we interviewed that applied for the fiscal year 2008 Small Starts program (including Very Small Starts applicants) included the City of Breckenridge Public Works Department (Breckenridge, Colorado); Dallas County Utility and Reclamation District (Irving, Texas); Fort Collins Transportation Department (Fort Collins, Colorado); Kansas City Area Transportation Authority (Kansas City, Missouri); King County Metro (King County, Washington); Lane Transit District (Springfield, Oregon); Los Angeles County Metropolitan Transit Authority (Los Angeles, California); Northern Arizona Intergovernmental Public Transportation Authority (Flagstaff, Arizona); Sarasota County Area Transit (Sarasota County, Florida); and Sound Transit (Seattle, Washington). In addition, we interviewed 5 other project sponsors that varied in their levels of experience with the New Starts program, size, and regional location. These 5 sponsors were the Metropolitan Transit Authority of Harris County (Houston, Texas); New Jersey Transit Corporation (Newark, New Jersey); Orange County Transit Authority (Orange County, California); St. Louis Regional Transit (St. Louis, Missouri); and TriMet (Portland, Oregon). To further address our objectives, we used a Web-based questionnaire to survey all of the project sponsors that are located in an urbanized area with a population of over 200,000 and have an annual ridership of over 1 million. These project sponsors may or may not have previously applied to the New Starts or Small Starts programs, but because of their size and ridership, they would be more likely to plan the types of transit projects that would potentially qualify for New Starts funding. Project sponsors were defined typically as transit agencies, but they may also have included city transportation offices and metropolitan planning organizations, among other entities. The questionnaire to project sponsors asked questions that allowed for a combination of open-ended and closed-ended responses. The questionnaire included questions about project sponsors’ (1) current transit situation, (2) most recently completed transit projects, (3) current ongoing transit projects, and (4) future planned transit projects. For each question, we asked the project sponsors about the types of transit project they sponsored, how they funded or intended to fund transit projects in the future, and their experiences with and perceptions of the various programs. The questionnaire was designed by a GAO survey specialist in conjunction with other GAO staff knowledgeable about the grant program. We pretested the questionnaire with 5 project sponsors that had varying levels of experience in working with the New Starts program. Three project sponsors had previously applied to either the New Starts program or the Small Starts program, while 1 project sponsor had not applied to either program. In addition, the 5 project sponsors represented both larger and smaller project sponsors included in our list of the 215 largest transit agencies. The 5 project sponsors were the Fort Collins Transportation Department (Fort Collins, Colorado); Maryland Transit Administration (Baltimore, Maryland); Rockford Mass Transit District (Rockford, Illinois); TriMet (Portland, Oregon); and Washington Metropolitan Area Transit Authority (Washington, D.C.). Furthermore, we asked two industry groups (the American Public Transportation Association and the New Starts Working Group) and FTA to review the project sponsor questionnaire and provide comments. During the pretests and reviews of the questionnaire, we asked the project sponsors and industry groups whether the questions were understandable and if the information was feasible to collect. We refined each of the questions as appropriate in response to the feedback we received. To conduct the questionnaire, we posted self-administered electronic questionnaires to the World Wide Web and sent e-mail notifications to project sponsor contacts provided to us by FTA in early February 2007. We found after our first e-mail that some addresses were no longer valid, so we contacted each agency by telephone to find the appropriate contact to send the e-mail notification. We also responded to inquiries from project sponsors. Many project sponsor contacts believed they were not the right person to answer the questions. In these instances, we resent the e-mail notification to the correct contact at the project sponsor. Our goal was to find the staff member at each project sponsor who was the most knowledgeable about the New Starts program and the Small Starts program. After determining the correct contact, we e-mailed each potential respondent a unique username and password to ensure that the project sponsor would have access to the questionnaire. We asked the project sponsor contact to complete the questionnaire within 2 weeks. To encourage respondents to complete the questionnaire, we sent an e-mail message to prompt each nonrespondent every 2 weeks after the initial e-mail message for approximately 6 weeks. After 6 weeks, we called all nonrespondents at least once to encourage their participation in the questionnaire and to increase our response rate. We closed the questionnaire on May 11, 2007. In total, we surveyed 215 project sponsors and received responses from 168 of them, for a response rate of 78 percent. To view our questionnaire and the aggregated project sponsor responses, go to www.gao.gov/cgi-bin/getrpt?GAO-07-927SP. Because the questionnaire was not a sample survey, it has no sampling errors. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as “nonsampling” errors. For example, difficulties in how a particular question is interpreted, in the sources of information available to the respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the questionnaire results. We took steps in developing the questionnaire, collecting the data, and analyzing the data to minimize these nonsampling errors. For example, as we have previously noted, our survey specialists designed the questionnaire in collaboration with GAO subject matter experts, and we pretested the draft questionnaire with the appropriate officials to ensure that the questions were relevant, clearly stated, and easy to comprehend. After the data were analyzed, a second, independent analyst checked all computer programs. Since this was a Web-based questionnaire, the respondents entered their answers directly into the electronic questionnaire, eliminating the need to have the data keyed into a database, thereby removing an additional potential source of error. We performed our work from November 2006 through July 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, other key contributors to this report were Nikki Clowers, Assistant Director; Elizabeth Eisenstadt; Carol Henn; Bert Japikse; Amanda Miller; SaraAnn Moessbauer; Nitin Rao; Tina Won Sherman; Bethany Claus Widick; and Elizabeth Wood. Public Transportation: Preliminary Analysis of Changes to and Trends in FTA’s New Starts and Small Starts Programs. GAO-07-812T. Washington, D.C.: May 10, 2007. Public Transportation: New Starts Program Is in a Period of Transition. GAO-06-819. Washington, D.C.: August 30, 2006. Public Transportation: Preliminary Information on FTA’s Implementation of SAFETEA-LU Changes. GAO-06-910T. Washington, D.C.: June 27, 2006. Public Transportation: Opportunities Exist to Improve the Communication and Transparency of Changes Made to the New Starts Program. GAO-05-674. Washington, D.C.: June 28, 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: 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. | Through the New Starts program, the Federal Transit Administration (FTA) identifies and recommends new fixed-guideway transit projects for funding. The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) created a separate program, commonly called Small Starts, which is intended to offer a streamlined evaluation and rating process for smaller-scale transit projects. FTA subsequently introduced a separate eligibility category within the Small Starts program for "Very Small Starts" projects. These are simple, low-risk projects that qualify for a simplified evaluation and rating process. SAFETEA-LU requires GAO to annually review FTA's New Starts process. This report presents information on (1) FTA's fiscal year 2008 funding recommendations, (2) the extent to which the New Starts pipeline has changed over time, and (3) future projected trends for the New Starts and Small Starts pipelines. To address these objectives, GAO surveyed 215 project sponsors--78 percent of which responded--and interviewed FTA officials, 15 project sponsors, and 3 industry groups. For the fiscal year 2008 evaluation cycle, FTA recommended to Congress 10 New Starts and 4 Small Starts projects for funding. The administration's budget request of $1.40 billion is primarily allocated to New Starts projects with existing and pending full funding grant agreements. SAFETEA-LU made several changes to the New Starts evaluation and rating process, which FTA is implementing. Since the fiscal year 2001 evaluation and rating cycle, the New Starts pipeline--that is, projects in the preliminary engineering and final design phases--has changed in size and composition, responding to a variety of factors. The number of projects in the New Starts pipeline has decreased by more than one-half, and the types of projects in the pipeline have changed, with bus rapid transit replacing commuter or light rail as the most common type of project. FTA officials attributed the decrease in the number of projects to FTA's increased scrutiny of applications to help ensure that only the strongest projects enter the pipeline, and to FTA's efforts to remove projects from the pipeline that were not advancing or did not adequately address identified problems. Project sponsors that GAO interviewed cited other reasons for the pipeline's decrease, including the complexity, lengthiness, and cost of the New Starts process. The lengthy nature of the New Starts process is due, in part, to the rigorous and systematic evaluation and rating process established by law--which GAO has previously noted could serve as a model for other programs. Other reasons cited by project sponsors for the decrease in the pipeline include finding alternative sources of funding or opting not to apply because they realize their projects are unlikely to receive funding. FTA is considering different ideas on how to improve the New Starts process, some of which may address the concerns identified by project sponsors. Despite these concerns, GAO's survey of project sponsors indicated future demand for New Starts funding. Project sponsors reported having 141 planned New Starts, Small Starts, and Very Small Starts projects and will likely seek New Starts funding for almost three-fourths of these projects. Of these planned projects, project sponsors indicated that they intend to seek New Starts funding for 57 New Starts projects, 30 Small Starts projects, and 14 Very Small Starts projects. Project sponsors GAO surveyed also reported considering a range of alternative project types in their planning. Although project sponsors expressed appreciation for the creation of the Small Starts program, noting it filled a funding gap, they said the Small Starts application process is not tailored to the Small Starts program and is time-consuming, costly, and duplicative. GAO also found that the application is not always tailored for Small Starts applicants and, in several instances, requests duplicative information. FTA officials acknowledged that the Small Starts application process could be further streamlined, and they are working to decrease the burden. |
The federal government helps students and families save, pay for, and repay the costs of postsecondary education through grant and loan programs authorized under title IV of the Higher Education Act of 1965, and through tax preferences—reductions in federal tax liabilities that result from preferential provisions in the tax code, such as exemptions and exclusions from taxation, deductions, credits, deferrals, and preferential tax rates. In fiscal year 2004, Education made approximately $14 billion in grants and provided another $56 billion in loan assistance (face value) through the title IV programs. The fiscal year 2004 outlay equivalent cost of the postsecondary tax preferences reviewed in this study was estimated to be $10 billion. Assistance provided under title IV programs include Pell Grants for low- income students, parent loans known as PLUS loans, and Stafford loans. While Pell Grants reduce the price paid by the student, student loans help to finance the remaining costs and are to be repaid according to varying terms. Stafford loans may be either subsidized or unsubsidized. The federal government pays the interest cost on subsidized loans while the student is in school, and during a 6-month period known as the grace period, after the student leaves school. For unsubsidized loans, students are responsible for all interest costs. Stafford and PLUS loans are provided to students through both the Federal Family Education Loan Program (FFELP) and the William D. Ford Direct Loan Program (FDLP). The federal government's role in financing and administering these two loan programs differs significantly. Under FFELP, private lenders, such as banks, provide loan capital and make loans, and the federal government guarantees FFELP lenders a minimum yield on the loans they make and repayment if borrowers default. Under FDLP, federal funds are used as loan capital and loans are provided through participating schools. The Department of Education and its private-sector contractors jointly administer the program. Title IV also authorizes programs funded by the federal government and administered by participating higher education institutions, including the Supplemental Educational Opportunity Grant (SEOG), Perkins loans, and federal work-study aid, collectively known as campus-based aid. To receive title IV aid, students (along with parents, in the case of dependent students) must complete a Free Application for Federal Student Aid (FAFSA) form. Information from the FAFSA, particularly income and asset information, is used to determine the amount of money—called the expected family contribution (EFC)—that the student and/or family is expected to contribute to the student’s education. Statutory definitions establish the criteria that students must meet to be considered independent of their parents for the purpose of financial aid, and statutory formulas establish the share of income and assets that are expected to be available for the student’s education. Once the EFC is established, it is compared with the cost of attendance at the institution chosen by the student. The cost of attendance comprises tuition and fees; room and board; books and supplies; transportation; miscellaneous personal expenses; and, for some students, additional expenses. If the EFC is greater than the cost of attendance, the student is not considered to have financial need, according to the federal aid methodology. If the cost of attendance is greater than the EFC, then the student is considered to have financial need. Title IV assistance that is made on the basis of the calculated need of aid applicants is called need-based aid. Key characteristics of title IV programs are summarized in table 1, below. Prior to the 1990s, virtually all major federal initiatives to assist students with the costs of postsecondary education were provided through grant and loan programs authorized under title IV of the Higher Education Act. Since the 1990s, however, federal initiatives to assist families and students in paying for postsecondary education have largely been implemented through the federal tax code. The federal tax code now contains a range of tax preferences that may be used to assist students and families in saving for, paying, or repaying the costs of postsecondary education. These tax preferences include credits and deductions, both of which allow tax filers to use qualified higher education expenses to reduce their federal income tax liability. The tax credits reduce the tax filers’ income tax liability on a dollar-for-dollar basis but are not refundable. Tax deductions permit qualified higher education expenses to be subtracted from income that would otherwise be taxable. To benefit from a higher education tax credit or tuition deduction, a tax filer must use tax form 1040 or 1040A, have an adjusted gross income below the provisions’ statutorily specified income limits, and have a positive tax liability after other deductions and credits are calculated, among other requirements. Tax preferences also include tax-exempt savings vehicles. Section 529 of the tax code makes tax free the investment income from qualified tuition programs. There are two types of qualified tuition programs: savings programs established by states, and prepaid tuition programs established either by states or by one or more eligible educational institutions. Another tax-exempt savings vehicle is the Coverdell Education Savings Account. Tax penalties apply to both 529 programs and Coverdell savings accounts if the funds are not used for allowable education expenses. Key features of these and other education-related tax preferences are described below, in table 2. Our review of tax preferences did not include exclusions from income, which permit certain types of education-related income to be excluded from the calculation of adjusted gross income on which taxes are based. We also did not include special provisions in the tax code that also extend existing tax preferences when tax filers support a postsecondary education student. Appendix IV lists all tax preferences reported by IRS, including ones not included in this review. Title IV programs have been in place for decades, while most education- related tax preferences were created much more recently. Between the late 1950s and the early 1980s each major federal initiative to assist students with the costs of postsecondary education was provided either through grant or loan programs. From 1981 through 1995 no new federal grant or loan-financing vehicles were adopted; however, new financing options, such as loan consolidation, and new delivery systems, such as direct student lending, were introduced for student loan programs. Since 1995, on the other hand, every federal initiative for the financing of postsecondary education has been implemented through the federal tax code, primarily through the Tax Relief Act of 1997 and the Economic Growth and Tax Relief Reconciliation Act of 2001. By 2002 the number of tax filers claiming a tax credit or tuition deduction was broadly comparable to the number of students aided through title IV programs: about 8.4 million students received a title IV grant and/or loan, and about 9.6 million tax filers filed returns claiming a Hope tax credit, Lifetime Learning tax credit, or tuition deduction. (See fig. 1.) Postsecondary student financial assistance provided through programs authorized under title IV of the Higher Education Act and the tax code differ in three key ways. First, tax preferences and title IV programs differ in the timing and the distribution of benefits they provide. Title IV grant and loan programs primarily provide aid to students and families while students are in college, whereas tax preferences help both during the college years and before and after college by assisting with saving for or repaying college costs. Additionally, although student aid programs and tax preferences assist students and families across a wide range of income levels, some title IV programs, such as the Pell Grant and subsidized Stafford student loan programs, provide much of their financial assistance to students and families whose incomes are lower, on average, than students who receive unsubsidized Stafford loans, tax deductions, or make use of tax-exempt saving vehicles. Last, students and families have more responsibility for appropriately using and thereby obtaining the benefits of tax preferences compared with title IV aid. Title IV programs and education-related tax preferences differ significantly as to when eligibility is established and in the timing of the assistance they provide. Eligibility for title IV programs is generally established at the time of enrollment and prior to each subsequent school year thereafter, and title IV programs generally provide benefits to students while they are in school. Education-related tax preferences reach widely across the life span. They encourage saving for college, especially among families with dependent children through tax-exempt saving; assist enrolled students and their families in meeting the current costs of postsecondary education through credits and a tuition deduction; and assist students and families repaying the costs of past postsecondary education by allowing tax filers to claim a deduction for student loan interest paid. Thus, tax filers must determine their eligibility for these preferences every year that contributions are made to Coverdell Education Savings Accounts or every year that a former student claims a student loan interest deduction. Table 3 shows a comparison of the timing of title IV assistance and the assistance provided through various tax preferences. While title IV programs and tax preferences assist many students and families, a variety of program and tax rules affect students’ and families’ eligibility for such assistance. These rules also affect the distribution of title IV aid and the assistance provided through tax preferences. As a result, the beneficiaries of title IV programs and tax preferences differ, as discussed below. Title IV programs have rules for calculating grant and loan assistance that give different consideration to family income, assets, and college costs in the award of financial aid. Pell Grant awards are calculated by subtracting the student’s expected family contribution (EFC) from the maximum Pell Grant award ($4,050 in academic year 2004-2005), or the student’s cost of attendance, whichever is less. Because the expected family contribution is closely linked to family income and circumstances (such as the size of the family and the number of dependents in school), and modest EFCs are required for Pell eligibility, Pell awards are received primarily by families with modest incomes. The maximum subsidized Stafford loan that a student may obtain is based upon his or her cost of attendance, minus the expected family contribution and the estimated financial assistance that the student will receive. For a given cost of attendance, therefore, the amount of a subsidized Stafford loan increases as EFC decreases. In contrast, the maximum unsubsidized Stafford loan amount is calculated without direct consideration of financial need: students may borrow up to their cost of attendance, minus the estimated financial assistance they will receive. The different award rules for Pell Grants and subsidized and unsubsidized Stafford loans result in different patterns of program participation among students of different incomes, and different distributions of dollar support among students. As table 4 shows, 92 percent of Pell financial support in 2003-2004 was provided to dependent students whose family incomes were $40,000 or below, and the 38 percent of Pell recipients in the lowest income category ($20,000 or below) received a higher share (48 percent) of Pell financial support. With respect to subsidized Stafford loans, 67 percent of recipients had family incomes of $60,000 or less and received a proportional share of total subsidized loan volume. In contrast, 65 percent of unsubsidized Stafford loan recipients had family incomes above $60,000 and received 69 percent of total unsubsidized loan volume. Because independent students generally have lower incomes and accumulated savings than dependent students and their families, patterns of program participation and dollar distribution differ. Participation of independent students in Pell, subsidized Stafford, and unsubsidized Stafford loan programs is heavily concentrated among those with incomes of $40,000 or less: from 74 percent (unsubsidized Stafford) to 95 percent (Pell) of program participants have incomes below this level. As shown in table 5, the distribution of award dollars follows a nearly identical pattern. Many education-related tax preferences have both de facto lower limits created by the need to have a positive tax liability in order to obtain their benefit and income ceilings on who may use them. For example, the Hope and Lifetime Learning tax credits require that tax filers have a positive tax liability to use them and income-related phase-out provisions in 2004 that begin at $42,000 and $85,000 for single and joint filers, respectively. The income-related phase-out provision for the tuition deduction, in comparison, begins in 2004 at $65,000 and $130,000 for single and joint filers, respectively. As a result, the majority of tax filers claiming the Hope and Lifetime Learning tax credits in 2002 had incomes under $40,000. Among those who claimed the tuition deduction, in contrast, 38 percent of tax filers had incomes in this range, while 62 percent had incomes over $40,000. Table 6 shows the income categories of tax filers claiming the three tax preferences available to current students and/or their families along with the distribution of dollars through those preferences in 2002. The reduction in tax liability associated with the use of the Hope and Lifetime tax credits also differs from that associated with the use of the tuition deduction. In 2002 tax filers claimed Hope credits worth about $3.2 billion and Lifetime Learning credits totaling about $1.7 billion. As shown in table 6, below, about 80 percent of the 2002 Hope and Lifetime credits’ reduction in tax liability went to tax filers with incomes between $20,001 and $80,000. The distribution of benefits for the tuition deduction shows a substantially different pattern: more than half (52 percent) of the approximately $1.3 billion reduction in tax liability associated with the use of the deduction in 2002 went to families with incomes of $80,001 and above. Although many families are eligible to participate in tax-exempt savings programs, the programs are more advantageous to those with higher incomes and tax liabilities. Families with higher than average incomes are more likely to use tax-exempt savings opportunities for a range of reasons, including, among others, that (1) these families hold greater assets to invest in these vehicles; (2) these families have a higher marginal tax rate, and thus benefit the most from the use of these vehicles; and (3) higher-income families may gain a reduction in tax liability even if withdrawals are not used for postsecondary expenses. The federal government and postsecondary institutions have significant responsibilities in assisting students and families in obtaining assistance provided under title IV programs but only minor roles with respect to tax filers’ use of education-related tax preferences. To obtain federal student aid, applicants must first complete the FAFSA form, which in its 2004 paper version was over eight pages long and contained more than 100 questions. While concerns have been raised that the FAFSA application may deter potentially eligible students from participating in title IV grant and loan programs, filling out the FAFSA and submitting it to the Department of Education completes, by and large, students’ and families’ responsibility in obtaining aid. To benefit from title IV programs, students need not learn the rules of the federal student aid methodology, eligibility rules for individual programs, or understand the ways in which federal student aid programs interact with one another. Rather, the Department of Education is responsible for calculating students’ and families’ EFC on the basis of the FAFSA, and a student’s educational institution is responsible for determining aid eligibility and the amounts and packaging of aid awards. In addition, title IV educational institutions assist Education in verifying the information submitted on the FAFSA form for a sample of aid applicants. Higher education tax preferences, in contrast to federal grants and student loans, require more responsibility on the part of students and families. Although postsecondary institutions provide students and IRS with information about higher education attendance, they have no other responsibilities for higher education tax credits, deductions, or tax- preferred savings. The federal government’s primary role with respect to higher education tax preferences is limited to the promulgation of rules; the provision of guidance to tax filers; and to the processing of tax returns, including some checks on the accuracy of items reported on those tax returns. In contrast, the primary responsibility for selecting among and properly using tax preferences rests with tax filers: they must understand the rules in light of their own situation, identify applicable tax preferences, understand how these tax preferences interact with one another and with federal student aid, keep records sufficient to support their tax filing, and correctly claim the credit or deduction on their return. According to our analysis of IRS data on the use of Hope and Lifetime tax credits and the tuition deduction, some tax filers appear to make less-than- optimal choices among them. The apparently suboptimal use of postsecondary tax preferences may arise, in part, from the complexity of using these provisions; however, our analysis of tax data does not permit us to identify why they are making these choices. Tax policy analysts consistently identify postsecondary tax preferences as a set of tax provisions that demand a particularly large investment of knowledge and skill on the part of students and families or expert assistance purchased by those with the means to do so. Additional complexity associated with the use of postsecondary tax preferences also arises from the interaction of tax preferences and title IV student aid. Making poor choices among tax preferences for postsecondary education may be costly to tax filers. For example, families may strand assets in a tax- exempt savings vehicle and incur tax penalties on their distribution if their child chooses not to go to college. They may also fail to minimize their federal income tax liability by claiming a tax credit or deduction that yields less of a reduction in taxes than a different tax preference or by failing to claim any of their available tax preferences. For example, if a married couple filing jointly with one dependent in his/her first 2 years of college had an adjusted gross income of $50,000, qualified expenses of $10,000 in 2004, and tax liability greater than $2,000, their tax liability would be reduced by $2,000 if they claimed the Lifetime Learning credit but only $1,500 if they claimed the Hope credit. To assess whether tax filers faced difficulty with choosing among these preferences, we examined whether tax filers who were confronted with a relatively common tax choice—whether to claim the Hope or Lifetime Learning credit or the tuition deduction—chose the tax preference that minimized their tax liability. We analyzed information that IRS was provided with by educational institutions using Form 1098-T and tax return information in IRS’s 2002 Statistics of Income sample. Because 87 percent of Form 1098-T returns did not contain educational expense information, we were able to analyze only the remaining 13 percent of tax returns (representing about 1.8 million returns) in the SOI sample that received a Form 1098-T and contained information concerning students’ educational expenses. We were unable to determine if this 13 percent of returns is representative of the entire population of Form 1098-Ts. (See appendix I for details.) All estimates and their associated confidence intervals can be found in appendix II. We found that some people who appear to be eligible for tax credits and/or the tuition deduction did not claim them. The filers of about 77 percent of the tax returns that we were able to review were apparently eligible to claim one or more of the three tax preferences: the tax filers appear to have had a positive income tax liability, qualified educational expenses, an adjusted gross income below statutory phase-out limits, and were otherwise eligible. Among filers who were apparently eligible to claim one of the three tax preferences, 27 percent, representing about 374,000 tax filers, failed to do so. The amount by which these tax filers failed to reduce their tax averaged $169; 10 percent of this group could have reduced their tax liabilities by over $500. Some tax filers used a higher education tax credit or the tuition deduction but chose one that yielded a smaller reduction in their tax liability than they could have otherwise realized. Among those who claimed the tuition deduction, we estimate that 21 percent (representing about 51,000 tax filers) would have been better off claiming the Lifetime Learning tax credit while 8 percent (representing about 22,000 tax filers) of those claiming the Lifetime Learning credit would have reduced their taxes by a greater amount if they had claimed the tuition deduction instead. The average amount by which these tax filers failed to reduce their taxes was $83 for tax filers claiming the tuition deduction and $138 for those claiming the Lifetime Learning credit. Some tax filers making these decisions failed to realize larger reductions in their tax liabilities—10 percent of suboptimal tuition deduction claimants could have reduced their tax liabilities by about $158 or more and 10 percent of suboptimal Lifetime Learning credit claimants could have reduced their tax liabilities by about $237 or more. On the other hand, we found no cases where tax filers claiming a Hope credit would have been better off by claiming a Lifetime Learning credit instead. Suboptimal choices were not limited to tax filers who prepared their own tax returns. A possible indicator of the difficulty people face in understanding education-related tax preferences is how often the suboptimal choices we identified were found on tax returns prepared by paid tax preparers. We estimate that about 50 percent of the returns we found that appear to have failed to optimally reduce the tax filer’s tax liability were prepared by paid tax preparers. Generalized to the population of tax returns we were able to review, returns prepared by paid tax preparers represent about 223,000 of the approximately 447,000 suboptimal choices we found. The apparently suboptimal use of postsecondary tax preferences may arise, in part, because of the complexity of using these provisions. Tax policy analysts have frequently identified postsecondary tax preferences as a set of tax provisions that demand a particularly large investment of knowledge and skill on the part of students and families or expert assistance purchased by those with the means to do so. They suggest that this complexity arises from multiple postsecondary tax preferences with similar purposes, from key definitions that vary across these provisions, and from rules that coordinate the use of multiple tax provisions. Additional complexity associated with the use of these provisions may arise from the interaction of tax preferences and title IV student aid. Complexity may lead some not to claim a credit because they judge the added costs of filing for the credit to outweigh its benefits. Multiple tax preferences with similar purposes may place substantial demands on the knowledge and skills of millions of students and families. Twelve tax preferences are outlined in the IRS publication, Tax Benefits for Education, including four different tax preferences for educational saving. Three of these preferences—Coverdell Education Savings Accounts, Qualified Tuition Programs, and U.S. education savings bonds— differ across more than a dozen dimensions, including the tax penalty that occurs when account balances are not used for qualified higher education expenses, who may be an eligible beneficiary, annual contribution limits, and other features. Attempting to learn about, compare, and choose from among these tax-preferred higher education savings options may require substantial knowledge and skill on the part of parents with young dependents beyond that required of savings and investment decisions in general. Among the tax preferences we reviewed, three help students meet current costs—the Hope credit, Lifetime Learning credit, and the tuition deduction. These tax preferences also differ across many dimensions. Though similar in purpose, the three preferences have different eligibility criteria, benefit levels, and income-related phase-outs. For tax filers to obtain the maximum benefit from these preferences, they must first ascertain which preference they are eligible to use, and then correctly calculate which preference minimizes their tax liability by making separate calculations between the Hope and Lifetime Learning credits. If filers are within the phase-out range, they must calculate whether the tuition deduction is preferable to either credit. Tax filers with more than one student in postsecondary education may be eligible to claim multiple preferences, and may need to test different combinations of benefits to optimize tax savings. Additional demands on the skill and knowledge of students and families may result from the fact that higher education tax preferences do not all use the same definition of qualified higher education expenses. What tax filers are allowed to claim as a qualified higher education expense varies, for example, between tax-exempt savings vehicles and tax credits. For example, while Coverdell Education Savings Accounts and section 529 Qualified Tuition Programs permit tax filers to include tuition, fees, books, supplies, and equipment required for enrollment as part of their qualified educational expenses, higher education tax credits permit only tuition and fees required for enrollment to be counted as qualified higher education expenses. These dissimilar definitions require that tax filers keep track of expenses separately, applying some expenses to some tax preferences, but not others, and the Joint Committee on Taxation has suggested that they may increase the likelihood of inadvertent errors and may also increase taxpayer frustration. In addition to learning about, comparing, and selecting tax preferences, filers who wish to make optimal use of multiple tax preferences must understand how the use of one tax preference affects the use of others. The use of multiple education-related tax preferences is coordinated through rules that prohibit the application of the same qualified higher education expenses for the same student to more than one education-related tax preference, sometimes referred to as “anti-double-dipping rules.” These rules are important because they prevent tax filers from underreporting their tax liability. Nonetheless, anti-double-dipping rules are potentially difficult for tax filers to understand and apply, and misunderstanding them may have consequences for a filer’s tax liability. Consider, for example, how the use of college savings programs and the tuition deduction is affected by these rules. To calculate whether a distribution from a college savings program is taxable, a tax filer must determine if the total distributions for the tax year are more or less than the total qualified educational expenses reduced by any tax-free educational assistance, i.e., their adjusted qualified education expenses (AQEE). After subtracting tax-free assistance from qualified educational expenses to arrive at the AQEE, tax filers multiply total distributed earnings by the fraction (AQEE / total amount distributed during the year). If parents of a dependent student paid $6,500 in qualified education expenses from a $3,000 tax-free scholarship and a $3,600 distribution from a tuition savings program, they would have $3,500 in AQEE. If $1,200 of the distribution consisted of earnings, then $1,200 x ($3,500 AQEE / $3,600 distribution) would result in $1,167 of the earnings being tax-free, while $33 would be taxable. However, if the same tax filer had also claimed a tuition deduction, anti-double-dipping rules would require the tax filer to subtract the expenses taken into account in figuring the tuition deduction from AQEE. If $2,000 in expenses had been used toward the tuition deduction, then the taxable distribution from the section 529 savings program would rise to $700. For families such as these, anti-double-dipping rules increase the computational complexity they face and may result in unanticipated tax liabilities associated with the use of section 529 savings programs. Because the use of federal higher education tax preferences may affect a student’s eligibility for title IV federal student assistance—and the receipt of title IV federal student assistance may affect a student’s ability to use federal higher education tax preferences—many students and families must develop knowledge and skill sufficient to understand the relationship between the two. For example, the Internal Revenue Code requires tax filers to reduce the qualified higher education expenses they apply toward higher education tax credits by the amount of nontaxable aid they receive, including federal aid such as a Pell Grant. As a result, receiving a Pell Grant has the potential to reduce the amount of Hope or Lifetime Learning tax credit for which a filer is eligible. More generally, tax filers must take care to reduce their qualified higher education expenses by the amount of all nontaxable assistance that they receive—federal and nonfederal— applying only adjusted qualified higher education expenses toward credits, deductions, and distributions from tax-exempt savings vehicles. While some federal higher education tax preferences, such as tax credits, have no effect on one’s eligibility for title IV federal student assistance, others do: like other family savings, assets held in tax-exempt savings vehicles, such as a Coverdell Education Savings Account or a section 529 savings account, are included in the calculation of the expected family contribution. In those instances where students are on the margin of eligibility to participate in need-based title IV federal aid programs, using these accounts may reduce the aid for which a student is eligible. The federal financial aid methodology in place prior to January 2004 treated assets held in different savings vehicles in widely varying ways. According to one set of calculations, each dollar of funds held in a 529 savings program resulted in a reduction of 15 cents in need-based aid, while each dollar of funds held in a Coverdell Educational Savings Account resulted in a $1.22 reduction in need-based aid. For families close to the income limit for eligibility for need-based aid, a $1,000 pretax investment in a Coverdell Educational Savings Account yielded a simulated final return (net of income taxation and foregone student aid) of -$1,194, leaving the family worse off than if they had not saved, or if they had saved using a regular savings account (+$490) or a traditional individual retirement account (+$844). In response to recommendations contained in our 2002 report on student aid, the Department of Education modified its guidance concerning federal financial aid methodology, announcing that Coverdell assets would be treated as assets of the parent, rather than the student— and, therefore, result in the same reduction in need-based aid as 529 savings program assets. Nonetheless, families that save in prepaid tuition programs remain subject to a dollar-for-dollar reduction in federal aid for each dollar distributed by the program. Little is known about the effectiveness of federal grant and loan programs and education-related tax preferences in promoting attendance, choice, and persistence. Many federal aid programs and tax preferences have not been studied, and for those that have been studied, important aspects of their effectiveness remain unexamined. When research exists, it reaches varying conclusions about the effects of federal programs and tax preferences. Some studies identify no measurable effects on college attendance and persistence, while others find positive effects. (A bibliography listing the studies we reviewed is included at the end of this report.) Data and methodological challenges limit the certainty with which the effects of title IV programs and tax preferences, especially the effects of the latter, can be identified and result in widespread gaps in the knowledge of their effectiveness. In 2002 we recommended that Education sponsor research into key aspects of effectiveness of title IV programs and that Education and the Department of the Treasury collaborate on such research into the relative effectiveness of title IV programs and tax preferences. Since our prior report, little has been done to implement these recommendations, although Education is the process of establishing a postsecondary research center. We found no research on any aspect of effectiveness for several major title IV federal postsecondary programs and tax preferences, including the Federal Work-Study program, the tuition deduction, tax-exempt savings programs, and others. For other federal programs, no research exists on important aspects of program effectiveness. For example, no research has examined the effects of federal postsecondary education tax credits on students’ persistence in their studies or on the type of postsecondary institution they choose to attend. When research on the effectiveness of federal assistance does exist, it reaches varying findings about title IV student aid and tax preferences. Some studies find that title IV programs increase the rates of college attendance and persistence, while others have identified no positive effects. Research on Pell Grants shows that they generally have little or no impact on attendance, with the exception of one study that found Pell Grants to have increased attendance for students from 22 to 35 years of age. The study attributed the program’s impact to the fact that older students generally attend less-expensive institutions where Pell Grants represent a larger share of the cost of college than the same size grants provided to students in general. The study also suggests that the limited impact of Pell Grants on attendance in general may be due to the fact that institutional aid awards may decrease at the same time as Pell Grant awards increase, creating a substitution effect that could diminish the impact of Pell Grants on attendance. According to the study, this occurs less often for older students because they tend to go to institutions that have less institutional aid for which Pell Grant awards might substitute. Some research has also found that Pell Grants, like other grant programs, appear to increase students’ persistence toward completing their studies. Student loans have been found to modestly increase college attendance, persistence, and choice, but there are various limitations to consider. Of the three studies examining the effect of borrowing on college attendance, only one focuses on lower-income students. The study estimates that a $1,000 increase (in 1977 dollars) resulted in a 4.3 percentage point increase in college enrollment among dependent students with family incomes below $15,000. However, given long-term changes in lending markets, returns to schooling, and other conditions, students’ behavioral responses to equivalent changes in loan amounts may be different today from what they were in 1977. Findings about the impact of loans on persistence and choice are each based on only one study, and focus only on middle-income students. We found one study concerning how the Hope and Lifetime Learning tax credits affect college attendance. The study found the credits to have no effect on college attendance. This may be because the students who receive these credits are likely to attend college anyway. The author acknowledges several limitations of the study. For example, the study uses income categories—as opposed to actual income—thereby introducing measurement error and attenuating the estimated effects of the credits on attendance. We also note that the study measured eligibility for the credits, rather than the receipt of tax credits. Measuring eligibility rather than the receipt of credits tends to underestimate the effect of credits on attendance because many tax filers who appear to be eligible for the credits do not claim them. This study did not examine whether federal student tax credits affect persistence or choice. In addition to the research into the federal tax, grant, and loan programs described above, a large body of research estimates the effects of both tuition changes and non-title IV financial aid programs on postsecondary attendance. These studies all found either an inverse relationship between the cost of tuition and level of enrollment or that financial assistance increased enrollment. One survey of this work concludes that a $1,000 reduction in net costs (in 2001 dollars) would result in a 3 to 6 percent increase in college enrollment rates. Federal Pell Grants and postsecondary tax credits do not show similar effects in the studies we examined. Substitution effects caused by offsetting reductions in nonfederal aid may diminish the enrollment effect of Pell awards. Also, the impact of tax credits on enrollment may be limited by the fact that tax filers receive higher education tax credits the year following tuition outlays. Program design and information may also account for some of these differences: tuition information and many nonfederal aid benefits are known when a person is choosing whether or not to attend college; however, students may not be aware of tax credits and Pell Grants or their effects on price until after they have already decided to go to college. While federal grants, student loans, and tax credits were created to result in beneficial consequences, such as increasing college attendance, they have also been found to result in the raising of tuition by institutions in some circumstances. One potential explanation is that institutions raise tuition because federal aid increases the amount students are able to pay. Alternatively, federal aid may increase the demand for education, and with no offsetting factors, this drives the price of tuition up. Gaps in the research-based evidence of federal postsecondary program effectiveness may be due, in part, to data and methodological challenges that have proven difficult to overcome. The relative newness of most of the tax preferences also presents challenges because relevant data are just now becoming available. Additionally, to analyze the tax programs, actual tax return data are preferred to indirect or processed data, but researchers are often limited to publicly available data containing self-reported information on income because of tax data confidentiality protections. Methodological challenges add to the difficulty of estimating the effects of these programs. In general, researchers can reliably identify the behavioral effects of a program when one factor changes while all others remain unchanged. For example, if no other factors change, a researcher could identify the impact of postsecondary tax credits on enrollment by comparing enrollment rates before and after the tax credits are enacted. Typically, however, many factors change simultaneously, either offsetting or enhancing the effect of the policy intervention being studied. For example, tuition rates may rise at the same time that postsecondary tax credits are introduced, or other sources of postsecondary assistance—such as federal, state, or institutional grants—may decrease. These changes undermine researchers’ ability to reliably isolate the behavioral effects of the policy under study. While researchers in some fields address this problem through the use of experiments, few opportunities exist for experimentation in the study of postsecondary education finance. Alternatively, researchers may address this problem through the use of quasi-experimental research designs, which attempt to approximate the random assignment of participants to treatment and control groups by matching participants to nonparticipants having similar characteristics. In practice, however, data limitations often make this difficult to implement. To isolate the impact of tax credits on college attendance, for example, researchers may need to compare credit recipients with nonrecipients who are similar in a range of ways—including academic preparation, family income and wealth. National surveys often do not contain complete data on all of these necessary factors both for those who attend and do not attend college. In 2002, we recommended that Education sponsor research into key aspects of effectiveness of title IV programs, and that Education and the Department of the Treasury collaborate on such research into the relative effectiveness of title IV programs and tax preferences. In order to provide Congress with information about the effectiveness of title IV programs, we recommended in 2002 that Education sponsor research on the impact of title IV programs on postsecondary attendance, choice, completion, and costs. To provide information about the relative effectiveness of Education’s direct expenditure programs and Treasury’s postsecondary tax provisions, we recommended that the Secretaries of Education and Treasury collaborate in studying the combined effects of tax preferences and title IV aid. Few steps have been taken to implement these recommendations. However, Education is in the process of establishing a postsecondary research center that will, among other things, examine the impact of title IV programs. As we noted in our 2002 report, research into the effectiveness of different forms of postsecondary education assistance is important. Without such information federal policymakers cannot make fact-based decisions about how to build on successful programs and make necessary changes to improve less effective programs. As we stress in our recent report 21st Century Challenges: Reexamining the Base of the Federal Government, the budget deficit and other major fiscal challenges facing the nation necessitate rethinking the base of existing federal spending and tax programs, policies, and activities by reviewing their results and testing their continued relevance and relative priority for a changing society. In our January 2004 report on OMB’s Program Assessment Rating Tool (PART), we recommended that OMB target PART assessments based on such factors as the relative priorities, costs, and risks associated with related clusters of programs and activities and that OMB select related or similar programs for review in the same year to facilitate comparisons and trade-offs. Furthermore, in our June 14, 2005 testimony before the Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Federal Financial Management, Government Information, and International Security, we reported that it is often critical to understand how programs fit with a portfolio of tools and strategies in order to capture whether programs complement and support related programs, are duplicative or redundant, or work at cross purposes to other initiatives. The different tax preferences and title IV programs in place to help students and families finance postsecondary education are a good example of the sort of related clusters of programs and activities to which we were referring. Congress has adopted a range of tools to help students and families pay for postsecondary education, including grants, loans, and tax preferences. Many title IV financial aid programs have a long history, while most of the tax preferences do not. The addition of tax preferences to the title IV grant and loan programs has increased the number of options and given students and families new choices about how to combine saving, borrowing, and current income to meet the costs of postsecondary education. Postsecondary tax preferences are widely thought to present challenges of complexity to students and families. As we have shown, tax filers appear to have some difficulty in making fully effective use of some postsecondary tax preferences now in the tax code. Also, although millions of tax filers are receiving billions of dollars in assistance with postsecondary costs through both title IV programs and tax preferences, little is known about the effectiveness of any of these forms of assistance in part because of data and methodological issues. As we recommended in our 2002 report on federal financial aid, it is important that information about the effectiveness of both tax preferences and title IV federal grant and loan programs be developed so that decision makers in Congress and in the executive branch can make efficient use of limited federal resources and reexamine, if necessary, the tools used to help students and families pay for postsecondary education. We provided a draft of this report to the Internal Revenue Service, the Department of the Treasury, and the Department of Education for review and comment. The Internal Revenue Service provided technical comments, which we incorporated. The Department of the Treasury did not provide comments on our report. In its written comments, Education disagreed with our conclusion on the extent that title IV programs have been studied. Education also said that we did not properly acknowledge the role that its National Postsecondary Student Aid Study (NPSAS) played in our analysis and that the report did not cite many Departmental publications prepared on the basis of NPSAS and other Departmental data collections, such as Persistence and Attainment of Beginning Students with Pell Grants. In our report, we describe NPSAS as a comprehensive study examining how students and their families pay for postsecondary education and note that we relied upon NPSAS data to conduct our analysis. Further, we explain in our report that our findings about the effectiveness of federal postsecondary assistance are based upon studies that meet professional standards of econometric analysis and contain acceptably identified statistical estimates of program effects. We do not include publications that fail to meet these standards. While the data collections cited by the Department provide useful descriptive information concerning title IV programs, they do not provide data sufficient to determine key program effects. In particular, because these data collections do not contain information about those who do not attend postsecondary institutions, they are of limited use in establishing the effectiveness of title IV programs, especially with respect to postsecondary attendance—a challenge we note in our report. Consequently, publications based upon these data share this limitation. With respect to the study specifically cited by the Department—Persistence and Attainment of Beginning Students with Pell Grants—it does not contain acceptably identified estimates of Pell Grant effects on persistence. In particular, the study does not implement a design and include variables that can isolate the effect of Pell Grant receipt on persistence from other factors that are associated both with persistence and with Pell Grant receipt, including academic preparation, changes in family income, and the net cost of education. Thus the study’s estimate of the effect of Pell Grants on persistence may reflect not only the influence of the Pell Grant, but also the influence of these other factors. Consequently, its results cannot be used to reliably assess the impact of Pell Grant receipt on persistence. Although Education stated that our report presented an incomplete and inaccurate assessment of its research, it nonetheless agreed that more research should be done and that it is “committed to continuing to increase its research associated with the effectiveness of the programs.” The Department expressed a similar commitment in response to our September 2002 report which found that Education had undertaken little work identifying the impact of its grant and loan programs and recommended that the Department sponsor research on the impact of title IV programs on postsecondary education attendance and choice, completion, and costs. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to The Commissioner of Internal Revenue, The Secretary of Education, The Secretary of the Treasury, and other interested parties. This report is available at no charge on GAO’s web site at http://www.gao.gov. If you or any of your staff have any questions, please contact Michael Brostek at (202) 512-9110 or Cornelia Ashby at (202) 512-7215. You may also reach us by e-mail at [email protected] and [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report were David Lewis, Assistant Director, Jeff Appel, Assistant Director, Eric Mader, Thomas Weko, John Mingus, Cynthia Decker, Jeffrey Weinstein, and Katherine France. Our review focused on answering the following three questions: (1) How does title IV grant and loan assistance compare with that provided through the tax code? (2) To what extent are tax filers effectively using the opportunities presented by postsecondary tax preferences? (3) What is known about the effectiveness of federal assistance in promoting college attendance, providing students with a wider range of choices among postsecondary institutions, or encouraging students to persist in their studies? To compare title IV programs and tax preferences, we reviewed articles, studies, and reports on federal assistance for postsecondary education published by the Joint Committee on Taxation, the Internal Revenue Service (IRS), the Department of Education’s National Center for Education Statistics and Office of Federal Student Aid, and other sources. Programs or tax preferences that served more than 500,000 participants were judged to be, for the purpose of our review, major. To obtain information on participant numbers and other comparative information, we used (1) fiscal year 2004 information from the President’s fiscal year 2006 budget request, (2) IRS’s 2002 Statistics of Income (SOI) data set including IRS Form 1098-T information for all tax filers in the 2002 SOI sample, (3) 2003-2004 school year data from the National Postsecondary Student Aid Study (NPSAS), (4) data as of December 31, 2004, on the number of accounts and amounts invested in section 529 Qualified Tuition Programs from the College Savings Plans Network, and (5) tax year 2002 data on the estimated number of contributions to Coverdell Education Savings Accounts from IRS. We also reviewed studies conducted by Congressional Research Service, the Congressional Budget Office, GAO, the Department of the Treasury, the Urban Institute, and the College Board. We also interviewed individuals from the Congressional Research Service, Education, IRS, Treasury, and universities. The 2002 SOI data and 2003-2004 NPSAS data were the most recent data available. The SOI individual tax return file is a stratified probability sample of income tax returns filed with IRS. The SOI sample of 175,000 returns represented the approximately 130 million tax returns filed for 2002. NPSAS is a comprehensive study that examines how students and their families pay for postsecondary education. It includes nationally representative samples of 79,852 undergraduates, 9,611 graduate students, and 1,283 first-professional students enrolled during the 2003-2004 academic year. The NPSAS data are based on student interviews and administrative records, and NPSAS includes survey results from both students who received financial aid and those who did not. To assess the reliability of the SOI and NPSAS sample data, we reviewed existing information about the samples and performed electronic testing of the required data elements to detect obvious problems in accuracy and completeness. We determined that SOI and NPSAS data, as well as other data used to provide certain specific pieces of information, were sufficiently reliable for this report. Because estimates from the SOI and NPSAS data are based on samples, they are subject to sampling errors. These sampling errors measure the extent to which the point estimates may vary from the actual values in the population of tax filers. Each of our estimates is surrounded by a 95 percent confidence interval: an interval that 95 times out of 100 will contain the true population value. The upper and lower bounds of the 95 percent confidence intervals for each estimate are presented in the tables in appendix II. To examine the extent to which tax filers are effectively using postsecondary education tax preferences, we used much of the same information we obtained for the description and comparison of the programs and tax preferences. In addition we estimated the number of tax filers who were eligible for an education tax credit or tuition and fees deduction but either did not claim one at all or appeared to make a less- than-optimal choice among these tax preferences and the amounts of tax benefits lost as a result. To do this analysis we used IRS’s SOI sample of individual tax returns for tax year 2002 and all Form 1098-T information returns for tax filers in the sample. Postsecondary institutions participating in Education’s student aid programs are required to issue Form 1098-Ts to all enrolled students. Form 1098-Ts include the student’s name, address, and social security number, and the school’s taxpayer identification number (TIN). Form 1098-Ts also indicate if the student was a graduate student and if he or she was enrolled at least half-time. Postsecondary institutions had the option of providing information concerning students’ educational expenses, scholarships, and grants but were not required to do so. By combining information on the Form 1098-Ts with information on the tax return, we were able to identify the postsecondary student population in the SOI sample and the choices that tax filers made concerning education-related tax preferences. To conduct the analysis, we had to exclude two types of tax returns from consideration. Because a person cannot claim the tuition deduction or the Hope or Lifetime Learning credits if he or she is claimed as a dependent on someone else's tax return, we excluded dependent tax returns in the SOI sample from our analysis. We also excluded the tax returns of tax filers that received a Form 1098-T with no information concerning students’ educational expenses because we could not analyze the tax returns without these data. This included the tax returns of individuals who received an education tax credit or tuition deduction but did not receive a Form 1098-T. These limitations excluded 87 percent of the returns in the sample. We considered different explanations for why those tax filers with education expenses did not claim an education tax credit or tuition deduction. For example, we examined whether tax filers had (1) income that exceeded the program thresholds for tax year 2002, (2) no taxable income, (3) no tax liability after claiming other tax credits, or (4) no net educational expenses after accounting for scholarships and grants as reported on the Form 1098-T. We also examined whether tax filers were married filing separately or filed a Form 1040EZ because this would prevent tax filers from being able to claim the education tax credits or tuition deduction. We calculated tax filers’ optimal choice among the Hope and Lifetime Learning credits, and the tuition deduction on the basis of program eligibility criteria for tax year 2002. Tax filers are limited to claiming either a tuition deduction or an education tax credit for the same student. Eligibility is restricted by modified adjusted gross income and, in the case of the Hope tax credit, whether or not students are enrolled at least half- time. We shared our methodology for this analysis with tax policy researchers outside of GAO and incorporated their comments into our analysis. To identify available academic research on the effectiveness of major federal financial aid programs, we reviewed studies that examined whether the programs or tax preferences affect college attendance, persistence, and choice. We looked for these measures because they have been the focus of congressional concern as expressed in committee reports, statutorily established study commissions, and requests for our work from Congress. We examined studies we found through searches in EconLit, Digital Dissertations from ProQuest, and the National Bureau of Economic Research web site. These online sources are nationally recognized repositories of research results. In addition, we also examined relevant studies cited in studies found from our searches. Some of these studies were excluded from further assessment because they did not undertake original data analysis that could identify the effectiveness of federal financial aid programs. We assessed studies that provided an original empirical analysis according to professional standards of econometric analysis for their methodological rigor. The results of the studies that we judged to contain acceptably identified statistical estimates formed the basis for our findings about the availability of information concerning the relative effectiveness of major federal financial aid programs. We conducted our review from May 2004 through June 2005 in accordance with generally accepted government auditing standards. We used two data sets in this review: Education’s 2003-2004 National Postsecondary Student Aid Study and the Internal Revenue Service’s 2002 Statistics of Income. Estimates from both data sets are subject to sampling errors and the estimates we report are surrounded by a 95 percent confidence interval. The following tables provide the lower and upper bounds of the 95 percent confidence interval for all estimate figures in the tables in this report. For figures drawn from these data, we provide both point estimates and confidence intervals. We analyzed the following postsecondary-education-related tax preferences in detail in this review. Lifetime Learning Credit: Income-based tax credit claimed by tax filer on behalf of students enrolled in one or more postsecondary education courses. Hope Credit: Income-based tax credit claimed by tax filer on behalf of students enrolled at least half-time in an eligible program of study and who are in their first 2 years of postsecondary education. Student Loan Interest Deduction: Income-based tax deduction claimed by tax filer on behalf of students who took out qualified student loans while enrolled at least half time. Tuition and Fees Deduction: Income-based tax deduction claimed by tax filer on behalf of students who are enrolled in one or more postsecondary education course and have either a high school diploma or a General Educational Development (GED) credential. Section 529 Qualified Tuition Programs—College Savings Programs and Prepaid Tuition Programs: Non-income-based programs that provide favorable tax treatment to investments and distributions used to pay the expenses of future or current postsecondary students. Coverdell Education Savings Accounts: Income-based savings program providing favorable tax treatment to investments and distributions used to pay the expenses of future or current elementary, secondary, or postsecondary students. The following postsecondary-education-related tax preferences were not included in this review. Scholarships, Fellowships, Grants, and Tuition Reductions Income Exclusion: Scholarships and fellowships paid directly to degree-candidate students or to their educational institutions for tuition and fees are not taxed as income. However, scholarships and fellowships covering room and board or transportation or paid in return for services, such as teaching, are taxable. Also, tuition reductions, for example discounts given to employees of an educational institution or their children, are not counted as income for tax purposes. Employer-Provided Education Benefits Exclusion: Financial assistance provided by employers to employees up to $5,250 in 2004 to pay for employee educational expenses is not counted as income for tax purposes. Only funds used to pay for tuition, fees, books, equipment, and similar expenses qualify. Funds from an employer and used to pay for meals, lodging, or transportation count as income for tax purposes. Student Loan Forgiveness Exclusion: Student loan repayment assistance or cancellation provided in exchange for working for a period of time in certain professions for any of a broad class of employers is not treated is taxable income. Education Savings Bonds: Interest earned on U.S. savings bonds is not taxed if the bond holder is paying postsecondary education tuition and fees or making contributions to a 529 qualified tuition program or a Coverdell education savings account. The exclusion is available to tax filers with modified adjusted gross incomes below $74,850 ($119,750 if married filing jointly or qualified widow(er)). Business Expense Deduction of Work-Related Education: Tax filers may deduct the cost of work-related education if the education is required by their employer or the law to maintain the tax filer’s present salary, status, or job and maintains or improves skills needed in the tax filer’s present work. Education to meet the minimum educational requirements of the tax filer’s present trade or business or education towards a new trade or business does not qualify. The tax filer must itemize deductions on form 1040 Schedule A, C, or F. The amount of the deduction is the total of work- related education expenses plus other job and certain miscellaneous expenses that is in excess of 2 percent of adjusted gross income. Uniform Transfers to Minors: Money paid directly to an educational institution for another person’s tuition are not subject to gift taxes. Early Withdrawals From Individual Retirement Accounts: The 10 percent additional tax that applies to withdrawal of funds from an Individual Retirement Account does not apply if the funds are used to pay for the postsecondary education expenses of the account holder or his or her dependent. Parental Personal Exemption for Dependent Students: The tax code definition of “dependent” for tax filing purposes involves 5 tests, including whether the dependent is (1) a member of your household or related to you, (2) a U.S. citizen or resident, (3) filing a joint tax return, (4) earning less than $3,100, and (5) receiving more than half of their support from the taxpayer claiming the dependent. In 2004, someone over age 18, earning more than $3,100, and not living with the tax filer throughout the year would likely not qualify as a dependent. 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Vol. 43, No. 4 (2002): 1249-1287. | Federal assistance helps students and families pay for postsecondary education through several policy tools--grant and loan programs authorized by title IV of the Higher Education Act of 1965 and more recently enacted tax preferences. In fiscal year 2004, about $14 billion in grants and $56 billion in loans were made under title IV while estimated outlay equivalents for postsecondary tax preferences amounted to $10 billion. In light of the relative newness and financial significance of tax preferences, this report examines (1) how title IV assistance compares to that provided through the tax code, (2) the extent to which tax filers effectively use postsecondary tax preferences, and (3) what is known about the effectiveness of federal assistance. Title IV student aid and tax preferences provide assistance to a wide range of students and families in different ways. While both help students meet current expenses, tax preferences also assist students and families with saving for and repaying postsecondary costs. While both serve students and families with a range of incomes, some forms of title IV aid--grant aid, in particular--provide assistance to those whose incomes are lower, on average, than is the case with tax preferences. While both require students and families to fill out forms, tax preferences require more responsibility on the part of students and families because they must identify applicable tax preferences, understand complex rules concerning their use, and correctly calculate and claim credits or deductions. While the tax preferences are a newer policy tool, the number of tax filers using them has grown quickly, surpassing the number of students aided under title IV in 2002. Some tax filers do not appear to make optimal education-related tax decisions. For example, among the limited number of tax returns available for our analysis, 27 percent of eligible tax filers did not claim either the tuition deduction or a tax credit. In so doing, these tax filers failed to reduce their tax liability by $169, on average, and 10 percent of these filers could have reduced their tax liability by over $500. One explanation for these taxpayers' choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use. Little is known about the effectiveness of title IV aid or tax preferences in promoting, for example, postsecondary attendance or choice, in part because of research data and methodological challenges. As a result, policymakers do not have information that would allow them to make the most efficient use of limited federal resources to help students and families. |
The National Science Foundation conducts scientific research in the polar regions of Antarctica and Greenland and funds and manages the U.S. Antarctic Program. This program sends nearly 3,000 scientists and support personnel to Antarctica each year to support scientific research in areas such as astrophysics, atmospheric chemistry, biology, earth sciences, ocean and climate systems, and glaciology. The National Science Foundation also chairs an interagency committee to coordinate the scientific research efforts of all federal agencies in the Arctic region, including Greenland. The 109th Airlift Wing is the main provider of air logistic support for National Science Foundation activities in Antarctica. The unit also supports the activities of the National Science Foundation and other agencies in Greenland. Members of the 109th Airlift Wing train on and operate unique LC-130 ski-equipped aircraft that take off and land on snow and ice (see fig. 1). The unit operates 10 LC-130 aircraft. The 109th Airlift Wing supports U.S. Antarctic Program mission requirements from mid-October to the end of February each year. It employs 220 full-time Active Guard and Reserve members whose principal task is to support this program. It receives additional support from “traditional” guardsmen, other Active Guard and Reserve members, and military technicians of the 109th Airlift Wing, as well as members from other military units. Operations are conducted from McMurdo Station, the permanent logistics station for U.S. operations in Antarctica. The 109th Airlift Wing schedules between 450 and 500 flights in Antarctica for the 5-month operational season to meet National Science Foundation requirements. According to the 109th Airlift Wing, personnel typically deploy for a period of 1 to 13 weeks, which includes up to 1 week of travel from New York to Antarctica. These deployments are conducted on a rotational basis. The 109th Airlift Wing maintains a presence of approximately 120 personnel (50 operational, 61 logistic, and 9 support) at McMurdo Station from October to the end of February. In Greenland, the 109th Airlift Wing performs training missions for unit personnel who will deploy to Antarctica. The unit also performs scientific support missions for the National Science Foundation as well as for the National Aeronautics and Space Administration and European research programs. Unit operations in Greenland run from mid-March to September each year and are conducted from staging locations at Thule Air Base and Kangerlussuaq. Missions are flown to all parts of the Greenland Ice Cap, northern Canadian locations, and Arctic Ocean camps. The 109th conducts 10 to 12 1-week deployments to Greenland. Within OSD, the Under Secretary of Defense (Personnel and Readiness) is responsible for DOD personnel policy, including oversight of reserve affairs and military personnel pay and benefits. The Under Secretary of Defense (Personnel and Readiness) leads the Unified Legislation and Budgeting process, which was established in 1994 to develop and review personnel compensation proposals. In addition, the Office of the Under Secretary of Defense (Personnel and Readiness) is conducting the congressionally mandated review of special and incentive pays for reservists performing duty in the polar regions. Hardship duty pay compensates military personnel on duty for more than 30 consecutive days in harsh or difficult living conditions. The Secretary of Defense has the authority to establish implementing regulations for such pay, including the designation of hardship duty locations and rates. Within OSD, the Assistant Secretary of Defense (Force Management Policy) tasked a working group in 1998 to develop hardship duty pay policy. The working group determined that (1) uniformed members who perform duty in designated hardship locations for more than 30 consecutive days are eligible for hardship duty pay and (2) this pay is not intended to compensate for difficult working conditions. According to DOD, personnel assigned to an area for a short period do not endure the same range of physical hardships as those in the area on a long-term basis. According to an OSD official, the working group linked the 30-day hardship duty threshold to family separation allowance, which compensates members who are away from their families for more than 30 consecutive days. We found no basis to disagree with the criteria DOD has established for hardship duty pay. OSD, in its appeal submitted in response to the National Defense Authorization Act for Fiscal Year 2003, opposed the legislation creating an exception to the 30-day hardship duty threshold for missions to the polar regions on the grounds that it “unnecessarily circumvents a process that has proven to be a fair and equitable means of setting hardship duty pay location rates worldwide.” The Assistant Secretary of Defense (Force Management Policy) regularly reviews and determines hardship duty locations and rates. In certain instances, the Assistant Secretary of Defense (Force Management Policy) automatically designates hardship duty locations. All installations located on land areas or an ice shelf above 66 degrees 33 minutes north latitude (Arctic region) or below 60 degrees south latitude (Antarctica) are designated as hardship duty locations. For all other locations, unified commanders with regional responsibilities submit a completed Hardship Duty Location Assessment Questionnaire to the Assistant Secretary of Defense (Force Management Policy), who reviews these requests twice a year. Monthly pay rates for hardship duty are $50, $100, and $150 and are based on the severity of living conditions. Living conditions are placed into three categories: (1) physical environment, which includes factors such as climate and physical and social isolation; (2) living conditions, including sanitation, disease, medical facilities, housing, food, and recreational and community facilities; and (3) personal security, including political violence, harassment, and crime. Hardship duty performed for more than 30 consecutive days in Antarctica and Greenland qualifies at the $150 monthly rate. Allowing an exception to the 30-day hardship duty threshold for members of the 109th Airlift Wing who deploy to the polar regions would result in minimal additional costs. The National Science Foundation reimburses DOD for 109th Airlift Wing logistic support in the polar regions and would incur most of these additional costs. However, allowing this exception could set a precedent for DOD personnel performing other missions lasting 30 days or less. The costs of granting an exception for short-term missions conducted at other hardship locations are unknown. The 109th Airlift Wing estimated that granting an exception to the 30-day hardship duty threshold for unit members deployed to the polar regions would cost approximately $125,000 to $130,000 a year based on deployment trends in past years. We did not verify the cost data. In fiscal year 2002, for example, the unit had a total of 1,478 deployments to the polar regions, including 690 to Antarctica and 788 to Greenland. Unit members deployed for a total of 15,846 days, including 11,906 days in Antarctica and 3,940 days in Greenland. According to a unit official, approximately 30 unit members deployed for more than 30 consecutive days. The 109th Airlift Wing estimated that if the exception to the 30-day threshold had been in effect in fiscal year 2002, hardship duty pay costs for that year would have increased by about $127,000, including approximately $95,000 for deployments to Antarctica and approximately $32,000 for deployments to Greenland. The National Science Foundation would incur most of these increased costs. It directly reimburses DOD for 109th Airlift Wing logistic support performed in Antarctica, including personnel and training costs above and beyond the unit’s wartime task requirements. The reimbursements from the National Science Foundation include funding for the 220 full-time Active Guard and Reserve members employed for the polar mission and for all flying training hours required for these personnel to maintain their qualifications. The National Science Foundation reported that the total costs in fiscal year 2002 for the unit’s support of Antarctic missions were $22.7 million. For operations in Greenland, the 109th Airlift Wing is reimbursed by its customers, including the National Science Foundation, based on a rate structure established by DOD for each particular mission. For example, the National Science Foundation reimbursed the 109th Airlift Wing about $375,000 in fiscal year 2002 for missions in Greenland. Other military personnel performing short-term assignments in the polar regions would also benefit from an exception to the 30-day hardship duty threshold. For example, the Air Force Reserve’s 445th Airlift Wing and the 452nd Airlift Mobility Wing conduct passenger and cargo flights on C-141 wheeled aircraft between Christchurch, New Zealand, and McMurdo Station, Antarctica. An OSD official said information was not readily available on the additional estimated costs of granting the exception for these personnel. According to officials within the Office of the Under Secretary of Defense (Personnel and Readiness), allowing an exception to the 30-day hardship duty threshold would set a precedent for other short-term missions that last 30 consecutive days or less. Of the 170 hardship duty locations, 67 locations (39 percent) qualify at the maximum monthly pay rate of $150. In 2002, DOD refused a request by the Navy for an exception to the 30-day threshold for duty on Vieques Island, Puerto Rico. The Navy stated that security personnel who are deployed to the island on a 14-day rotational schedule live in “substandard conditions.” DOD, in turning down the request, stated that “members on a short-term duration tour-of-duty do not endure the range of physical hardships experienced by those who are permanently assigned.” According to an official within the Office of the Under Secretary of Defense (Personnel and Readiness), granting an exception to the 30-day threshold for other short-term missions would result in additional hardship duty pay costs, but these costs are unknown because DOD has not conducted a cost analysis. The 109th Airlift Wing justified its proposal for hazardous duty pay for military personnel performing duty in the polar regions on the basis of the extreme working conditions they encounter and their exposure to potential medical hazards. Unit officials also expressed concern about the retention of unit personnel, but they did not know what impact hazardous duty pay for polar duty would have on retention. A senior unit official said the unit submitted a proposal in 2000 to the New York Guard seeking modifications to a DOD regulation to designate polar operations as hazardous duty. Hazardous duty pay is a type of incentive pay intended to induce personnel to volunteer for duties that may be hazardous. According to the senior unit official, the New York Guard submitted the proposal to Congress. The proposal was not provided to DOD for consideration in the DOD Unified Legislation and Budgeting process, which reviews personnel compensation proposals. Although the 109th Airlift Wing’s proposal addressed hazardous duty pay, Congress developed a legislative provision in 2002 to grant an exception to the 30-day hardship duty pay threshold. The senior 109th Airlift Wing official said the unit’s justification for hazardous duty pay for polar operations could also be applied to hardship duty pay. According to information provided by the 109th Airlift Wing, military personnel performing duty in the polar regions encounter extreme working conditions and face exposure to potential medical hazards. Flight crews routinely conduct takeoffs and landings in remote areas on snow and ice. In zero visibility conditions, they must use emergency whiteout landing procedures. Maintenance personnel work in temperatures as low as minus 59 degrees Fahrenheit without the protection of hangars. Operations in these conditions expose personnel to potential medical hazards such as hypothermia, frostbite, carbon monoxide poisoning, and ultraviolet radiation exposure. In addition, the unit indicated that the dry conditions in Antarctica can lead to dehydration and fatigue. A small clinic at McMurdo station is capable of treating minor injuries, but all major injuries and surgeries must be treated in Christchurch, New Zealand. (App. I provides a more detailed description of the conditions in which deployed members operate and their exposure to potential medical hazards.) National Science Foundation officials acknowledged that the operating environment in Antarctica can be harsh and that employees from all participating agencies and organizations – not just 109th Airlift Wing personnel – face difficult working conditions. They said the National Science Foundation has adopted a variety of procedures that mitigate the hazards faced by U.S. Antarctic Program participants, including scientists, support contractor personnel, civilian federal employees, and DOD civilian and military personnel. National Science Foundation officials said operational improvements were implemented to make Antarctic flight operations safer and to mitigate the impact of the harsh environment on personnel. For example, an emergency divert airfield was established in 2002, and navigational aids and more accurate weather forecasting capabilities have been implemented and remain a high priority. While duty performed for more than 30 consecutive days in the polar regions of Antarctica and Greenland qualifies for hardship duty pay, duty in the polar regions has not been designated as a hazardous duty. Section 301 of title 37 of the United States Code designates certain duties entitled to hazardous duty pay. These duties include parachute jumps, demolition of explosives, and participation in flight deck operations on an aircraft carrier. Other hazardous duties include exposure to above-normal levels of toxic fuels or propellants, and the handling of chemical munitions. Personnel handling these materials are compensated for the potential for accidental or inadvertent exposure and not for actual detectable exposure to these materials. A 109th Airlift Wing official expressed concern over the retention of unit personnel who require additional training for polar duty. Flight crews receive training in Greenland and Antarctica on how to land on and take off from snow and ice and in zero visibility conditions. Flight crews are also required to attend arctic survival training in Greenland where they learn how to survive on an ice cap for extended periods with no heat and limited survival gear. Flight crews typically take 3 years to receive their qualification to fly ski-equipped aircraft. Maintenance personnel attend a maintenance recovery school in Greenland, which teaches basic polar survival skills to enable them to cope with the extreme conditions they confront when they repair aircraft with little support equipment. A 109th Airlift Wing official said the unit is experiencing a high turnover of Active Guard and Reserve members who directly support polar missions in aerospace maintenance (pay grades E-5 and E-7) and aircraft hydraulics (pay grades E-5 and E-7). For the entire 109th Airlift Wing, the unit has difficulty retaining “traditional” guardsmen in the following critical skills: aerospace maintenance and ground equipment, avionics, and aircraft fuels. Despite retention difficulties in some critical skills, the unit filled 98 percent of the Active Guard and Reserve positions who directly support operations in Antarctica in 2002. The retention fill rate for the entire unit was 97 percent during the same year. A unit official said it is unknown what impact hazardous duty pay for polar duty would have on retention of unit personnel. Exit surveys conducted with separating personnel show that dissatisfaction with pay is one of several reasons for leaving, but is not the primary separation factor. Between 2001-2003, 165 members left the unit. The most frequently cited separation factors were family conflict, civilian job conflict, and weekend drills (see fig. 2). The unit cannot track specific mission concerns such as deployments to the polar regions as separation factors. The exit surveys used by the 109th Airlift Wing do not indicate whether an individual’s reason for leaving is connected specifically with polar duty. A unit official stated that, based on responses for reasons for leaving, it is possible to “subjectively deduce that length of deployments and distance from home, as in polar deployments, are key factors influencing retention decisions.” The exit surveys also do not track separation factors based on personnel categories such as military technicians, Active Guard and Reserve, Active Guard and Reserve who support the U.S. Antarctic Program, and drilling reservists. Based on our discussions with the 109th Airlift Wing concerning the exit surveys, the unit has modified the exit survey to track deployments to the polar regions as a separation factor. The hardship duty pay legislation introduced in 2002 — directed at the 109th Airlift Wing — would have created an exception to (1) the 30-day hardship duty pay threshold and (2) the monthly hardship duty rate established by DOD for the polar regions. We believe that granting such an exception for hardship duty pay is not justified under current DOD policy. First, DOD intends for hardship duty pay to compensate military personnel who endure a range of hardship on a long-term basis — defined by DOD as more than 30 consecutive days. Granting this exception could set a precedent for DOD personnel performing other missions that do not meet the 30-day threshold, which could increase hardship duty pay costs. Second, under current DOD policy, hardship duty pay is intended to compensate personnel for harsh or difficult living conditions, rather than for difficult working conditions. However, the 109th Airlift Wing cited the extreme working conditions encountered by personnel deployed to the polar regions. According to the 109th Airlift Wing, unit personnel are subjected to extreme conditions and are exposed to potential medical hazards while on duty in the polar regions. These factors warrant consideration as part of DOD’s review of special and incentive pays for personnel performing duty in the polar regions. In addition, because one of the purposes of hazardous duty pay is to induce personnel to volunteer for duties that may be hazardous, we believe that retention data should also be considered as part of DOD’s review. Officials from the 109th Airlift Wing expressed concerns about current retention rates, but they did not know what impact hazardous duty pay for polar duty would have on retention. Exit surveys conducted with separating personnel show that dissatisfaction with pay was not among the most frequently cited reasons that members of the unit provided for leaving. At the time we conducted our review, the 109th Airlift Wing was not collecting retention data related to members who were deployed to the polar regions. Collecting this data would be helpful to target retention incentives to the personnel categories experiencing the highest turnover rates. According to an official of the 109th Airlift Wing, the unit has modified the exit survey it uses to track deployments to the polar regions as a separation factor. Congress has directed DOD to study special and incentive pays for reservists performing duty in the polar regions. As part of this study, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Personnel and Readiness) to assess certain factors in determining whether personnel performing polar duty should receive hazardous duty pay. These factors are the extreme working conditions that military personnel encounter while performing polar duty, the exposure of military personnel to potential medical hazards related to polar duty, and retention data for military personnel performing polar duty. In written comments on a draft of this report, DOD concurred with our recommendation on assessing certain factors to determine whether personnel performing polar duty should receive hazardous duty pay. DOD’s comments are reprinted in appendix II. DOD and the National Science Foundation also provided technical comments that we incorporated as appropriate. Our review focused on special and incentive pay for DOD personnel performing duty in the polar regions. To develop the information in this report, we interviewed DOD officials in the Office of the Assistant Secretary of Defense for Reserve Affairs, the Office of Military Compensation, and the Air National Guard. We also met with officials at the National Science Foundation. We visited Stratton Air Guard Base, where we interviewed officials from the 109th Airlift Wing, New York Air National Guard. In addition, we reviewed DOD Financial Management Regulations related to hardship duty pay and hazardous duty pay. To assess DOD’s rationale for hardship duty pay, including the 30-day threshold, we reviewed the legislative history concerning hardship duty pay, analyzed DOD policies implementing this pay, and interviewed OSD officials. To assess the potential implications, including costs, of making an exception to the 30-day threshold, we reviewed cost data from the 109th Airlift Wing and interviewed officials from OSD, the 109th Airlift Wing, and the National Science Foundation. We did not verify cost data provided by the 109th Airlift Wing. To assess the justification for hazardous duty pay for polar duty, we obtained documentation on the 109th Airlift Wing’s operational activities and the conditions unit members encounter when deployed to polar regions. We also obtained and analyzed retention data for 109th Airlift Wing personnel performing duty in the polar regions. We conducted our review from December 2002 to March 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Under Secretary of Defense (Personnel and Readiness); the Director, National Science Foundation; and the Director, Office of Management and Budget. In addition, the report will be available at no charge on GAO’s Web site at www.gao.gov. If you or your staff have any questions regarding this report, please call me at (202) 512-5140 or Brenda S. Farrell at (202) 512-3604. Major contributors to this report were Kelly Baumgartner, Thomas W. Gosling, and Timothy Wilson. The 109th Airlift Wing submitted a proposal in 2000 to the New York Guard seeking to modify the Department of Defense’s (DOD) current hazardous duty pay regulation by designating as hazardous duty (1) duty involving frequent and regular participation in flight operations in ski- equipped LC-130 aircraft conducting ski landings and takeoffs on snow in polar locations and (2) duty involving maintenance of LC-130 ski-equipped aircraft as a primary duty in polar locations. The 109th Airlift Wing justified its proposal to designate polar operations as hazardous duty on the basis of two primary factors — difficult working conditions, including cold temperatures, and exposure to potential medical hazards. According to the 109th Airlift Wing, flight crews and maintenance personnel operate and maintain LC-130 ski-equipped aircraft in difficult working conditions. Specific hazards and risks include the following: Ski takeoffs include steering with asymmetrical use of the throttles and the rudder only, since use of the nose wheel will cause aircraft damage. The aircraft is highly susceptible to sliding off ski ways in high winds, particularly at low speeds (below 60 knots), when the rudder is not effective. Ski landings are performed in extreme, remote areas of Antarctica and Greenland, hundreds of miles from any station or site; on glaciers and open snow locations in areas not surveyed and never before visited by humans; on crevasses that are hidden under snow bridges; and in katabatic winds that often make landing and taxiing on skis extremely difficult. Whiteout procedures require flight crews to perform an approach and landing in a designated area in zero visibility weather conditions. Ski approaches in bad weather include a lack of external navigation aids to orient the aircraft on approach, flying in weather conditions down to 300 feet above ground and 1 mile visibility, and flying in conditions that can induce extreme vertigo when there is no contrast between the white snow and white clouds. Many missions are flown to high altitude elevations. Each year over 250 missions are flown to the South Pole at an elevation of over 9,300 feet. Many missions are flown to camps in Antarctica and Greenland at field elevations greater than 10,000 feet and some as high as 12,000 feet. Assisted take-off rockets are routinely used for getting an aircraft airborne on a takeoff from high altitude sites. Aircraft must achieve a higher than normal ground speed to reach the proper indicated airspeed to get enough lift for takeoff due to thin air. The snow at high altitude locations is often unprepared, which creates additional drag and makes it more difficult to build up speed during the takeoff slide. Unit personnel fly missions to locations where there is no camp, no personnel, and no equipment, which creates the risk of being stranded. There is no rescue capability at these locations other than another LC-130 aircraft. Personnel are exposed to extremely cold temperatures as low as minus 59 degrees Fahrenheit. Wind chills can be as high as minus 100 degrees Fahrenheit. All fueling and cargo operations are conducted with engines running, which requires a flight engineer to operate the refueling panel outside for 30 to 40 minutes directly behind running engines. Loadmasters are also outside of the aircraft for periods of 1 to 3 hours off-loading and on-loading cargo from the snow with engines running. Cargo loading and unloading are extremely difficult, often with little or no material handling equipment. Two to three hours of manual labor are often required by the flight crews to load and unload cargo in the snow. This activity is extremely hazardous due to the extreme physical exertions required with little oxygen in the atmosphere and exhaust fumes from the aircraft engines. According to the 109th Airlift Wing, polar operations expose 109th Airlift Wing personnel to a variety of potential medical hazards. Potential medical hazards include the following: Frostbite and hypothermia — Brief exposure to polar temperatures can have a severe impact. For example, exposed flesh freezes at minus 59 degrees Fahrenheit within 1 minute, with no wind. Carbon monoxide poisoning — Aircraft maintenance and unloading activities expose flight crews over a prolonged period to potentially hazardous exhaust fumes. Continuous exposure to intense sunlight — Operations during the 5 months in Antarctica are conducted in 24-hour direct sunlight. Exposure to ultraviolet radiation is greatly increased due to the hazard of the “ozone hole” over the Antarctic continent. | The 109th Airlift Wing, New York Air National Guard, conducts supply missions for scientific research in the polar regions. Most unit members do not spend more than 30 consecutive days in the polar regions. Therefore, they are not eligible for hardship duty pay, which requires more than 30 consecutive days of duty in a designated hardship location. Congress considered legislation in 2002 to make an exception to the 30-day hardship duty pay threshold for polar duty. This legislation was not approved. In addition, the 109th Airlift Wing proposed designating polar duty as a hazardous duty. The Conference Report accompanying the National Defense Authorization Act for Fiscal Year 2003 directed GAO and DOD to conduct separate reviews of special and incentive pays for polar duty. GAO assessed DOD's rationale for hardship duty pay and the implications of making an exception to hardship duty pay. In addition, GAO assessed the 109th Airlift Wing's justification for hazardous duty pay for polar duty. Hardship duty pay is intended to compensate military personnel assigned to areas for more than 30 consecutive days where quality-of-life conditions are substantially below those in the continental United States. DOD did not support the hardship duty pay legislation on the basis that this pay was not intended to compensate stays of short duration and the legislation circumvented a DOD process designating hardship duty locations and rates. Granting an exception to the 30-day hardship duty pay threshold for 109th Airlift Wing personnel deployed to the polar regions would result in minimal costs, but this exception could set a precedent for DOD personnel performing other short-term missions and could further increase costs. Had this exception been in effect in 2001-2002, the 109th Airlift Wing estimated the costs would have totaled about $127,000. The National Science Foundation would incur most of these costs because it reimburses DOD for logistic support in the polar regions. The costs of granting an exception for short-term missions conducted by DOD personnel at other hardship locations are unknown. Based on its review of the intent of hardship duty pay and the implications of granting an exception, GAO believes that an exception to the 30-day threshold is not justified under current DOD policy. The 109th Airlift Wing justified its proposal for hazardous pay on the basis of extreme working conditions and exposure to medical hazards. For example, maintenance personnel work in temperatures as cold as minus 59 degrees Fahrenheit without the protection of hangars and are exposed to potential medical hazards such as frostbite, hypothermia, and carbon monoxide poisoning. Unit officials expressed concern about the retention of personnel who require additional training for polar operations, but they did not know what impact hazardous duty pay would have on retention. Recent data from exit surveys show that dissatisfaction with pay was not among the most frequently cited reasons for leaving. |
In July 2012, we reported on changes Interior made to its oversight of offshore oil and gas activities in the Gulf of Mexico in the aftermath of the Deepwater Horizon incident. Specifically, we reported that On October 1, 2011, Interior officially established two new bureaus, separating offshore resource management oversight activities, such as reviewing oil and gas exploration and development plans, from safety and environmental oversight activities, such as reviewing drilling permits and inspecting drilling rigs. Because the responsibilities of these new bureaus are closely interconnected, and carrying them out will depend on effective coordination, Interior developed memoranda and standard operating procedures to define roles and responsibilities and facilitate and formalize coordination. New safety and environmental requirements and policy changes designed to mitigate the risk of a well blowout or spill initially required Interior to devote additional resources and time to reviewing certain oil and gas exploration and development plans and drilling permits for oil and gas activities in the Gulf of Mexico. Specifically, these policy changes affected Interior’s (1) environmental analyses, (2) reviews of oil and gas exploration and development plans, and (3) reviews of oil and gas drilling permits. Our analysis of drilling permit approval time frames found that approval times initially increased after the new requirements went into effect, but as both Interior staff and oil and gas companies became more familiar with these requirements, the review times decreased. Interior’s inspections of offshore Gulf of Mexico oil and gas drilling rigs and production platforms from January 1, 2000, through September 30, 2011, routinely identified violations. However, Interior’s database was missing data on when violations were identified, as well as when they were corrected for about half of the violations issued. As a result, Interior did not know on a real-time basis whether or when all violations were identified and corrected, potentially allowing unsafe conditions to continue for extended periods. During this same period, Interior issued approximately $18 million in civil penalty assessments. At the time of our report, Interior had begun implementing a number of policy changes to improve both its inspection and civil penalty programs—but had not assessed how these changes would affect its ability to conduct monthly drilling rig inspections. Interior continued to face challenges following its reorganization that may affect its ability to oversee oil and gas activities in the Gulf of Mexico. Specifically, Interior’s capacity to identify and evaluate risks associated with drilling remained limited, raising questions about the effectiveness with which it allocated its oversight resources. Interior also experienced difficulties in implementing effective information technology systems, such as those that aid its reviews of oil and gas companies’ exploration and development plans. It also continued to face workforce planning challenges, including hiring, retaining, and training staff. Moreover, Interior did not have current strategic plans to guide its information technology or workforce planning efforts. Our July 2012 report resulted in 11 recommendations for specific improvements to Interior’s oversight of offshore oil and gas activities, including those intended to improve its drilling inspection program and human capital planning. Interior generally agreed with our recommendations and has committed to implementing them. Federal oil and gas resources generate billions of dollars annually in revenues that are shared among federal, state, and tribal governments; however, in several reviews over the past 5 years we found Interior may not be properly assessing and collecting these revenues. In September 2008, we reported that Interior collected lower levels of revenues for oil and gas production in the deepwater of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners in other countries, as well as in some states whose revenue collection systems were evaluated in a comprehensive industry study.significant changes in the oil and gas industry over the past several decades, we found that Interior had not systematically reexamined how the U.S. government is compensated for extraction of oil and gas in over 25 years. We recommended Interior conduct a comprehensive review of In addition, despite the federal oil and gas fiscal system using an independent panel. After Interior initially disagreed with our recommendations, we recommended that Congress consider directing the Secretary of the Interior to convene an independent panel to perform a comprehensive review of the federal oil and gas fiscal system and establish procedures to periodically evaluate the state of the fiscal system. In response to that recommendation, Interior commissioned a study that compared the U.S. government’s fiscal system with that of other resource owners. We are currently conducting work to assess how Interior plans to use the results of this study to inform decisions about its fiscal system. Furthermore, we reported, in July 2009, on numerous problems with Interior’s efforts to collect data on oil and gas produced on federal lands and waters, including missing data, errors in company-reported data on oil and gas production, and sales data that did not reflect prevailing market prices for oil and gas. As a result of its lack of consistent and reliable data on the production and sale of oil and gas from federal lands and waters, Interior could not provide reasonable assurance that it was assessing and collecting the appropriate amount of royalties on this production. We made a number of recommendations to Interior to improve controls on the accuracy and reliability of royalty data. Interior generally agreed with our recommendations and has implemented the majority of them. We also reported, in March 2010, that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands and For example, we found that neither waters was accurately measured. BLM nor MMS had consistently met their agency goals for oil and gas production verification inspections, intended to examine, among other things, whether lessees were taking steps to ensure that the amount of oil and gas produced from federal lands and waters was being accurately measured. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development. We also raised concerns over Interior’s efforts to develop software to allow inspection staff to remotely monitor gas production. Specifically, we found that BLM’s Remote Data Acquisition for Well Production program—a program designed to provide industry and government with common tools to validate production and to view production data in near real-time—had shown few results, despite 10 years of development and costs of over $1.5 million. Our March 2010 report identified 19 recommendations for specific improvements to oversight of production verification activities, including recommendations intended to strengthen BLM’s production inspection program and its ability to obtain near real-time gas production data. Interior generally agreed with our recommendations; it has already implemented many of them and continues to work on the remainder. Additionally, we reported, in October 2010, that Interior’s data likely understated the amount of natural gas produced on federal leases, because the data did not quantify the amount of gas released directly to the atmosphere (vented) or burned (flared) during the production process. This vented and flared gas represents lost royalties to the government and contributes to greenhouse gases. We recommended that Interior improve its data and address limitations in its regulations and guidance to reduce this lost gas. Interior generally agreed with our recommendations and is taking steps to implement them. In February 2011, we added Interior’s management of federal oil and gas resources to our list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. We added Interior to the list because the department: (1) did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands; (2) continued to experience problems in hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters; and (3) was engaged in a broad reorganization of both its offshore oil and gas management and revenue collection functions, leading to concerns about whether Interior could provide effective program oversight while undergoing such a broad reorganization. In the February 2013 update to our High Risk list,federal oil and gas management high-risk area to focus on revenue collection and human capital challenges because Interior had completed its reorganization. In order for GAO to remove the high-risk designation, Interior must successfully address the challenges we have identified, implement open recommendations, and meet its responsibilities to manage federal oil and gas resources in the public interest. While Interior recently began implementing a number of GAO recommendations, including those intended to improve the reliability of data necessary for determining royalties, the agency has yet to implement a number of other recommendations, including those intended to help the agency (1) provide reasonable assurance that oil and gas produced from federal leases is accurately measured and that the public is getting an appropriate share of oil and gas revenues and (2) address its long- standing human capital issues. We are currently engaged in two reviews examining the remaining two high-risk issues. First, we are conducting a follow up review of Interior’s collection of revenues from the production of oil and gas on federal lands and waters. As part of this review, we will examine Interior’s progress, if any, in (1) ensuring the government is getting a fair return for federal oil and gas resources, (2) meeting agency targets for conducting oil and gas production verification inspections, and (3) providing greater assurance that oil and gas production and royalty data are consistent and reliable. Second, we are reviewing the extent to which Interior continues to face problems hiring, training, and retaining staff, and how any remaining problems affect Interior’s ability to oversee oil and gas activities on federal lands and waters. As part of this effort, we will focus on the causes of Interior’s human capital challenges, actions taken, and Interior’s plans for measuring the effectiveness of corrective actions. In addition, while we have narrowed the focus of the high-risk area to revenue collection and human capital issues, we will, in the course of ongoing work on these issues, continue to consider Interior’s reorganization and its affect on the agency’s ability to oversee federal lands and waters. In conclusion, Interior’s management of federal oil and gas resources is in transition. Our past work has found a wide range of weaknesses in Interior’s oversight of federal oil and gas resources, ultimately resulting in its inclusion on our High Risk List in 2011. Since then, Interior has successfully implemented many recommendations and resolved one of the three concerns that led to its inclusion on the high risk list—the challenges associated with its reorganization. We remain hopeful that Interior will continue to implement the many remaining recommendations we have made, thereby providing greater assurance of effective oversight of federal oil and gas resources. Chairman Lankford, Ranking Member Speier and Members of the Subcommittee, 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. If you have any questions concerning 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. Other individuals who made key contributions include Jon Ludwigson, Assistant Director; Christine Kehr, Assistant Director; Janice Ceperich; Glenn Fischer; Cindy Gilbert; Alison O’Neill; and Barbara Timmerman. 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. | Interior issues permits for the development of new oil and gas wells on federal lands and waters; inspects wells to ensure compliance with environmental, safety, and other regulations; and collects royalties from companies that sell the oil and gas produced from those wells. In recent years, onshore and offshore federal leases produced a substantial portion of the oil and gas produced in the United States. In fiscal year 2012, Interior collected almost $12 billion in mineral revenues including those from oil and gas development, making it one of the largest nontax sources of federal government funds. Previous GAO work has raised concerns about Interior's management and oversight of federal oil and gas resources. This testimony focuses on (1) Interior's oversight of offshore oil and gas resources, (2) Interior's collection of oil and gas revenues, and (3) Interior's progress to address concerns that resulted in its inclusion on GAO's High Risk List in 2011. This statement is based on prior GAO reports issued from September 2008 through February 2013. GAO is making no new recommendations. Interior continues to act on the recommendations that GAO has made to improve the management of oil and gas resources. GAO continues to monitor Interior's implementation of these recommendations. Interior's oversight of offshore resources . In July 2012, GAO reported on changes to the Department of the Interior's oversight of offshore oil and gas activities in the Gulf of Mexico following the Deepwater Horizon incident. Specifically, GAO reported that Interior had established two new bureaus, separating resource management oversight activities from safety and environmental oversight activities. GAO also reported that new requirements and policy changes designed to mitigate risk of a well blowout or spill had initially required additional resources and increased permit approval times, but that approval times decreased as Interior staff and oil and gas companies became more familiar with the new requirements. GAO also found that Interior's inspections of offshore Gulf of Mexico drilling rigs and production platforms routinely identified violations, but that Interior's database was missing data on when violations were identified and corrected. GAO made 11 recommendations aimed at improving Interior's oversight activities. Interior generally agreed with the recommendations and plans to implement them. Interior's collection of oil and gas revenues. In September 2008, GAO reported that Interior collected lower levels of revenues 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 in other countries and some states. In July 2009, GAO reported on problems with Interior's efforts to collect data on oil and gas produced on federal lands, including missing and erroneous data. In March 2010, GAO reported that Interior was not taking needed steps to ensure that oil and gas produced from federal lands was accurately measured and was not consistently meeting its goals for oil and gas production verification inspections. GAO made numerous recommendations aimed at improving Interior's revenue collection policies, including oversight of production verification activities and controls on the accuracy and reliability of royalty data. Interior generally agreed with these recommendations and has implemented many of them. Interior's oil and gas management on GAO's high risk list . In February 2011, GAO added Interior's management of federal oil and gas resources to its list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. GAO added this high risk area because Interior (1) did not have reasonable assurance that it was collecting its share of revenues; (2) continued to experience problems hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations; and (3) was engaged in a broad agency reorganization that could adversely impact its ability to effectively manage oil and gas during the crisis following the Deepwater Horizon incident. In February 2013, after Interior completed its reorganization, GAO narrowed the oil and gas high-risk area to focus on revenue collection and human capital challenges and is currently examining these issues. While Interior has begun to implement many of GAO's recommendations, it has yet to fully implement a number of others, including recommendations intended to (1) provide reasonable assurance that oil and gas is accurately measured, and that the public is getting an appropriate share of revenues, and (2) address its long-standing human capital issues. |
Since late 1982, Congress has, for the most part, prohibited DOD from contracting for security guards at U.S. domestic installations. According to the legislative history, the prohibition was originally enacted because of concerns about the uncertain quality and reliability of private security guard services, base commanders’ potential lack of control over contractor personnel, and the right of contractor personnel to strike. Following the terrorist attacks of September 11, however, DOD directed installation commanders to ensure that all vehicles, identification cards, badges, and other forms of identification were inspected for authorized access to military installations. These increased security requirements created an increased demand for personnel to perform security-related tasks. Initially, security requirements were filled at military installations with active duty and reserve component personnel. However, as reserve personnel reached their mandatory release dates from active duty and as competing demands for both reserve and active component personnel grew, resources became constrained. DOD reported that contracting for security guard services was deemed necessary and practical to allow it to simultaneously support increased demands for military forces and to meet heightened security requirements for continental U.S. installations and facilities. Accordingly, in the Bob Stump National Defense Authorization Act for Fiscal Year 2003, Congress temporarily authorized DOD to waive the prohibition against contracting for security guard functions, thereby minimizing the department’s need to use military personnel to perform these functions. The congressional waiver authority was predicated on an expectation that without the contract guards, military personnel would be used to perform the increased security function. In addition, it was expected that contract guards would perform their jobs as well as the military personnel who had previously served in that capacity. The 2003 authorization act required that in order to use the authority, the following stipulations must be met: Recruiting and training standards for contract security guards must be comparable to standards for DOD personnel who perform security guard functions. Contract security guards must be effectively supervised, reviewed, and evaluated. Employment of contract security guards must not cause a reduction in the security of the military installation. The waiver authority was initially set to expire in December 2005, but the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 extended the authority through September 2006, provided that DOD submit a report to Congress on the contract guard program. The report, entitled “Department of Defense Installation Security Guard Requirement Assessment and Plan,” was submitted to Congress on November 22, 2005. The National Defense Authorization Act for Fiscal Year 2006 again extended the waiver authority an additional year, through September 2007. The Army, Air Force, and Navy each have employed contract security guards under the waiver authority. The Army was the first to begin acquiring guards and has used the waiver authority most extensively; as of December 2005, it had contracted for security guards at 57 installations, whereas contract guards are being used at 18 Air Force and 5 Navy installations. Several key players are involved in the Army’s contract security guard program. Army Office of the Provost Marshal General: This office directs policy for all matters relating to Army law enforcement, police intelligence, physical security, criminal investigations, provost marshal activities, and military police and provides oversight of these resources. The Office of the Provost Marshal General was the requiring agency that determined and prioritized security guard requirements at each installation and identified the number of guards needed. Installation Management Agency (IMA): Formed in 2002, IMA is responsible for centralized oversight of U.S. Army bases and for administering all aspects of the contract guard program according to the requirements set by the Provost Marshal General. IMA is responsible for developing the guard contracts’ performance work specifications, which specify what the Army expects the contractors to do, such as detailing the requirements for screening and training. Army Contracting Agency (ACA) (northern region): This was the contracting agency for the guard program. It awarded six fixed-price, award-fee contracts and has issued task orders under these contracts for guards at 57 installations. The contracting officer has designated an IMA official as the government’s primary oversight representative for the guard program. Army installations: These are the recipients of contract guards. Installation officials are responsible for ensuring that the contractor’s performance is evaluated daily and that the guards are screened and trained by reviewing contractor-supplied records. Installation personnel provide input to IMA as part of the award-fee process. U.S. Small Business Administration (SBA): SBA oversees the 8(a) Business Development Program and is responsible for issuing regulation and policy concerning the program. Although SBA has delegated contracting authority to DOD for 8(a) procurements, SBA district offices—in this case, the Alaska district office—must approve any proposed contract going to an 8(a) firm and are to be notified if 8(a) contracts are modified. Contractors: Two of the four contractors providing security guards are 8(a) Alaska Native corporation firms, both of which have subcontracted a portion of the work to security guard firms that are large businesses. ANCs were created by Congress to help settle Alaska Native land claims and to foster economic development for Alaska Natives, have been accorded special advantages under SBA’s 8(a) Business Development Program. 8(a) ANC firms are considered small disadvantaged businesses, and as long as they meet relevant size standards for the procurement and other eligibility requirements, they can be awarded contracts noncompetitively for any dollar amount. Generally, acquisitions offered to other 8(a) businesses where the contract value is more than $3 million or $5 million (for manufacturing) must be competitively awarded. The other two contractors are not ANC firms. When acquiring services, a federal agency’s first course of action is typically to develop an acquisition strategy. Ideally, this would involve examining and weighing several alternatives. Once the Army decided to use contract security guards, it began analyzing its contracting options. ACA could have chosen from among numerous contract vehicles available to acquire the guard services. It had the option of awarding a new contract or using existing interagency contracts through other federal agencies. For example, the General Services Administration (GSA) awards governmentwide contracts, including contracts for security guard services, under its Federal Supply Schedule (Schedule) program to help federal agencies make purchases in less turnaround time on a competitive basis for commonly used items or services. To motivate contractors to perform well, the Army chose to use monetary incentives called award fees. Award fees allow agencies to adjust the amount of fee paid to the contractor based on performance. We recently questioned how effectively these fees are being used at DOD because its programs have paid contractors large amounts of fees on acquisitions that are experiencing problems. We reported that DOD has little evidence to support its belief that these fees improve contractor performance and acquisition outcomes. Separately, we have reported on concerns involving the trustworthiness of contractors and subcontractors who have access to U.S. military installations. DOD officials have told us that they have not evaluated the trustworthiness of some contractors because the department’s existing antiterrorism standards do not specifically require them to do so. In response to our recommendations, DOD officials are in the process of revising the standards to verify trustworthiness of contractors and subcontractors and better control access to installations, facilities, and sensitive areas. The Army has awarded two sole-source contracts, totaling almost $495 million, to 8(a) ANC firms to acquire the bulk of its contract guards, even though contracting officials pointed out that using competed GSA Schedule contracts would have been just as fast and less costly. We found that the Army hired an inexperienced contractor to help refine the performance work statement, failed to monitor certain subcontracting limitations under 8(a) contracts, and turned again to the 8(a) sole-source contracts in a third acquisition phase despite knowing that its competed contracts for the same services, awarded in the second acquisition phase, had cost 25 percent less than the initial 8(a) sole-source contracts. An understanding of the Army’s approach for acquiring contract security guards requires getting a broad overview of the three phases of the acquisition, knowing how much the Army has spent so far to acquire guards and who the key players are, and following the chronology of contracting events. Table 1 presents the three-phased approach and shows in which phase the Army used 8(a) sole-source contracts or competitive contracts. Since the Army’s contract security guard program began in 2003, the Army has devoted almost twice as many contract dollars to sole-sourcing under the 8(a) program as it has to full and open competition. Figure 1 shows that 46 out of 57 Army installations received their contract guards through 8(a) sole-source contracts in phases one and three and that the guards for the remaining 11 installations were acquired through competed contracts. Table 2 shows how the acquisition approach began taking shape before the Army settled on its three-phased approach and who the key players were. Even though the use of the GSA Schedule was identified as a possible acquisition approach, the Army decided that the best course of action for the first acquisition phase was to award contracts to 8(a) ANC firms, believing that use of the GSA Schedule would have taken longer, would not have allowed a consolidated approach at the national level, and would have diluted the Army’s purchasing power. The Army was not able to provide us with any analysis showing how it made these determinations. We found that other federal agencies, such as the U.S. Air Force and the Department of Homeland Security’s Federal Protective Service, have used GSA Schedule contracts to obtain their security guards. According to the Air Force contracting officer, using GSA Schedule contracts was considered the more efficient, faster method to obtain the guards. The Air Force has used these contracts to obtain contract security guards at 18 bases at an annual estimated cost of $29 million. The Federal Protective Service manages and oversees 10,000 armed contract security guards that were mostly obtained under GSA’s Schedule program. SBA’s Alaska district office, in a May 2003 letter to ACA, stated that it was “marketing” a particular 8(a) ANC firm to meet the Army’s security guard requirements. According to ACA officials, this firm was already being considered by the Army. A second 8(a) ANC firm that had approached the Army was also considered. Before awarding the contracts to these companies, the contracting office asked the Defense Contract Management Agency to evaluate the firms’ capabilities. The agency rated one of the firms—the one SBA had marketed to the Army—as “high risk” for performance because it had experience manufacturing goods but no experience providing services. The risk was mitigated somewhat because of anticipated support and assistance from the company’s parent corporation, the Defense Contract Management Agency said, and because the firm had chosen to team up with a subcontractor experienced in providing security guard services. Subsequently, in a process known as “alpha contracting,” Army officials worked together with this ANC firm to finalize the contract guard performance work statement by refining specific tasks for feasibility and affordability. The resulting performance work statement was then used on all of the security guard contracts. During a second acquisition phase in September 2003, the Army awarded four competed contracts. In evaluating the contractors’ cost proposals for the second acquisition phase, the Army recognized that the same contractors involved in the first phase submitted cost proposals considerably higher than the winning proposals. But the Army turned again to these same contractors in phase three, adding 37 more installations to the 8(a) sole-source contracts. The Army took this action despite knowing that the government was paying considerably less for the phase-two competed contracts. An ACA analysis computing the cost per contract employee showed that the competitive contracts cost about 25 percent less than the 8(a) sole-source contracts. ACA officials told us that the Army returned to the ANC firms in part because doing so was an easy method of obtaining additional security guards and because they were pleased with the ANC firms’ performance. In addition, IMA officials asserted that because the phase three requirements were not finalized until within 90 days of when the contract guards were required, a competitive solicitation was not possible. In phase three, the ANC firms’ contracts were modified to expand the ceiling prices to a total value of $480 million each. When modifying the contracts, ACA did not comply with a requirement to notify SBA. In delegating procurement authority under the 8(a) program to DOD, SBA requires that DOD provide a copy of contracts, including modifications, to the SBA district office within 15 working days of the date of award or of contract modification. The Army contracting officer was unaware of this requirement and said she does not send 8(a) modifications to SBA. However, after being made aware of this requirement, the contracting officer said that contract modifications will be forwarded to the appropriate SBA office. Under the 8(a) program, businesses can subcontract up to 50 percent of the personnel costs incurred under each service contract. The two ANC firms have established agreements with their subcontractors, large security guard companies, intended to ensure that the subcontractors perform 49 percent of the work, while ANC firms retain 51 percent. As of December 2005, more than $200 million has been subcontracted under the Army’s guard contracts. The ANC firms have taken different approaches to dividing the workload with their subcontractors. One divides the workload on an installation basis, while the second firm decided to share workload by staffing the gates at each installation partially with its own employees and partially with the subcontractor’s employees. In the latter case, the guards’ uniform patches reflect the names of both companies. The Army’s contracting officer is responsible for determining whether the ANC firms are complying with the 50-percent limit on subcontracting, but this is not being done. The contracting officer told us that the contractors’ proposed approach for complying with the limitation on subcontracting is reviewed each time additional work is awarded to the ANC firms, but actual performance is not monitored to ensure compliance. We found confusion as to who is responsible for the monitoring. The contracting officer pointed to SBA; the contracting officer representative in IMA pointed to ACA. In practice, the Army is relying on the prime contractors themselves to ensure that their subcontractors stay below the 50-percent limit. The two firms told us they monitor their compliance with the required 50/50 split. The Army’s screening process is unreliable because of lack of adherence to Army policy, a time lapse of as much as 2 years from the start of interim employment until detailed nationwide background checks are completed; and a reliance on job applicants to self-report accurate information on their employment application forms. The combined effect of these weaknesses has put the Army at risk of staffing its gates with contract security guards who are not qualified for the job and in fact has resulted in applicants with criminal histories, including felons, being employed as guards. We have previously reported on, and made recommendations concerning, the inadequacy of screening measures used for contract employees with access to military installations and other sensitive areas. Army policy requires all prospective contract guards to undergo a two-part screening process—an initial screening conducted by the contractor followed by a thorough, more detailed screening conducted by the federal government. Table 3 highlights the activities required for each part of the process and who is responsible for conducting the various screening activities. IMA requires contractors to conduct local agency checks before offering interim employment to prospective employees. Training, such as firearms training and weapons qualifications, cannot begin until the local agency checks have been completed and the results are favorable. If the results are unfavorable, employment is not offered. Weaknesses in the screening process have led to risky situations, as the following examples illustrate: A contractor had permitted guards to take firearms training and start working even before their local agency checks were completed. In April 2005, the Army found that 61 guards had been put to work at one installation even though they had records relating to criminal offenses, about two dozen of which involved felonies or domestic violence and abuse cases. One of the guards had an active warrant and was arrested while performing his duties. The Army found similar circumstances at another installation in August 2005 with a different contractor. Twenty-eight guards were identified in the Army’s Crime Records Center database as having records relating to criminal offenses, including assault, larceny, possession and use of controlled substances, and forgery. At another location, we found that paperwork to initiate national agency checks had not been submitted for any of the 128 guards hired during a 2-year period. The contractor had been responsible for initiating and submitting these checks between December 2003 and March 2004, but did not follow through and was out of compliance with the terms of its contract. In March 2004, it became the responsibility of installation officials, rather than the contractors, to submit the national agency checks. However, the officials told us they had not received the new direction from IMA and thus did not comply with it. The officials said that they have now submitted the required paperwork to initiate the national screening process. An IMA official told us that national agency checks had never been conducted for guards at another installation either. An Army official at another location informed us that national agency checks were pending for the 8 guard files we sampled. However, the installation’s security office found no record of a national agency check ever being initiated for 3 of these guards. At the same installation, when we asked for documentation of compliance with the Army’s regulation for certifying the reliability and suitability of prospective and current contract security guards, we were provided with documents that were missing key screening information. For example, the section addressing the screening of personnel records was not completed and the name of the physician conducting the medical examination was not included. Also missing was information demonstrating that guards had been briefed on the Army’s reliability standards and objectives. These documents were all signed and dated by the Army’s certifying official on the day they were sent to us. Moreover, the certifying official did not fill out the section on the form indicating whether the individual was or was not suitable for employment. The Army’s reliance on job applicants to be forthcoming and accurate on their application forms affects the quality of the local agency checks. The contractor asks for typical employment information, such as full name, other names or aliases, Social Security number, addresses during the most recent five-year period, and employment history. The local agency check is dependent on full and accurate disclosure on these forms. The contractor itself does not conduct the check, but hires an outside firm to perform this task, and each firm uses the job applicant’s information as a basis for conducting the check. If the applicant falsifies information or neglects to include former addresses outside the county and state of current residence, the local agency check may not search existing records in those jurisdictions, and the contractor may never know that the applicant is unsuitable for hire. Furthermore, how the checks are conducted varies among the different firms. For example, one firm conducted a statewide investigation, while another company checked records in all 50 states and 57 counties. Because Army policy allows interim employment after a local agency check uncovers no problems, a contract guard who successfully hid a criminal history during the job application process could be working at an installation gate, using a firearm, until a national agency check discovers the truth. When we brought these concerns to IMA officials, they stated that permitting interim employment is the fastest, most effective means of putting contract guards at the gates. IMA officials also asserted that the issues we found only highlight that the contract security program is working as intended because individuals with criminal histories ultimately were caught. The officials were unwilling to explore other options to mitigate the potential risk of having extended periods of time during which unsuitable individuals were guarding Army installations. In 2003 and 2004, we reported on the inadequacy of screening measures used for contract employees with access to military installations, facilities, and sensitive areas, and the risks posed to military forces. As a result of our work, the Assistant Secretary of Defense, Special Operations and Low Intensity Conflict, is revising the department’s antiterrorism standards to require a more thorough screening of contract personnel, including security guards, at military installations. The standards, however, have not been completed or approved—and no specific time frame is set for their approval. In addition, in response to a Homeland Security Presidential Directive regarding the need to establish a common identification standard for federal employees and contractors, DOD is strengthening its screening process to include new, secure, and reliable credentials that will be used by DOD employees as well as contract personnel. These credentials will not be issued unless employees and contract personnel pass the national agency check. According to DOD’s implementation plan, the revised screening improvements are to be implemented by October 2006. The Federal Acquisition Regulation has also been amended to require contractors to comply with the agency’s personnel identity verification process. Between now and when the new screening improvements are implemented, the Army could mitigate the risk of hiring personnel with criminal records by supplementing the local agency check with background information accessed through the Army’s Crime Records Center database, which maintains information from Army law enforcement records. The Army’s Criminal Investigation Command has recommended that these checks be done on prospective security guard employees. Another supplemental source of information is the Federal Bureau of Investigation’s National Crime Information Center (NCIC) database. The NCIC database is a national index of theft reports, warrants, missing- persons reports, and other criminal justice information submitted by law enforcement agencies across the United States in a secure, electronic format in real time. While not a perfect solution, since it also relies in part on self-reported information, use of this database would give the Army access to detailed background information on prospective contract guards with far less turnaround time than it currently takes the Office of Personnel Management to conduct national agency checks. In fact, the Army’s Criminal Investigation Command recommends use of the NCIC database. Some Army installations, concerned about the time lapse between the local and the national agency checks, have used it to mitigate what they perceive as risks associated with hiring guards based only on the local agency check. IMA officials, however, have repeatedly instructed installations not to use the NCIC database, citing an Army policy from 1993 that, they assert, does not permit its use. An IMA official told us that the purpose of requiring the contractor to perform the screening function is to reduce the Army’s costs and to streamline the background check process with, IMA asserts, adequate results. During our review, officials from the Office of the Provost Marshal General told us that they recognized the need for interim improvements in the screening process and said they would contact the Federal Bureau of Investigation to explore the feasibility of the Army using the NCIC database. The Army may not have in place adequately trained contract security guards protecting its installations because contractors are given responsibility to conduct nearly all of the training; and neither IMA nor Army installation personnel provide sufficient oversight to know whether training is actually conducted in accordance with contractual provisions, training records are accurate and complete, and contractors are adhering to standards. We found instances where the contractors were not complying with requirements to track and maintain records of employee training and where contractors’ training techniques were inconsistent. The Army requires contractors to train their guards in 19 competencies listed in table 4. The Army requires that the contractors conduct training in these 19 areas before the guards are put to work and annually thereafter. While contractors are required to make training records and certifications available for Army installations to review, Army personnel are not required to certify the training. Even though some installations officials said they have taken the initiative to have their performance monitors observe the guard training on a periodic basis, we found at 4 installations that monitoring of the training is not consistently done, if at all. According to IMA officials, government monitors should be supervising the contractors on a daily basis and should be observing guard training in accordance with the Quality Assurance Surveillance Plan. We found, however, that training is not referenced in the plan. In fact, the plan states that the government is responsible for ensuring its stated needs are met while allowing the contractor sufficient latitude to allow accomplishment of the desired task with a “minimum of oversight.” Lack of government oversight may have contributed to a situation where a contractor’s training records were falsified. In 2005, an investigation discovered that contractor personnel at one installation had falsified training records relating to firearms qualification. The contractor subsequently determined that its employees had not followed the company’s procedures and had validated training for individuals who had in fact not properly qualified. The installation required the guards to be requalified in firearms, which cost the Army over $7,000. At least three guards could not qualify. The supervisor of the guards and training officer involved in the incidents were terminated by the contractor. According to Army officials at that installation, they have since stepped up their on-site observations of the weapons training. We found that poor documentation in the training files also contributed to some installations not knowing whether guard training is meeting contract requirements. Our analysis of individual training records found several instances of missing documentation and irregularities. Each of the installations we visited documented and maintained the training records differently. The lack of detail, in some cases, would make it impossible for a government performance monitor to know whether the guards had been trained as required. We also found that at three installations, the contractor had certified security guards as trained before records indicated that the training had been completed, including one case where a guard was certified before the weapons qualification training had even started. At another installation, officials determined the guards did not need to train in one or more of the specific training topics found in the performance work statement. However, according to installation officials, IMA was not informed of this decision, nor was this deviation noted in individual training records. While the Army requires contractors to train their employees in the 19 competency areas, it is left to the contractors to determine how to structure the training. The Army provides little guidance in terms of training content or techniques. As a result, we found a lack of standardization across installations. For example: weapons training conducted in a simulation room with moving targets versus only classroom lectures; prospective guards given unlimited tries to pass weapons training versus being allowed only three tries; firearm training conducted within the first 3 days of training—because this is an area prospective guards are likely to fail—versus during the third week of training; and a subcontractor using its own, detailed weapons re-qualification policy that the prime contractor has not endorsed and does not follow. Because the contractors have a large amount of leeway in how they conduct the training, this variation is not surprising. While the Army does not require its performance monitors to oversee contract security guard training, other federal agencies do require such government oversight. For example, the Air Force and the Federal Protective Service, both of which use contract guards, require government officials to observe and certify that the guards have successfully completed weapons-firing qualification. Also, we have previously reported on the benefits of centralized development of training content, including standardization. Centralizing design can enhance consistency of training content and offer potential cost savings. Additionally, centralization can help agencies realize cost savings through standardization of record keeping and simplified and more accurate reporting on courses, certifications, educational attainment, costs, or standards. The Transportation Security Administration, for example, has taken several steps to strengthen its review of air carriers’ crew member security training curriculum. These steps include developing a standard review form for inspectors and trainers to use to enhance consistency in the review process. Based on our review of a draft IMA document, the Army is considering a requirement that the contractors submit periodic status reports specific to each installation, using a standard form that includes an update on training. This training update would include the number of new hires trained, annual refreshers and continuing education classes, and weapons qualifications. In December 2005, IMA officials conducted a briefing to the installation monitors that discussed the need to inspect training and training records. The Army’s strategy of using award fees to motivate contractors has resulted in over $18 million in fee payouts for complying with the basic contractual requirements—not for exceeding what the contract requires. We identified a number of concerns with the award-fee process and question the continued need for award fees under the security guard program. Each of the Army’s security guard contracts uses the same award-fee plan, which spells out criteria for evaluating contractor performance, and the final ratings dictate how much money is to be paid in award fees. In our comparison of the award-fee plan with the contract’s statement of work, we found that the award fee is not designed to elicit “above-and-beyond” performance. Rather, the award-fee plan merely requires contractors to meet contractual requirements. The evaluations are conducted on a semiannual basis. Each of four award- fee factors is worth a certain percentage of the total score. In addition, under each factor, a score between 0 and 100 can be given. A score from 91 to 100 is considered excellent performance, 81 to 90 is very good, 70 to 80 good. A score of 69 or below is considered satisfactory or below performance, resulting in no award fee. See table 5 for an overview of the award-fee factors used in conducting the semiannual evaluations. As of February 1, 2006, a total of $18.76 million in award fees was available in the contract guard program. Only $0.42 million or almost 2 percent was not earned by the contractors. As figure 2 shows, IMA has authorized almost all of its available award fees. The Army’s practice of routinely paying its contractors nearly the entire available award fee creates an environment where contractors expect to receive most of the available fee, regardless of acquisition outcomes. We recently reported that DOD frequently pays most of the available award fee to contractors regardless of their performance outcomes. The award fees being paid to the security guard contractors are in addition to the profit they have already built into their prices. We found that under the terms of their contracts, not all of the contractors are eligible to receive the same percentage of award fee—even though they are all performing under the same performance work specification. Three of the four contractors negotiated a fee equal to 5 percent of their annual contract value, but the other negotiated only 3 percent. One contractor told us that it offered to reduce its fee but ACA officials refused, stating that they believed the 5 percent fee was necessary to motivate performance. Among the criteria used to rate the contractors’ performance are the results of on-site inspections of the guards. Army performance monitors are required to conduct inspections, evaluate performance, take into account any comments from persons who have had dealings with the guards, assign ratings commensurate with performance, and report their ratings to IMA’s award-fee review board. The board comprises members familiar with the contract requirements, and the board makes the final recommendation to IMA’s award-fee determining official about how much the contractors should receive in award fees. We found that at over half of the 11 Army installations we visited, the government monitors rated performance without having conducted all of the required inspections. Several monitors stated that limited resources prevented them from conducting the inspections. Three monitors told us they have not been conducting weekly checks of the contractors’ performance. Another monitor said it was a “waste of time” to go around counting guards to ensure the contractor has provided enough employees to meet contract requirements. Several monitors told us that they are not conducting the required blind checks, where they attempt to get on base using false identification. In one case, the monitor said this check is impractical because the contract guards know him by sight. One monitor told us that in deriving the ratings, he starts at 100 and lowers the rating if there are inadequacies in performance. Lack of guidance from IMA was a complaint among the monitors we interviewed. For example, several monitors told us that they have no quantifiable way of determining whether a contractor who performs in an excellent manner in a certain evaluation factor should receive a score of 91 or 100. For lack of any other method, they ultimately use subjective reasoning to make their decisions. Several monitors have taken it upon themselves to establish their own methods for determining where the ratings should fall. One created a checklist that he fills in each week, and at the end of each evaluation period the weekly ratings are used to derive an overall rating. Another convenes a “mini” award-fee board at the installation to obtain formal input from other government officials familiar with the contractor’s performance. Actions such as these demonstrate that some monitors are attempting to inject more rigor into the award-fee process, but the result is a lack of uniformity in criteria for determining award-fee payouts. Although monitors said they have brought this issue to IMA’s attention, the agency has not issued any clarifying guidance. IMA and ACA officials indicated they believe the award-fee plan provides sufficient guidance for the performance monitors to follow. March/April 2005 marked the end of an award fee evaluation period. Our analysis found that, of the 50 recommendations given by the award fee board to the fee determining official, all were in the “excellent” range, with 29 receiving scores of 100 percent and 10 others receiving 99 percent. None fell below 91 percent. Table 6 shows that this result is typical of the pattern over the life of the contract guard program, with 66 percent of contractor evaluations receiving a score of 99 or 100 percent. We found that IMA’s award-fee board did not always carefully review performance monitors’ input in making award fee determinations. An IMA official said that “rubber stamping” by the board may have led to an error that we found in the course of our audit work. During the March/April 2005 evaluation period, the board mistakenly reviewed an evaluation report covering the wrong period and recommended 99 percent of the available award fee be paid to the contractor at the time this contractor was under investigation for falsifying training records. To rectify the error, the board later recommended lowering the score from 99 to 90 percent of the available award fee amount. The government monitor at this installation was unaware that the board had reviewed the wrong report or that it had initially awarded the contractor 99 percent of the award fee. IMA’s appeals process also raises questions about the integrity of the award-fee process. During the March/April 2005 evaluation period, the award-fee board raised over 25 percent of performance monitors’ ratings. Sometimes the board raised the scores unilaterally because members believed the monitors were being too critical of the contractor’s performance. Sometimes the scores were raised because the performance monitors did not, in the board’s view, provide sufficient narrative to support their scores. In these cases, the board normally raised the scores without contacting the monitors for additional support. In reviewing performance evaluations, we found that some performance monitors, on the basis of poor contractor performance, gave the contractors relatively low ratings—in the “good” range with a score between 70 and 80—but the IMA board often raised the scores. For example, for the “sound management of government property” factor, a performance monitor provided a score of 80 because the contractor had three vehicular accidents. IMA raised the score for this factor to 95 because the contractor remedied the problem and paid for damages. This action resulted in the contractor receiving an overall performance score of 99 and almost $55,000 in award fees for that period. Contractors, upon receiving award-fee evaluations, are allowed to rebut the scores, either in person or by letter. The board has raised ratings after hearing rebuttals during the appeals process, but it is not IMA’s policy to inform performance monitors when their submitted scores are changed. In the March/April 2005 evaluation period, IMA adjusted 14 of the 50 performance monitor assessments. IMA raised the scores for 13 of them—increases ranging from 2 to 15 percent—and lowered the score for one by 6 percent. In one case, a performance monitor reported that the contract guards were not able to detect a fake installation vehicle pass, which was presented to gain access at nine different control points. The performance monitor also reported that five guards, in violation of standard operating procedures and Army regulation, fired on a vehicle leaving the installation. After the contractor appealed the score, IMA raised the rating of 90 (very good) to 96 (excellent), awarding the contractor almost $246,000. In another case, a performance monitor had deducted 10 points under the factor “effective contribution to a positive Army image,” in part because a contractor employee had been arrested off-post with 100 prestamped passes to the base in his possession. The contractor protested its rating, arguing that the incident occurred off-post and involved no negative publicity. IMA added back 2 points, awarding the contractor almost $97,000. We also found that in one case, IMA reduced the installation monitor performance rating from 99.1 to 93.1 points, both scores considered excellent, because the contractor had refused to provide pepper spray to its guards, as required. Even though the contractor was not in compliance with the contract, over $100,000 in award fee was authorized. During the acquisition planning for the guard contracts, ACA’s contract attorney questioned the appropriateness of using an award fee. In his memorandum to the contracting officer, he stated that the government has already dictated the standards to the contractor in the statement of work, and if those standards are insufficient, the government should raise the standards. The attorney concluded that he was unconvinced that adding an award fee made good business sense and was in the best interest of the government. Nevertheless, ACA prepared a written justification for use of award fees which asserts, among other reasons, that award fees were needed to motivate the contractors because of the “extremely subjective” nature of the performance evaluation. The Federal Acquisition Regulation states that fixed-price contracts, where the contractor’s profit is already built into the base price, may include award fees to motivate a contractor when other incentives cannot be used because the contractor’s performance cannot be measured objectively. However, IMA’s award-fee plan sets forth a number of objective factors, such as providing the required coverage at the gates and wearing proper uniforms, on which monitors are to base their ratings. ACA’s justification also states that the award fee is needed to motivate a “better than satisfactory” performance. As discussed above, the contractors are merely required to comply with the basic terms of the contract, not to perform above and beyond, to earn the fee. The initial stated intent of having the award fee was that the fee would motivate the contractors to provide security guards as quickly as possible—within 90 days or fewer of contract award. The award-fee plan was subsequently modified to remove the 90-day requirement now that guards are in place, and it now reflects the evaluation criteria outlined in table 5. The Army’s continued need to use award fees well after the contractors have achieved full operational capability is unclear. IMA officials said they like the award fee because it gives them leverage to deal with the contractors and results in the contractors being more responsive. In addition, the ACA contracting officer, who is handling all of the Army’s guard contracts and task orders, told us she finds the award-fee administration time-consuming and cumbersome, because she must modify each task order every 6 months to reflect the award-fee decisions. We found errors in the administration of the program. For example, in one incident the contractor was overpaid $47,548, but this administrative error was not recognized for over a year. In two other examples, award fees were based on an incorrect amount and the contractor was underpaid by about $130,000. The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 extended the waiver authority for hiring contract guards through September 2006, but the extension hinged in part on a required report by DOD on its contract guard program. The report, “Department of Defense Installation Security Guard Requirement Assessment and Plan,” was delivered to Congress on November 22, 2005. The report addresses Army, Navy, and Air Force experience with contract guards. On the basis of our work with the Army, which has acquired the vast majority of contract guards, we believe additional observations should be provided on some of the report’s statements. The report describes the use of contract security guards as “cost- effective,” but at the same time states that the Air Force has determined that cost-effectiveness must be determined base by base because of differing locations and economic circumstances. We found during our review that the issue of cost-effectiveness is not clear-cut. In fact, there are differing opinions on this subject even within the Army. The Deputy Assistant Secretary of the Army’s Director for Programs and Strategy prepared an independent cost evaluation in April 2005 entitled “Contracting Versus Using Department of the Army Civilians to Provide Installation Security.” The study found that using Department of the Army civilian guards is significantly less costly than using contract guards. IMA officials disagree, emphasizing that the cost evaluation does not calculate the challenges imposed by the Army’s current personnel system in hiring civilians or the benefit of contracting this function in the flexibility it offers IMA. The report states that “assessments to date determined that they perform on par with military security guards.” When we asked the report’s working group chairman for the basis for this statement, we were told that input from installation officials had been obtained. IMA officials, who assisted in writing the report, told us that the assessments refer to the award-fee performance evaluations. Those evaluations, however, are used to determine how the contractors, not individual contract guards, are performing; they do not compare contract guards with military security guards. The report states that “contracts for security services are specific concerning the training, performance and supervision of security guards. Effective oversight ensures that installation and facility security is not diminished.” We found that the oversight function performed by the Army, specifically training, needs improvement. The report cites quality assurance surveillance plans that are supposed to be prepared by government representatives and used by installation performance monitors. We found that the Army’s quality assurance surveillance plan, which applies to each of the 57 installations using contract security guards, mirrors the award-fee plan, which performance monitors have found to be unclear. The report states that “on-site visits of installations by the headquarters of the respective services are conducted to ensure proper enforcement of the performance work statements.” However, IMA officials did not visit all 57 installations. In fact, they told us that in 2005, they conducted 17 on-site visits to enforce the performance work statement. At the 11 installations we visited, we found that improvements were needed in training and screening oversight. At one installation, it took over 2 years before IMA found that the contractor and the installation were not in compliance with the performance work statement. The report states that “local security checks and National Agency Checks are performed on all prospective employees.” As we found during our review of the Army’s guard program, weaknesses in the screening process have led to unscreened personnel guarding the gates, and the checks had not been performed on all contract guards. The report characterizes the contracts to the ANC firms as set-aside 8(a). Set-aside 8(a) generally refers to cases when there will be competition among 8(a) firms. In fact, these were sole-source contracts under the 8(a) program. According to ACA officials, future reports will make this clarification. To make the best use of taxpayer dollars and achieve its desired outcomes in relying on contractors to guard military installations, the Army requires sound acquisition planning, leading to prudent contract awards, and rigorous monitoring of contractor performance. A lack of diligence in these areas, coupled with the practice of awarding fees for compliance with basic contractual requirements, indicates that the Army needs to do more to achieve its goals. The Army needs to take a stronger role in overseeing contractor performance, and we believe a reassessment of the acquisition approach is called for. We are making the following seven recommendations to the Secretary of Defense to improve management and oversight of the contract security guard program. We recommend that the Secretary of the Army be directed to take the following seven actions: Direct the ACA to take the following two actions: reassess its acquisition strategy for contract security guards, using competitive procedures for future contracts and/or task orders, remove award-fee provisions from future contracts and task orders under existing contracts. Direct IMA to take the following four actions: monitor the status of DOD’s revised antiterrorism standards and implement them into Army policy for screening of contract security guards as deemed suitable, direct installations to use the Army’s Crime Records Center and the National Crime Information Center databases to supplement initial screening (local agency check) of contract security guards until the new standards are in effect, issue a standardized recordkeeping format for contractors to show that the guards have met all training requirements, and require installation performance monitors to review training files to ensure that initial training certification is achieved as well as subsequent annual recertification. Direct the Office of the Provost Marshal General to require an Army official to monitor and certify contractor training of guards, especially weapons-qualification training. We provided a draft of this report to DOD for review and comment. In written comments, DOD agreed with the findings and stated that the Department of the Army is implementing the seven recommendations. DOD stated that these recommendations will strengthen the contracting process and help ensure that the department receives the best security guard support available. The department’s comments are reprinted in appendix III. We are sending copies of this report to the Secretary of Defense, the Secretary of the Army, the Director of the Office of Management and Budget, and interested congressional committees. We will make copies available to others upon request. This 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 or need additional information, please contact me at (202) 512-4841or [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 were David E. Cooper, Director; Michele Mackin, Assistant Director; Noah Bleicher; Lily Chin; Todd Dice; Paul Gvoth; Arthur James Jr.; Robert Rapasky; Holly Reil; and Russ Reiter. The Army, Air Force, and Navy each have employed contract security guards under the congressional waiver authority. At the time of our review, the Marine Corps had not yet used the authority. We focused our review on the Army’s use of contract security guards because it (1) was the first activity to use the waiver authority and (2) had used the authority substantially more than the Air Force or Navy. The first Army contract security guard contract was awarded in July 2003, whereas the Air Force and Navy contracts did not start until May and June 2004, respectively. In addition, the Army has contracted for security guards at 57 installations, whereas contract security guards are being used at 18 Air Force and 5 Navy installations. During our audit, we conducted interviews with Army officials from the Installation Management Agency (IMA), the Army Contracting Agency, and the Office of the Provost Marshal General. We visited 11 Army installations that are currently using contract security guards and met with government and contractor officials at each location. Officials from these 11 installations are responsible for a total of 14 different installations. These installations represent approximately 25 percent of the 57 installations that have the contract security guard program in place. We used two factors to determine which installations to visit: the contractor and the March/April 2005 performance monitor assessments. Our analysis of these evaluations ensured we visited at least 1 installation per contractor that had a perfect score, where the average of the four award- fee rating categories was 100 percent--typically, these were locations IMA had recommended we visit. To provide a balanced view, we then chose 2 other locations for each contractor with lower averages and a wide variation in the range of scores for the categories. We visited 3 installations per contractor, except in the case of Coastal International Security, which provides guards at only 2 locations. At the 11 installations, we collected an arbitrary sample of the personnel files, including screening and training records. We met with officials responsible for and collected documentation related to the contract security guard program at (1) Adelphi Laboratory Center, (2) Fort Belvoir, (3) Fort Campbell, (4) Fort Detrick, (5) Fort Drum, (6) Fort Eustis/Fort Story, (7) Fort Meade, (8) Fort Myer/Fort McNair, (9) Redstone Arsenal, (10) Fort Riley, and (11) Fort Stewart/Hunter Army Airfield. We also met with officials from the four contractors and two subcontractors that provide guard services to the Army: Akal Security, Alutiiq Security and Technology (with Wackenhut Services as a subcontractor), Chenega Integrated Systems (with Vance Federal Security Services as a subcontractor), and Coastal International Security. We also consulted with officials from the Army Audit Agency, Air Force Audit Agency, and the Army Criminal Investigation Command. To address the Army’s acquisition strategy, we reviewed the various proposals for and the ultimate acquisition plan used by the Army Contracting Agency. We reviewed Defense Contract Management Agency analysis on the Alaska Native corporation (ANC) firms. We also reviewed federal regulations pertaining to ANCs under the Small Business Administration’s 8(a) Business Development Program. We reviewed each contract and its subsequent modifications. We analyzed the task orders to determine the cost of the different contract vehicles the Army used to obtain its contract security guards. We compared the Army’s acquisition strategy with that of other agencies using contract security guards, specifically the U.S. Air Force and the Department of Homeland Security’s Federal Protective Service. We also held discussions with officials from these two agencies. To assess whether the Army ensures that the contract security guards are effectively screened, we reviewed screening requirements in the performance work statement and analyzed the selected personnel screening files at the 11 installations we visited. We reviewed screening requirements the Air Force and Federal Protective Service have for their contract security guards. We interviewed officials at the installations, including contractors, and IMA. We shared the specific results of our file review of screening records with installation and contractor officials. We reviewed our prior reports on combating terrorism and consulted with representatives from the Department of Defense’s Office of Special Operations and Low Intensity Conflict and the Federal Bureau of Investigation. To determine whether the Army ensures the contract security guards are adequately trained, we reviewed the training requirements outlined in the performance work statement and Army regulation 190-56, The Army Civilian Police and Security Guard Program (June 1995), in addition to analyzing the sample of personnel training files at the 11 installations we visited. We interviewed installation officials, including contractors, and IMA. We shared the specific results of our file review of training records with installation and contractor officials. We reviewed the report on the falsification of training records prepared by a contractor and consulted with an official from the Defense Criminal Investigative Service. We also reviewed the training requirements for contract security guards at the Air Force and the Federal Protective Service. To assess the Army’s rationale for providing the contractors with award fees and how the award fee process is being implemented, we reviewed the Federal Acquisition Regulation to determine what circumstances are appropriate for using an award fee with a firm fixed-price contract. We reviewed the Army Contracting Agency’s “Contract Incentives Guide” (November 2004), and our recent report Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes (December 2005). We compared the government monitors’ evaluation reports with the criteria in the award-fee plan as well as with the final scores approved by the IMA fee determining official. We analyzed the requirements in the performance work statement and compared them with the award fee-plan. Because the Army does not maintain information on how much it is paying in award fees, we reviewed each task order to identify the award fees authorized and whether contract modifications were executed. At each of the installations visited, we discussed the award-fee process with the performance monitors and obtained their observations and concerns. We conducted our review from May 2005 to February 2006 in accordance with generally accepted government auditing standards. Akal Security, Inc. Coastal International Security, Inc. Akal Security, Inc. Akal Security, Inc. Coastal International Security, Inc. Akal Security, Inc. Akal Security, Inc. Akal Security, Inc. Akal Security, Inc. Akal Security, Inc. 3 ANC- 8(a) sole-source 3 ANC- 8(a) sole-source 1 ANC- 8(a) sole-source 3 ANC- 8(a) sole-source 3 ANC- 8(a) sole-source 3 ANC- 8(a) sole-source from the ANCs’ sole-source contracts under the 8(a) program. Phase 2: Installations obtaining contract security guards under the full and open competition contracts. Phase : Installations obtaining contract security guards starting in fiscal year 2004 and later from the ANCs’ sole-source contracts under the 8(a) program. | Following the terrorist attacks of September 11, 2001, increased security requirements and a significant number of active duty and reserve personnel sent overseas to support the war on terror left the Department of Defense (DOD) with fewer military personnel to rely on to protect domestic installations. To correct this shortage, Congress is temporarily allowing DOD to use contract security guards to fulfill roles previously performed by military employees. The U.S. Army has awarded contracts worth nearly $733 million to acquire contract guards at 57 Army installations, an investment far greater than those made by other DOD services so far. The requesters asked GAO to assess how the Army has been managing and overseeing its acquisition of security guard services, particularly with regard to the Army's (1) acquisition strategy, (2) employment screening, (3) training of contract guards, and (4) award fee process. This report also discusses DOD's mandated November 2005 report to Congress on the contract guard program. The Army's three-phased approach for acquiring contract security guards has relied heavily on sole-source contracts, despite the Army's recognition early on that it was paying considerably more for its sole-source contracts than for those awarded competitively. The Army has devoted twice as many contract dollars--nearly $495 million--to its sole-source contracts as to its competed contracts and has placed contract security guards at 46 out of 57 installations through sole-sourcing. These sole-source contracts were awarded to two Alaska Native corporation firms under the Small Business Administration's 8(a) Business Development Program. Congress has provided these firms with special advantages in the 8(a) program. During initial planning, the Army worked with a contractor who had not performed guard services before to refine the contract performance work statement. The Army's procedure for screening prospective contract guards is inadequate and puts the Army at risk of having ineligible guards protecting installation gates. The Army found that, at two separate installations, a total of 89 guards were put to work even though they had records relating to criminal offenses, including cases that involved assault and other felonies. Thorough background checks lag far behind the rate at which contract guards are put to work, and the initial screening process relies on prospective guards to be honest when filling out job application forms. In response to an earlier GAO report, DOD agreed to revise its antiterrorism standards to put into place a better mechanism for verifying the trustworthiness of contractors. The Army has given its contractors the responsibility to conduct most of the training of contract guards, and the Army cannot say with certainty whether training is actually taking place and whether it is being conducted according to approved criteria. GAO found that there is no requirement for the Army to certify that a contract guard has completed required training and that Army performance monitors do not conduct oversight of training as a matter of course. GAO also found missing or incomplete training records at several installations. At three installations, guards were certified by the contractor before training had been completed. An investigation discovered that at one installation, contractor personnel had falsified training records; the Army subsequently paid the contractor over $7,000 to re-qualify the guards. The Army has paid out more than $18 million in award fees, but the fees are based only on compliance with basic contractual requirements, not for above-and-beyond performance. Over the life of the contract guard program, the Army has paid out almost 98 percent of the available award fees. The practice of routinely paying contractors nearly the entire available award fee has created an environment in which the contractors expect to receive most of the available fee, regardless of acquisition outcomes. GAO found that many Army performance monitors were not conducting all of the required inspections of contractor activity in order to rate performance. |
The influence of USDA on millions of Americans makes it essential that the department plan and manage its information technology wisely. USDA’s size and complexity, however, make this far from simple. It has a diverse portfolio of over 200 federal programs throughout the nation and the world. The department delivers about $80 billion in programs, at a cost in federal outlays of an estimated $54 billion. The fourth largest federal agency, USDA employs over 100,000 individuals in 31 agencies and departmental offices having multiple and sometimes disparate missions. Its responsibilities range from forests and timber to food assistance for the needy and the safety of meat and poultry products for human consumption. In fiscal year 1998 alone, USDA plans to spend about $1.2 billion on information technology and related information resources management (IRM) activities. It has reported spending more than $8 billion on IT over the past decade. During this time, USDA has seen its annual IT expenditures nearly double. As we testified before this Subcommittee last spring, USDA has a long history of problems in managing its substantial investments in IT. We chronicled many cases dating back to 1981 in which the department had not effectively planned major computer modernization activities or managed IT resources. Such ineffective IT planning and management have resulted in USDA’s wasting millions of dollars. While many factors have contributed to these problems, a major cause was the lack of strong IRM leadership, accountability, and oversight of the acquisition and use of departmental IT investments. Over the years USDA’s component agencies were allowed to independently acquire and manage IT investments solely on the basis of their own parochial needs or interests. Because of this, USDA agencies have continued to independently plan, acquire, and develop separate systems, without considering opportunities to integrate systems and share data. Consequently, over time, the department has invested hundreds of millions of dollars in hundreds of systems that are not interoperable with others in the agency and that actually inhibit the use and sharing of information. In fact, data are often inaccessible and underutilized outside of and even within USDA’s individual agencies for identifying problems, analyzing trends, or assessing crosscutting programmatic and policy issues. Unfortunately, USDA’s experiences with information technology management are not atypical among government agencies. After more than a decade of poor IT planning and program management by federal agencies, as just described for USDA, the Congress enacted the Clinger-Cohen Act of 1996, which, in part, seeks to strengthen executive leadership in information management and institute sound capital investment decision-making to maximize the return on information systems investments. It is important to note that just as technology is most effective when it supports defined business needs and objectives, the Clinger-Cohen Act is at its most powerful when integrated with the objectives of other, broader, governmentwide management reform legislation that USDA is also required to implement. One such reform is the Paperwork Reduction Act of 1995, which emphasizes the need for an overall IRM strategic planning framework, with IT decisions linked directly to mission needs and practices. Another is the Chief Financial Officers Act of 1990, which requires that sound financial management practices and systems essential for tracking program costs and expenditures be in place. Still another is the 1993 Government Performance and Results Act, which focuses on defining mission goals and objectives, measuring and evaluating performance, and reporting results. Together, Clinger-Cohen and these other laws provide a powerful framework under which federal agencies such as USDA have the best opportunity to improve their management and acquisition of IT. A central element of Clinger-Cohen was the requirement that the head of each executive agency designate a CIO. Much more than a senior technology manager, this top-level executive—reporting directly to the agency head—is to be responsible for mission results through technology by working with senior managers to achieve the agency’s strategic performance goals. Moreover, the CIO is to promote improvements in work processes and develop and implement an integrated, agencywide technology architecture. The CIO is also required to monitor and evaluate the performance of IT programs, and advise the head of the agency whether to continue, modify, or terminate a program or project. Further, the CIO is responsible for strengthening the agency’s knowledge, skills, and capabilities to effectively manage information resources. H.R. 3280 presents requirements to clarify and enhance the authorities of the department’s CIO; these requirements are discussed in five major sections. The first addresses the CIO’s relationship to the Secretary and the department’s Executive Information Technology Investment Review Board. The next three present requirements as they relate to developing an information technology architecture, providing funding for the CIO’s office, and establishing control over IT staff across the department. The last provision discusses an annual Comptroller General report on compliance. More specifically, the sections and some information about them include the following. This section requires that the CIO report directly to the Secretary, and that the CIO shall not be under the direction or control of the Deputy Secretary or other official or employee of the department. This section also requires the CIO to serve as vice chair of the department’s Executive Information Technology Investment Review Board—or any other entity established for this purpose—and to review and approve IT acquisitions by USDA offices and agencies. The Secretary of Agriculture established the CIO position on August 8, 1996. That same day, he announced the designation of the department’s then-Deputy Assistant Secretary for Administration to serve as acting CIO, and has since appointed this individual as USDA’s first departmental CIO. However, we were advised that the Secretary has not yet issued a formal delegation of authority describing the CIO’s authority and responsibilities. USDA established the Executive Information Technology Investment Review Board on July 1, 1996, to coordinate and prioritize the department’s IT investments, and to provide a critical link between IT and agency missions. Comprising senior-level managers, the board is also supposed to ensure that USDA technology investments are managed as strategic business resources supporting efficient and effective program delivery. Moreover, USDA’s Fiscal Year 1998 Appropriations Act provides that all IT acquisitions for new systems or significant upgrades must be approved by the CIO, with the concurrence of USDA’s Executive Information Technology Investment Review Board. The CIO told us that she had reviewed and approved the department’s fiscal year 1998 and fiscal year 1999 IT investment package and submitted it to the board in September 1997, which then concurred with the investment package as submitted. This section requires the CIO to be responsible for designing and implementing an information technology architecture for the department. It also requires the CIO to ensure that development, acquisition, procurement, and implementation of IT by any USDA office or agency complies with the resulting architecture and results in the best use of resources. In February 1997 USDA published an initial draft version of a high-level information technology architecture. However, the CIO said that little has been done since then and that much work remains to refine that version. This section requires each USDA office and agency to annually transfer to the control of the CIO an amount equal to 4 percent of the estimated expenditures to be made by that office or agency for equipment and software. The funds transferred are to remain available until expended by the CIO for carrying out responsibilities of the CIO, as outlined in this bill, Clinger-Cohen, and the Paperwork Reduction Act. Additionally, funds may be used when developing, acquiring, procuring, or implementing departmentwide information systems or to make all mission-critical systems Year 2000 compliant. Mr. Chairman, it is a policy call whether to transfer no-year funds to the CIO annually and what amount is required in addition to other sources of funding available to the CIO. In this regard, the CIO already obtains appropriated funds to carry out responsibilities under Clinger-Cohen and other legislative mandates. In addition, the CIO’s office uses working capital funds to support departmentwide IT-related activities, such as operating its Kansas City data center and carrying out telecommunications activities. This section creates the position of Deputy Information Officer within the CIO’s office, while abolishing the separate CIO positions within the department’s agencies and offices. It also requires that managers of major IT programs and projects within USDA shall be subject to the CIO’s approval and that the CIO shall provide his or her perspective as a factor in the performance reviews of such persons. Also covered under this section are the temporary detail and assignment of personnel to the CIO’s office and the transfer to the CIO of the direction and control of officials responsible for procurement of IT across the department. As we testified last October on the importance of having strong CIO leadership at federal agencies, we support the establishment of a CIO structure at major agency component and bureau levels because it may be difficult for the CIO at a large department to adequately oversee and manage the specific information needs of a department’s major components. Such a management structure is particularly important in situations, such as at USDA, where the departmental components have large information technology budgets or are engaged in major modernization efforts that require substantial CIO attention and oversight. In the Conference Report on the Clinger-Cohen Act, the conferees recognized that agencies may wish to establish CIOs for major components and bureaus. We believe that where utilized, such component-level CIOs should have responsibilities, authority, and management structures that mirror those of the departmental CIO. However, USDA could not readily provide information to identify the current organizational structures across USDA, where each of its component agency CIOs was positioned, or a description of their roles and responsibilities. We were told by the department’s CIO that the role of the CIO at the component level has not been defined consistently across USDA agencies. According to the CIO’s office, USDA agencies and departmental offices have a total of 16 positions that are either CIOs or senior IT officials with equivalent leadership roles. We were told that the roles and responsibilities of these officials differ from one agency to the next; some control all IT staff resources and others do not. Additionally, we were told that in most cases these officials report to their component management; USDA’s CIO then works with these individuals through the department’s Information Resources Management Council. The council has responsibility for planning, approving, and overseeing departmentwide IT projects. The bill would consolidate these agency CIO positions under the departmental CIO. This section requires that, not later than January 15 of each year, the Comptroller General shall submit to the Congress a report evaluating compliance by USDA’s CIO and the department with this proposed legislation. The bill provides that the report should include a review and compilation of spending by the department on information resources necessary to assess compliance with the annual transfer of funds to the CIO and use of these funds, as well as the CIO’s performance under this proposed legislation. It also provides that the report should include an evaluation of the department’s success in creating a departmentwide information system and ensuring that all mission-critical systems are Year 2000 compliant. In addition, this section provides for the Comptroller General to include other recommendations and evaluations considered appropriate. We are prepared to assist the Subcommittee in its efforts to ensure USDA’s compliance with any new legislative requirements. It is worth noting, however, that because USDA’s Inspector General is responsible for auditing the department’s annual financial statements, it may be more efficient to have that office review and compile spending data on information resources pertaining to the annual transfer and use of funds. Mr. Chairman, we support your effort and that of the Subcommittee and Mr. Latham to ensure strong and effective CIO leadership at USDA by providing for more accountability and responsibility over the substantial investments the department makes in information technology. We see the thrust of this bill as, for the most part, consistent with the goals of Clinger-Cohen and other legislation designed to strengthen executive leadership in information management. We testified last October on the importance of strong CIO leadership at federal agencies. At that time we said that various approaches exist as to how the CIO position can best be utilized to implement legislative requirements under Clinger-Cohen and other federal laws. These laws, along with guidance from the Office of Management and Budget and our best practices experience with leading organizations, define common tenets for the CIO position. What is important is that the approach be consistent with these tenets. Specifically, agencies should appoint a CIO with expertise and practical experience in technology position the CIO as a senior partner reporting directly to the agency head; ensure that the CIO’s primary responsibilities are for information have the CIO serve as a bridge between top management, line management, and information management support professionals, working with them to ensure the effective acquisition and management of information resources needed to support agency programs and missions; task the CIO with developing strategies and specific plans for the hiring, training, and professional development of staff in order to build the agency’s capability to develop and manage its information resources; and support the CIO position with an effective CIO organization and management framework for implementing agencywide information technology initiatives. Having an effective CIO with the institutional capacity and structure needed to implement the management practices embodied in the broad set of reforms set out in Clinger-Cohen and other legislation is crucial for improved planning and management of IT investments. Success at USDA will depend on how well the department implements such legislation, and how well the CIO exercises whatever authority she possesses to make positive change—and the degree to which this individual is held accountable for doing so. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the problems and challenges the Department of Agriculture (USDA) has faced in managing the more than $1 billion it spends annually on information technology (IT) investments, as well as recent IT reform legislation that established the Chief Information Officer (CIO) position in federal agencies. GAO noted that: (1) in fiscal year 1998 alone, USDA plans to spend about $1.2 billion on information technology and related information resources management (IRM) activities; (2) USDA has a long history of problems in managing its substantial investments in IT; (3) while many factors have contributed to these problems, a major cause was the lack of strong IRM leadership, accountability, and oversight of the acquisition and use of departmental IT investments; (4) consequently, over time, the department has invested hundreds of millions of dollars in hundreds of systems that are not interoperable with others in the agency and that actually inhibit the use and sharing of information; (5) after more than a decade of poor IT planning and program management by federal agencies, Congress enacted the Clinger-Cohen Act of 1996 which, in part, seeks to strengthen executive leadership in information management and institute sound capital investment decision-making to maximize the return on information systems investments; (6) other reform legislation includes the Paperwork Reduction Act of 1995, the Chief Financial Officers Act of 1990, and the 1993 Government Performance and Results Act; (7) together, Clinger-Cohen and these other laws provide a powerful framework under which federal agencies such as USDA have the best opportunity to improve their management and acquisition of IT; (8) a central element of Clinger-Cohen was the requirement that the head of each executive agency designate a CIO; (9) H.R. 3280 presents requirements to clarify and enhance the authorities of the department's CIO; (10) these requirements are discussed in five major sections; (11) the first addresses the CIO's relationship to the Secretary and the department's Executive Information Technology Investment Review Board; (12) the next three present requirements as they relate to developing and information technology architecture, providing funding for the CIO's office, and establishing control over IT staff across the department; (13) the last provision discusses an annual Comptroller General report on compliance; and (14) GAO sees the thrust of H.R. 3280 as, for the most part, consistent with the goals of Clinger-Cohen and other legislation designed to strengthen executive leadership in information management. |
At the federal level, the NRP provides a framework for how the federal government is to assist states and localities in managing emergencies and major disasters. NDMS is one of the programs identified in the NRP that can supplement state and local medical resources during emergencies, including providing resources to assist with evacuation. At the individual facility level, hospitals and nursing homes must comply with CMS requirements to participate in the Medicare and Medicaid programs. Several recently issued federal reports have looked at the adequacy of health care facility disaster planning, as prompted by Hurricane Katrina. In December 2004, DHS issued the NRP to consolidate existing federal government emergency response plans into a single coordinated plan, as mandated by the Homeland Security Act of 2002. The NRP provides a framework for how the federal government is to assist states and localities in managing domestic incidents, including an “emergency” or a “major disaster” declared by the President under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act). On May 25, 2006, DHS revised the NRP to address certain weaknesses or ambiguities identified following Hurricane Katrina. The NRP includes a Catastrophic Incident Annex, which provides for an accelerated, proactive national response to catastrophic incidents— defined as any natural or manmade incident, including terrorism, resulting in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, and/or government functions. By definition, a catastrophic incident almost immediately exceeds resources normally available to state, local, tribal, and private-sector authorities in the impacted area. A separate Catastrophic Incident Supplement, which was drafted but had not been approved at the time of Hurricane Katrina, provides additional detail on the roles and responsibilities of federal, state, and local responders during catastrophic incidents. However, as of June 2006, the supplement had not been finalized. Among its many components, the NRP establishes 15 emergency support functions (ESF), which identify resources and define the missions and responsibilities of various federal agencies in helping coordinate support during incidents of national significance. For each of the NRP’s 15 ESFs, which include Transportation, Communications, Firefighting, and Public Health and Medical Services, the NRP designates a federal agency as the ESF coordinator responsible for pre-incident planning and coordination. It also designates one or more primary agencies to be responsible for operational priorities and activities, coordinating with other agencies and state partners, and planning for incident management. HHS, for example, is designated as the ESF coordinator and the primary agency for ESF #8— Public Health and Medical Services. NDMS, one of the programs included in ESF #8—Public Health and Medical Services—of the NRP, was formed in 1984 to care for massive numbers of casualties generated in a domestic disaster or an overseas conventional war. It is a nationwide medical response system to supplement state and local medical resources during disasters and emergencies and to provide back-up medical support to the military and VA health care systems during an overseas conventional conflict. DOD, HHS, DHS, and VA are federal partners in NDMS. These partners most recently signed a memorandum of agreement in October 2005 that describes the roles and responsibilities of each partner. DHS has the authority to activate NDMS in response to public health emergencies, which include, but are not limited to, presidentially declared emergencies or major disasters under the Stafford Act. NDMS consists of three key functions: medical response, which includes medical equipment and supplies, patient triage, and other emergency health care services provided to disaster victims at a disaster site through NDMS medical response teams such as Disaster Medical Assistance Teams (DMAT); patient evacuation, which includes communication and transportation to evacuate patients from a mobilization center near the disaster site, such as an airport, to reception facilities in other locations; and “definitive care,” which is additional medical care—beyond emergency care—that begins once disaster victims are placed into an NDMS inpatient treatment facility (typically a nonfederal hospital that has signed an agreement with NDMS). DHS has lead responsibility for the medical response function of NDMS. DOD takes the lead in coordinating patient evacuation for NDMS, in collaboration with DOT, the other NDMS federal partners, and commercial transportation companies. VA and DOD share lead responsibility for arranging definitive care, including tracking the availability of beds in hospitals that participate in NDMS. NDMS was used to supplement state and local patient evacuation efforts during Hurricane Katrina and Hurricane Rita, which struck the Gulf Coast several weeks after Hurricane Katrina. NDMS officials told us that Hurricane Katrina was the first time that the patient evacuation and definitive care components of NDMS were used for a large number of patients. In response to state requests for assistance, NDMS moved people from Louisiana after Hurricane Katrina and from Texas before Hurricane Rita. In total, about 2,900 people were transported to NDMS patient reception areas due to the two hurricanes. CMS establishes federal regulations that hospitals and nursing homes must meet to participate in the Medicare and Medicaid programs. These regulations relate to many aspects of hospital or nursing home operations, such as health care services, dietetic services, and physical environment, including emergency management. Hospitals that are accredited by JCAHO or AOA are generally deemed to meet most of these Medicare and Medicaid requirements; no organizations have similar deeming authority for nursing homes. State agencies survey and certify nursing homes and nonaccredited hospitals to ensure that they follow CMS requirements. CMS provides guidance to state agencies in the CMS State Operations Manual, which includes interpretive guidelines and survey procedures for state agencies to assess compliance with CMS regulations. In addition to CMS requirements, JCAHO, AOA, and states can establish additional requirements for hospitals and nursing homes. A number of federal reports address the issue of evacuation and health care facility disaster planning. These reports have in various ways called for improvements in coordination. The White House report on lessons learned from the federal response to Hurricane Katrina recommended that agencies coordinate together to plan, train, and conduct exercises to evacuate patients when state and local agencies are unable to do so in a timely or effective manner. The House of Representatives Select Bipartisan Committee to Investigate the Preparation for and Response to Hurricane Katrina reported that medical care and evacuations suffered from a lack of advance preparations, inadequate communications, and difficulties in coordinating efforts. The select committee’s report and a DHS Office of Inspector General Performance Review of the Federal Emergency Management Agency (FEMA) both noted that search and rescue efforts during Hurricane Katrina were effective but could have benefited from improved coordination among federal agencies. The Senate Committee on Homeland Security and Governmental Affairs reported that federal agencies involved in providing medical assistance did not have adequate resources or the right medical capabilities to fully meet the medical needs arising from Katrina, such as meeting the needs of large evacuee populations, and were forced to use improvised and unproven techniques to meet those needs. Further, the committee reported that the federal government’s medical response suffered from a lack of planning, coordination, and cooperation. Hospital and nursing home administrators faced several challenges related to evacuation during recent hurricanes, including deciding whether to evacuate or stay in their facilities and “shelter in place”, obtaining transportation necessary for evacuations, and maintaining communication outside of their facilities. Administrators said they generally prefer to shelter in place, and when doing so must have the resources needed to provide care during a hurricane, and maintain self-sufficiency immediately after a hurricane to continue to care for patients until help can arrive. When evacuations were needed, facility administrators said that they had problems with transportation. Facilities had contracts with transportation companies, but competition for the same pool of vehicles created supply shortages. In addition, communication was impaired by damage to local infrastructure as a result of the hurricanes. For example, a nursing home in Florida was unable to communicate with local emergency managers. Hospital and nursing home administrators told us that they faced challenges in deciding whether to evacuate, including ensuring that they had sufficient resources to provide care or other services during the disaster and then in its aftermath until assistance could arrive. Administrators told us that they evacuate only as a last resort and that facilities’ emergency plans are designed primarily to shelter in place. Some hospitals provided a safe haven for devastated communities after a hurricane. In addition, some hospitals saw a surge in the number of people seeking care as a result of injuries sustained during the hurricane. For example, clinicians at a 153-bed hospital in Mississippi treated approximately 500 patients per day in the days after Hurricane Katrina, a substantial increase from their normal workload of about 130 patients per day. This hospital’s administrators told us that they felt obligated to remain open to serve the community’s needs. In addition, facility administrators and county representatives that we interviewed agreed that sheltering in place is generally safer than evacuating vulnerable hospital patients and nursing home residents. Although state and local governments can issue mandatory evacuation orders for certain areas, health care facilities may be exempt from these orders, as they were in a Mississippi county for Hurricane Katrina. When preparing to shelter in place, hospital administrators told us that they discharge patients when possible and stop performing elective surgeries to reduce the number of patients in the hospital. In anticipation of an inability to replenish resources during a hurricane, hospital and nursing home administrators take steps before hurricanes to ensure that the facilities have the resources needed to shelter in place and adequately care for patients and residents, including sufficient supplies, food, water, and power. For example, a nursing home administrator in Florida told us that the facility prepared for Hurricane Charley by obtaining 10 days of food and water for its 120 residents plus additional Meals, Ready-to-Eat to feed 500 people for up to 4 days, including staff and their families. Administrators from a hospital told us that they call their vendors 72 hours before a hurricane to order bulk supplies of milk, bread, and paper goods. Administrators from a Mississippi hospital noted that they prepare for hurricanes by ensuring that the facility has 3-4 days of clean linens and 5-6 days of medical supplies. Administrators must also make sure they have sufficient backup electrical power because life support systems require electricity to operate. One hospital administrator acquired an additional generator to extend the hospital’s capacity to supply backup power to 10 days. In addition, many of the administrators we interviewed noted that they maintain large fuel tanks to power the generators. For example, one hospital maintained a 20,000 gallon tank, which holds enough fuel to run the facility’s generators for 1 week. Some administrators told us that they also had difficulty obtaining sufficient fuel after the hurricanes. In addition to obtaining tangible supplies, administrators face the challenge of ensuring that facilities have the staff needed to provide adequate patient care during and after a hurricane. Hospital administrators noted the challenges involved with having sufficient numbers of clinical staff, such as doctors, available during hurricanes. Some facility administrators we interviewed identified “storm teams” of staff that were required to report to the facility before a hurricane and remain on site during the event. One hospital required the “storm team” to be prepared to stay at the facility for 3-4 days. Staff members were required to bring clothes, bedding, snacks, and other personal items. In some cases, facilities also allowed these staff members to bring their families and pets. One hospital administrator in Mississippi noted that the severity and destruction caused by Hurricane Katrina prevented the relief staff from taking over and the “storm team” remained at the facility for 14 days. Another hospital administrator in Florida noted that after Hurricane Charley, relief staff did not report for work. Hospital and nursing home administrators we interviewed reported that their facilities needed to be self-sufficient for a period of time immediately after a hurricane because new supplies may not arrive for several days. For example, a representative of a Florida nursing home association said that facilities need at least 10 days of supplies to effectively shelter in place until help can arrive. The need to be self-sufficient is especially important when disasters affect entire communities and delay response efforts, as demonstrated during hurricanes Charley and Katrina. Facilities that were part of networks were able to call on their corporate offices or sister facilities outside of the affected area to replenish needed supplies after a hurricane. For example, one administrator said that the company that owns his hospital has a division that tracks each facility’s preparedness resources, and the company’s supply warehouse has “disaster packs” of necessary supplies ready to be deployed in case of emergency. Additionally, the company has large contracts in place so that it can quickly obtain resources like fuel, generators, and staff. Facility administrators noted that they were not always able to obtain appropriate vehicles to accommodate their facilities’ patient needs. While some people can be moved using buses, some may require wheelchair- accessible vehicles, and others may need to be transported by ambulance. For example, one nursing home administrator noted that the facility contracted with a bus company, but stated that transportation remained a challenge because most of the facility’s residents used electric wheelchairs and needed vehicles with power lifts, which were not available. In addition, facilities also needed trucks to move staff and supplies to care for the patients. For example, one Florida nursing home administrator noted that the facility had arrangements with a trucking company to load and transport patient medical records, medications, laundry supplies, food, and water. Another nursing home administrator in Mississippi said that he rented a truck to move mattresses and other supplies for his residents. Having a contract with a transportation company or relying on the local government did not guarantee availability of transportation resources during a hurricane. Although facility administrators reported having contracts with transportation companies, competition for the same pool of vehicles created supply shortages. Hospital and nursing home administrators in several communities told us that their transportation companies also had contracts with other facilities in the community to provide services, a situation that may be sufficient for small evacuations but did not work when there were multiple facilities from the same area that needed to evacuate. In addition to contracting with multiple facilities, some companies’ vehicles were unavailable due to advance notice requirements, and others may have had vehicles that were badly damaged by the hurricane. For example, one nursing home administrator said that the bus company his facility contracted with required 24-hours notice before a bus could be chartered, and that providing this notice was difficult in a disaster situation. Some facilities relied upon local government resources to provide assistance with evacuations, but when an entire community was severely affected, local ambulances were damaged or in short supply and therefore unavailable. For example, one Florida hospital administrator had arranged for transportation through the local emergency operations center (EOC), but the hurricane destroyed the EOC. In contrast, when local officials in Mississippi faced a shortage of ambulances immediately after Hurricane Katrina, they called upon a national ambulance company, with which they had a contract, to provide additional resources from Texas and Alabama. Officials noted that state resources were not available after the storm and contracting with an ambulance company with national resources was beneficial. Hurricanes Charley and Katrina caused significant damage to the infrastructure of the surrounding communities, and left some hospital and nursing home administrators unable to communicate outside of their facilities. Several administrators that we interviewed reported that land- based telephone lines were not functional and cellular telephone reception was sporadic. Some administrators reported that cell phones based in other areas were more reliable than local cell phones. Since the 2004 hurricane season, some facilities in Florida have purchased satellite phones. For example, one nursing home administrator who faced communications difficulties after Hurricane Charley has since purchased satellite phones. However, during Hurricane Katrina, some Mississippi hospital administrators told us that their satellite phones did not function. Because no single communications technology is universally reliable, some facility administrators told us that they plan to diversify their communication capabilities by utilizing multiple forms of communication. Communication problems also affected county officials. Local EOC officials in both Mississippi and Florida reported being unable to communicate with state officials or local health care facilities. Because of communication problems at the local EOC, one nursing home administrator in Florida asked a staff member to drive to the EOC to communicate in person. In Mississippi, emergency managers relied on handheld radios and personal contact to communicate immediately after the hurricane. We have previously reported on communication difficulties during a public health emergency. NDMS has two limitations in its design that constrain its assistance to state and local governments with patient evacuation. First, NDMS is not designed to move patients or residents out of hospitals or nursing homes to mobilization centers. Second, NDMS was not designed nor is it currently configured for people who do not need hospital care, including nursing home residents. The first limitation of NDMS is that it is designed to move patients from a mobilization center, such as an airport, to other locations where they can receive necessary medical care, but it is not designed to move patients or residents out of hospitals or nursing homes to mobilization centers. NDMS officials told us that transportation from a health care facility to an NDMS mobilization center is the responsibility of local and state governments. Moreover, NDMS does not include helicopters, ambulances, or other short-distance vehicles necessary to move patients out of hospitals or nursing homes to mobilization centers. NDMS officials stated that NDMS transportation assets typically are large DOD airplanes designed to travel long distances, which can take approximately 24 hours or more to arrange. In addition, NDMS officials told us that to obtain ambulance or helicopter service, they would contract with private providers near a disaster site, which could lead to competition between the federal government and state and local authorities for the same pool of limited resources. Although NDMS evacuation efforts begin at mobilization centers, federal officials told us that no federal program is designed to move patients or residents out of hospitals or nursing homes to mobilization centers. NDMS and other documents that we reviewed also do not identify other federal programs that might assist in performing this function. We reviewed the NRP, the September 2005 draft Catastrophic Incident Supplement to the NRP, and NDMS documents. They do not indicate how the federal government is to assist state and local authorities in moving hospital patients and nursing home residents from their facilities. In particular, the September 2005 draft Catastrophic Incident Supplement to the NRP, which is intended to be used with the Catastrophic Incident Annex when a catastrophic incident almost immediately overwhelms the capabilities of state and local governments, states that collecting and transporting patients from health care facilities to mobilization centers is the responsibility of state and local authorities. The draft supplement does not describe what, if any, role the federal government may play in coordinating with state and local authorities for this kind of transportation. Despite this limitation of NDMS, some federal assistance was provided to move people out of health care facilities during Hurricane Katrina. Coast Guard officials told us that they evacuated about 9,400 people from hospitals and nursing homes as part of their search and rescue operations. NDMS officials reported that private, local, state, and federal resources transported hospital patients and nursing home residents to mobilization points, but there was a lack of coordination. For example, a report prepared by NDMS officials after Hurricane Katrina noted that, initially, transportation resources from the Coast Guard and DOD were not coordinated. The second limitation is that NDMS was not designed nor is it currently configured for people who do not need hospital care, including nursing home residents. As stated in the memorandum of agreement among the NDMS federal partners, the patient evacuation function of NDMS is intended to move patients so that they can receive medical care in NDMS hospitals—typically nonfederal hospitals that have agreements with NDMS. NDMS officials told us that they do not have agreements with nursing homes or other types of health care providers. However, because of the immediate demands posed by Hurricane Katrina, federal officials told us that NDMS had to move people who did not need hospital care, including nursing home residents and members of the general public who arrived at NDMS mobilization centers. NDMS flights evacuated people with various needs from mobilization centers to NDMS patient reception areas where officials assessed their health needs and arranged for them to receive additional medical care through the definitive care portion of NDMS. NDMS reception areas had to make special arrangements for people in need of nursing home care, because NDMS lacked preexisting agreements with nursing homes equipped to handle people with nonhospital health care needs. In a report prepared by NDMS after the hurricane, federal officials noted that NDMS was not optimally prepared to manage the nursing home requirements of evacuees who did not require hospitalization. The movement of nursing home residents during evacuations is not addressed elsewhere in the NRP. At the federal level, CMS has requirements related to hospital and nursing home disaster and evacuation planning as a condition of participation in the Medicare and Medicaid programs. For hospitals, a CMS requirement states that the overall hospital environment must be maintained to assure the safety and well-being of patients. According to CMS guidelines for interpreting this regulation, hospitals must develop and maintain comprehensive emergency plans, and when developing plans, should consider the transfer of patients to other health care settings or hospitals if necessary. For nursing homes, a CMS regulation states that facilities must have plans to meet all potential emergencies and disasters, although the interpretative guidelines do not specifically mention transfer of residents. CMS officials told us that, based on experiences during Hurricane Katrina, they have established a work group within CMS to review hospital and nursing home requirements and other provider standards, policies, and guidance related to emergency preparedness, including issues related to evacuations. The officials told us that they expect the work group to make initial recommendations for improvement in 2006. (See app. II for CMS regulations and interpretive guidelines related to evacuation planning and emergency preparedness.) In addition to CMS requirements, JCAHO, AOA, and states can establish additional emergency management requirements for health care facilities. For hospitals that it accredits, JCAHO requires that emergency plans include provisions for evacuating the entire building and transporting patients, supplies, staff, and equipment to alternate care sites if necessary. AOA requires that emergency plans for hospitals that it accredits include provisions for transferring patients and supplies to other settings for health care if necessary. (See app. III for a list of JCAHO and AOA requirements related to evacuation planning and emergency preparedness.) States can also establish additional requirements for facility evacuation planning that relate to transportation. For example, Florida requires hospitals and nursing homes to have comprehensive emergency management plans that document transportation arrangements to be used to evacuate residents. Mississippi requires nursing homes to maintain written transfer agreements with other facilities or alternative shelters in the event of a disaster. The state also requires hospitals to have written disaster preparedness plans that include relocation arrangements, including transportation arrangements, in the event of an evacuation. Federal requirements for hospitals and nursing homes include provisions that the facilities plan for disasters and emergencies. However, when hurricanes Charley and Katrina hit the Gulf Coast area, they created significant challenges for health care facility administrators that faced evacuation, including deciding whether to evacuate, securing transportation, and maintaining communications outside of their facilities. In particular, securing transportation was challenging because when multiple health care facilities within a community decided to evacuate, they had difficulty obtaining the number and type of vehicles needed and competed with each other for a limited supply of vehicles. A federal role related to evacuation is described in various documents, including the NDMS memorandum of agreement, the NRP, and its draft Catastrophic Incident Supplement. However, the challenges faced by hospitals and nursing homes during hurricanes Charley and Katrina also revealed two limitations in the federal government’s support to health care facilities that have to evacuate—the lack of assistance to states and localities to move people out of health care facilities to a mobilization point for federal transportation support and the lack of attention to nursing home residents needing evacuation. In terms of the first limitation, we found that the reliance in the NDMS design on local and state resources to move people directly out of facilities is inadequate when multiple facilities in the community have to evacuate simultaneously and compete for too few vehicles. In addition, DHS’s draft Catastrophic Incident Supplement to the NRP, which is intended to offer guidance for a situation in which state and local resources are overwhelmed, also would leave responsibility for moving people out of health care facilities on state and local authorities. It does not describe the role the federal government may play in coordinating with state and local authorities during hospital and nursing home evacuations. In terms of the second limitation, we noted that the evacuation of nursing home residents was not considered when NDMS was originally designed in 1984—nor is it currently addressed elsewhere in the NRP—but the experiences of these recent hurricanes also showed that the needs of this population when evacuations are required have been overlooked in the federal plans. DHS is the lead agency responsible for issuance and maintenance of the NRP, development of the draft Catastrophic Incident Supplement, and activation of NDMS. Until it addresses these limitations—within NDMS, the NRP, or through other mechanisms—vulnerabilities in the evacuation of hospitals and nursing homes will continue, and the federal government’s response will not be as effective as possible. To address limitations in how the federal government provides assistance with the evacuation of health care facilities, we recommend that the Secretary of Homeland Security take the following two actions: Clearly delineate how the federal government will assist state and local governments with the movement of patients and residents out of hospitals and nursing homes to a mobilization center where NDMS transportation begins. In consultation with the other NDMS federal partners—the Secretaries of Defense, Health and Human Services, and Veterans Affairs—clearly delineate how to address the needs of nursing home residents during evacuations, including the arrangements necessary to relocate these residents. We received written comments on a draft of this report from DHS, DOD, HHS, and VA. DHS stated that it will take our recommendations under advisement as it reviews the National Response Plan. According to DHS, all of the NDMS federal partners are currently reviewing the NDMS memorandum of agreement with a view towards working with state and local partners to alter, delineate, and otherwise clarify roles and responsibilities as appropriate. DHS confirmed that the primary responsibility for evacuations remains with state and local governments and that the federal government becomes involved only when the capabilities of the state and local governments are overwhelmed. However, as stated in the draft report, neither NDMS documents, the NRP, nor the draft Catastrophic Incident Supplement to the NRP—to be used in cases when the capabilities of state and local governments are almost immediately overwhelmed—describe the federal role in coordinating with state and local authorities during hospital and nursing home evacuations. We also noted that reliance on state and local resources was inadequate when multiple facilities in a community had to evacuate simultaneously. DHS’s written comments are reprinted in appendix IV. DOD disagreed with our conclusions concerning NDMS’s two limitations. First, DOD stated that our report implies that the provision of short- distance transportation is a federal responsibility, but DOD maintains that it is a state and local responsibility. However, during a catastrophic incident, the capabilities of state and local governments may almost immediately become overwhelmed. As we stated above in our response to DHS’s comments, the federal role in these situations has not been described. Second, DOD stated that our conclusion regarding the needs of nursing home residents was technically correct, but that we failed to describe the successful evacuation of nursing home residents during Hurricane Rita. Our draft report did describe NDMS’s evacuation of people, including nursing home residents and other people who did not need hospital care, during recent hurricanes due to the immediate demands posed by the storms. However, we also noted that the NDMS after-action report on hurricanes Katrina and Rita states that NDMS was not optimally prepared to manage the nursing home requirements of evacuees who did not require hospitalization. For this reason, we believe that explicit consideration of the needs of nursing home residents is warranted. DOD’s written comments are reprinted in appendix V. HHS concurred with our recommendations and made two general comments. First, HHS noted that we should address the role of DOT in the NRP to provide transportation support for domestic emergencies. Under ESF #8, DOT can assist with identifying and arranging for all types of transportation. However, as stated in the draft report, the NRP does not indicate how DOT or other federal agencies are to assist state and local authorities in moving hospital patients and nursing home residents from their facilities. Second, HHS commented that the report does not describe why NDMS was designed to focus on hospital evacuation, but HHS did not provide any additional information about NDMS’s origins. Although the draft report included available information on the origins of NDMS, our assessment focused on the program’s current status. HHS’s written comments are reprinted in appendix VI. VA agreed with our conclusions and recommendations and stated that it would continue to address issues raised in the draft report. VA’s written comments are reprinted in appendix VII. DHS and HHS also provided technical comments. In addition, DOT provided technical comments via email. We incorporated these comments where appropriate. We are sending copies of this report to the Secretaries of DOD, HHS, DHS, DOT, VA, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7101 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. To examine the challenges hospital and nursing home administrators faced related to recent hurricanes, we conducted case studies in two states—Florida and Mississippi. We selected these states based on their experience with previous disasters. During 2004, the state of Florida was hit by four hurricanes—Charley, Frances, Ivan, and Jeanne. Hurricane Charley was the strongest of these four, and the strongest hurricane to hit the United States since Hurricane Andrew hit southern Florida in 1992. In 2005, Mississippi received heavy storm damage from Hurricane Katrina caused by wind and an extremely high storm surge. In Florida, to understand the role of the state and local governments in evacuating hospitals and nursing homes, we interviewed and obtained documents from state and county officials. At the state level, we interviewed officials from the Florida Department of Health’s Office of Emergency Operations. We reviewed the Florida Comprehensive Emergency Management Plan, as well as Florida’s after-action report for the 2004 Hurricane season. At the local level, we selected two counties affected by Hurricane Charley—Charlotte and Volusia counties. Charlotte County, the entry point for the hurricane, is located on the Gulf Coast of Florida. Volusia County, the exit point for the hurricane, is located on the Atlantic Coast of the state. Within each county, we interviewed emergency management officials and reviewed county emergency management plans. To obtain information on the experiences of individual health care facilities in Florida, we identified hospitals and nursing homes within each of the selected counties, interviewed facility administrators, and reviewed documents. To select facilities, we asked emergency management officials in each county to provide contact information for hospitals and nursing homes that either evacuated or sheltered in place due to Hurricane Charley. In cases where the representatives identified by county officials were unavailable, we selected alternate health care facilities based on their proximity to the ocean. For each facility, we obtained and reviewed applicable emergency plans, hurricane plans, and/or evacuation plans. In total, we interviewed administrators from two hospitals and two nursing homes in Charlotte County and one hospital and two nursing homes in Volusia County. In addition to facility administrators, we interviewed officials from the Florida Hospital Association, the Florida Association of Homes for the Aging, and the Florida Health Care Association. In Mississippi, to understand the role of the state and local governments in evacuating hospitals and nursing homes, we interviewed and obtained documents from state and county officials. At the state level, we interviewed officials from the Mississippi Emergency Management Agency and Department of Health, and reviewed documents including the Mississippi Comprehensive Emergency Management Plan. At the local level, we selected the two coastal counties that were hit most directly by Hurricane Katrina—Hancock and Harrison counties. Hancock County, which includes the cities of Waveland and Bay St. Louis, was directly in the path of the storm and sustained extensive damage. Harrison County, which is adjacent to Hancock County and includes the cities of Gulfport and Biloxi, sustained extensive damage and has the area’s largest population. In each county, we interviewed emergency management officials. We also reviewed emergency management plans from Hancock and Harrison counties. To obtain information on the experience of individual health care facilities in Mississippi, we identified hospitals, nursing homes, and assisted living facilities within each of the selected counties; interviewed facility administrators; and reviewed documents provided. To locate health care facilities, we relied on a list of hospitals, nursing homes, and assisted living facilities in Hancock and Harrison counties from a June 2005 Mississippi Department of Health report on hospitals and a September 2005 Mississippi Department of Health report on institutions for the aged or infirm. We also identified facilities in Harrison County that were operated by the Department of Veterans Affairs (VA). We excluded nursing homes with fewer than 20 licensed beds. From this list, we selected facilities based on ownership type, vulnerability and proximity to the ocean, and size. For each facility, we obtained and reviewed emergency plans, hurricane plans, and/or evacuation plans. In total, we interviewed officials from one hospital and one nursing home in Hancock County and four hospitals and two assisted living facilities in Harrison County. We also interviewed representatives from the Gulf States Association of Homes and Services for the Aging. To examine the extent to which limitations exist in the design of the National Disaster Medical System (NDMS) or other federal programs to assist state and local governments with patient evacuations, we reviewed federal documents such as the National Response Plan, including Emergency Support Function #8—Public Health and Medical Services— and the Catastrophic Incident Annex. We also obtained and reviewed a September 2005 draft of the Catastrophic Incident Supplement to the NRP. We interviewed emergency preparedness officials from the Department of Defense, the Department of Health and Human Services, the Department of Homeland Security, the Department of Transportation, and the VA. To obtain additional information on NDMS, we reviewed program documents, including the memorandum of agreement that governs NDMS and an after- action report on the use of NDMS due to Hurricane Katrina. To examine the federal requirements for hospital and nursing home disaster and evacuation planning, we reviewed documents that identify the federal requirements and national standards related to emergency management, disaster preparedness, and patient evacuation. We reviewed documents provided by the Centers for Medicare & Medicaid Services (CMS) and by accrediting organizations that assess compliance with CMS requirements—the Joint Commission on Accreditation of Healthcare Organizations and the American Osteopathic Association. We also interviewed officials from these organizations concerning the requirements and enforcement mechanisms, as well as officials from the American Hospital Association, Federation of American Hospitals, and the American Health Care Association. In addition, we interviewed and obtained documents from the Florida Agency for Health Care Administration officials responsible for the licensing and certification of health care facilities as well as officials from the Mississippi Department of Health. We performed our work from October 2005 through July 2006 in accordance with generally accepted government auditing standards. The Centers for Medicare & Medicaid Services (CMS) establishes federal regulations that hospitals and nursing homes must meet to participate in the Medicare and Medicaid programs. CMS’s interpretive guidelines contain authoritative interpretations and clarifications of statutory and regulatory requirements and are to be used to make determinations about compliance with requirements. The tables below include regulations for hospitals and nursing homes that relate to disaster and evacuation planning. Table 1 includes CMS regulations and interpretive guidelines for hospitals. Table 2 includes CMS regulations and interpretive guidelines for nursing homes. CMS surveyors conduct health care facility surveys to evaluate the manner and degree to which the providers satisfy various CMS requirements or standards. Long-term care facilities include nursing homes. Hospitals that are accredited by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) or the American Osteopathic Association (AOA) are generally deemed to be compliant with the Centers for Medicare & Medicaid Services requirements. The document and table below include JCAHO and AOA requirements for hospitals that relate to evacuation planning and emergency preparedness. The document includes JCAHO hospital requirements, and table 3 includes AOA hospital requirements. In addition to the contact named above, key contributors to this report were Linda T. Kohn, Assistant Director; La Sherri Bush; Krister Friday; Nkeruka Okonmah; and William Simerl. Disaster Preparedness: Preliminary Observations on the Evacuation of Vulnerable Populations due to Hurricanes and Other Disasters. GAO-06- 790T. Washington, D.C.: May 18, 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. Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006. Disaster Preparedness: Preliminary Observations on the Evacuation of Hospitals and Nursing Homes Due to Hurricanes. GAO-06- 443R. Washington, D.C.: February 16, 2006. HHS Bioterrorism Preparedness Programs: States Reported Progress but Fell Short of Program Goals for 2002. GAO-04-360R. Washington, D.C.: February 10, 2004. Bioterrorism: Public Health Response to Anthrax Incidents of 2001. GAO-04-152. Washington, D.C.: October 15, 2003. Hospital Preparedness: Most Urban Hospitals Have Emergency Plans but Lack Certain Capacities for Bioterrorism Response. GAO-03-924. Washington, D.C.: August 6, 2003. Bioterrorism: Information Technology Strategy Could Strengthen Federal Agencies’ Abilities to Respond to Public Health Emergencies. GAO-03-139. Washington, D.C.: May 30, 2003. Bioterrorism: Preparedness Varied across State and Local Jurisdictions. GAO-03-373. Washington, D.C.: April 7, 2003. | Hurricane Katrina demonstrated difficulties involved in evacuating communities and raised questions about how hospitals and nursing homes plan for evacuations and how the federal government assists. Due to broad-based congressional interest, GAO assessed the evacuation of hospital patients and nursing home residents. Under the Comptroller General's authority to conduct evaluations on his own initiative, GAO examined (1) the challenges hospital and nursing home administrators faced, (2) the extent to which limitations exist in the design of the National Disaster Medical System (NDMS) to assist with patient evacuations, and (3) the federal requirements for hospital and nursing home disaster and evacuation planning. GAO reviewed documents and interviewed federal officials, and interviewed hospital and nursing home administrators and state and local officials in areas affected by Hurricane Katrina in Mississippi and Hurricane Charley in Florida. Hospital and nursing home administrators faced several challenges related to evacuations during recent hurricanes, including deciding whether to evacuate or stay in their facilities and "shelter in place", obtaining transportation necessary for evacuations, and maintaining communication outside of their facilities. Administrators took steps to ensure that their facilities had needed resources--including staff, supplies, food, water, and power--to provide care during the hurricane and maintain self-sufficiency immediately after. However, when evacuations were needed, facility administrators said that they had problems with transportation, such as securing the vehicles needed to evacuate patients. Although facility administrators had contracts with transportation companies, competition for the same pool of vehicles created supply shortages when multiple facilities in a community had to be evacuated. In addition, communication was impaired by hurricane damage. For example, a nursing home in Florida was unable to communicate with local emergency managers. NDMS is a partnership of four federal agencies, and has two limitations in its design that constrain its assistance to state and local governments with patient evacuation. The NDMS partners are the Department of Defense, the Department of Health and Human Services (HHS), the Department of Homeland Security (DHS), and the Department of Veterans Affairs; DHS is the lead agency. The first limitation is that NDMS evacuation efforts begin at a mobilization center, such as an airport, and do not include short-distance transportation assets, such as ambulances or helicopters, to move patients out of health care facilities to mobilization centers. The second limitation is that NDMS supports the evacuation of patients needing hospital care; the program was not designed nor is it currently configured to move people who do not require hospitalization, such as nursing home residents. Although NDMS moved nursing home residents due to Hurricane Katrina who were brought to mobilization centers, NDMS officials had to make special arrangements for people in need of nursing home care because NDMS lacked preexisting agreements with nursing homes. Neither of these limitations is addressed in other documents GAO reviewed, including DHS's National Response Plan (NRP). At the federal level, HHS's Centers for Medicare & Medicaid Services (CMS) has requirements related to hospital and nursing home evacuation planning as a condition of participation in the Medicare and Medicaid programs. CMS requires that hospitals maintain the overall hospital environment to assure patient safety, including developing plans that consider the transfer of patients to other health care settings. For nursing homes, CMS requires that plans meet all potential emergencies and disasters; however, requirements do not specifically mention the transfer of residents. In addition to assessing compliance with CMS requirements, the Joint Commission on Accreditation of Healthcare Organizations, the American Osteopathic Association, and states can also have additional emergency management requirements. |
Ensuring that pharmaceuticals are available for those with legitimate medical need while combating the abuse and diversion of prescription drugs involves the efforts of both federal and state government agencies. Under the FD&C Act, FDA is responsible for ensuring that drugs are safe and effective before they are available in the marketplace. The Controlled Substances Act, which is administered by DEA, provides the legal framework for the federal government’s oversight of the manufacture and wholesale distribution of controlled substances, that is, drugs and other chemicals that have a potential for abuse. The states address certain issues involving controlled substances through their own controlled substances acts and their regulation of the practice of medicine and pharmacy. In response to concerns about the influence of pharmaceutical marketing and promotional activities on physician prescribing practices, both the pharmaceutical industry and the Department of Health and Human Services’s (HHS) Office of Inspector General have issued voluntary guidelines on appropriate marketing and promotion of prescription drugs. As the incidence and prevalence of painful diseases have grown along with the aging of the population, there has been a growing acknowledgment of the importance of providing effective pain relief. Pain can be characterized in terms of intensity—mild to severe—and duration—acute (sudden onset) or chronic (long term). The appropriate medical treatment varies according to these two dimensions. In 1986, WHO determined that cancer pain could be relieved in most if not all patients, and it encouraged physicians to prescribe opioid analgesics. WHO developed a three-step analgesic ladder as a practice guideline to provide a sequential use of different drugs for cancer pain management. For the first pain step, treatment with nonopioid analgesics, such as aspirin or ibuprofen, is recommended. If pain is not relieved, then an opioid such as codeine should be used for mild-to-moderate pain as the second step. For the third step—moderate-to-severe pain—opioids such as morphine should be used. Beginning in the mid-1990s, various national pain-related organizations issued pain treatment and management guidelines, which included the use of opioid analgesics in treating both cancer and noncancer pain. In 1995, the American Pain Society recommended that pain should be treated as the fifth vital sign to ensure that it would become common practice for health care providers to ask about pain when conducting patient evaluations. The practice guidelines issued by the Agency for Health Care Policy and Research provided physicians and other health care professionals with information on the management of acute pain in 1992 and cancer pain in 1994, respectively. Health care providers and hospitals were further required to ensure that their patients received appropriate pain treatment when the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), a national health care facility standards-setting and accrediting body, implemented its pain standards for hospital accreditation in 2001. OxyContin, a schedule II drug manufactured by Purdue Pharma L.P., was approved by FDA in 1995 for the treatment of moderate-to-severe pain lasting more than a few days, as indicated in the original label. OxyContin followed Purdue’s older product, MS Contin, a morphine-based product that was approved in 1984 for a similar intensity and duration of pain and during its early years of marketing was promoted for the treatment of cancer pain. The active ingredient in OxyContin tablets is oxycodone, a compound that is similar to morphine and is also found in oxycodone- combination pain relief drugs such as Percocet, Percodan, and Tylox. Because of its controlled-release property, OxyContin contains more active ingredient and needs to be taken less often (twice a day) than these other oxycodone-containing drugs. The OxyContin label originally approved by FDA indicated that the controlled-release characteristics of OxyContin were believed to reduce its potential for abuse. The label also contained a warning that OxyContin tablets were to be swallowed whole, and were not to be broken, chewed, or crushed because this could lead to the rapid release and absorption of a potentially toxic dose of oxycodone. Such a safety warning is customary for schedule II controlled-release medications. FDA first approved the marketing and use of OxyContin in 10-, 20-, and 40-milligram controlled-release tablets. FDA later approved 80- and 160-milligram controlled-release tablets for use by patients who were already taking opioids. In July 2001, FDA approved the revised label to state that the drug is approved for the treatment of moderate-to-severe pain in patients who require “a continuous around-the-clock analgesic for an extended period of time.” (See app. II for a summary of the changes that were made by FDA to the original OxyContin label.) OxyContin sales and prescriptions grew rapidly following its market introduction in 1996. Fortuitous timing may have contributed to this growth, as the launching of the drug occurred during the national focus on the inadequacy of patient pain treatment and management. In 1997, OxyContin’s sales and prescriptions began increasing significantly, and they continued to increase through 2002. In both 2001 and 2002, OxyContin’s sales exceeded $1 billion, and prescriptions were over 7 million. The drug became Purdue’s main product, accounting for 90 percent of the company’s total prescription sales by 2001. Media reports of OxyContin abuse and diversion began to surface in 2000. These reports first appeared in rural areas of some states, generally in the Appalachian region, and continued to spread to other rural areas and larger cities in several states. Rural communities in Maine, Kentucky, Ohio, Pennsylvania, Virginia, and West Virginia were reportedly being devastated by the abuse and diversion of OxyContin. For example, media reports told of persons and communities that had been adversely affected by the rise of addiction and deaths related to OxyContin. One report noted that drug treatment centers and emergency rooms in a particular area were receiving new patients who were addicted to OxyContin as early as 1999. Pain patients, teens, and recreational drug users who had abused OxyContin reportedly entered drug treatment centers sweating and vomiting from withdrawal. In West Virginia, as many as one-half of the approximately 300 patients admitted to a drug treatment clinic in 2000 were treated for OxyContin addiction. The media also reported on deaths due to OxyContin. For example, a newspaper’s investigation of autopsy reports involving oxycodone-related deaths found that OxyContin had been involved in over 200 overdose deaths in Florida since 2000. In another case, a forensic toxicologist commented that he had reviewed a number of fatal overdose cases in which individuals took a large dose of OxyContin, in combination with alcohol or other drugs. After learning about the initial reports of abuse and diversion of OxyContin in Maine in 2000, Purdue formed a response team made up of its top executives and physicians to initiate meetings with federal and state officials in Maine to gain an understanding of the scope of the problem and to devise strategies for preventing abuse and diversion. After these meetings, Purdue distributed brochures to health care professionals that described several steps that could be taken to prevent prescription drug abuse and diversion. In response to the abuse and diversion reports, DEA analyzed data collected from medical examiner autopsy reports and crime scene investigation reports. The most recent data available from DEA show that as of February 2002, the agency had verified 146 deaths nationally involving OxyContin in 2000 and 2001. According to Purdue, as of early October 2003, over 300 lawsuits concerning OxyContin were pending against Purdue, and 50 additional lawsuits had been dismissed. The cases involve many allegations, including, for example, that Purdue used improper sales tactics and overpromoted OxyContin causing the drug to be inappropriately prescribed by physicians, and that Purdue took inadequate actions to prevent addiction, abuse, and diversion of the drug. The lawsuits have been brought in 25 states and the District of Columbia in both federal and state courts. The Controlled Substances Act established a classification structure for drugs and chemicals used in the manufacture of drugs that are designated as controlled substances. Controlled substances are classified by DEA into five schedules on the basis of their medicinal value, potential for abuse, and safety or dependence liability. Schedule I drugs—including heroin, marijuana, and LSD—have a high potential for abuse and no currently accepted medical use. Schedule II drugs—which include opioids such as morphine and oxycodone, the primary ingredient in OxyContin— have a high potential for abuse among drugs with an accepted medical use and may lead to severe psychological or physical dependence. Drugs on schedules III through V have medical uses and successively lower potentials for abuse and dependence. Schedule III drugs include anabolic steroids, codeine, hydrocodone in combination with aspirin or acetaminophen, and some barbiturates. Schedule IV contains such drugs as the antianxiety drugs diazepam (Valium) and alprazolam (Xanax). Schedule V includes preparations such as cough syrups with codeine. All scheduled drugs except those in schedule I are legally available to the public with a prescription. Under the FD&C Act and implementing regulations, FDA is responsible for ensuring that all new drugs are safe and effective. FDA reviews scientific and clinical data to decide whether to approve drugs based on their intended use, effectiveness, and the risks and benefits for the intended population, and also monitors drugs for continued safety after they are in use. FDA also regulates the advertising and promotion of prescription drugs under the FD&C Act. FDA carries out this responsibility by ensuring that prescription drug advertising and promotion is truthful, balanced, and accurately communicated. The FD&C Act makes no distinction between controlled substances and other prescription drugs in the oversight of promotional activities. FDA told us that the agency takes a risk-based approach to enforcement, whereby drugs with more serious risks, such as opioids, are given closer scrutiny in monitoring promotional messages and activities, but the agency has no specific guidance or policy on this approach. The FD&C Act and its implementing regulations require that all promotional materials for prescription drugs be submitted to FDA at the time the materials are first disseminated or used, but it generally is not required that these materials be approved by FDA before their use. As a result, FDA’s actions to address violations occur after the materials have already appeared in public. In fiscal year 2002, FDA had 39 staff positions dedicated to oversight of drug advertising and promotion of all pharmaceuticals distributed in the United States. According to FDA, most of the staff focuses on the oversight of promotional communications to physicians. FDA officials told us that in 2001 it received approximately 34,000 pieces of promotional material, including consumer advertisements and promotions to physicians, and received and reviewed 230 complaints about allegedly misleading advertisements, including materials directed at health professionals. FDA issues two types of letters to address violations of the FD&C Act: untitled letters and warning letters. Untitled letters are issued for violations such as overstating the effectiveness of the drug, suggesting a broader range of indicated uses than the drug has been approved for, and making misleading claims because of inadequate context or lack of balanced information. Warning letters are issued for more serious violations, such as those involving safety or health risks, or for continued violations of the act. Warning letters generally advise a pharmaceutical manufacturer that FDA may take further enforcement actions, such as seeking judicial remediation, without notifying the company and may ask the manufacturer to conduct a new advertising campaign to correct inaccurate impressions left by the advertisements. Under the Controlled Substances Act, FDA notifies DEA if FDA is reviewing a new drug application for a drug that has a stimulant, depressant, or hallucinogenic effect on the central nervous system and has abuse potential. FDA performs a medical and scientific assessment as required by the Controlled Substances Act, and recommends to DEA an initial schedule level to be assigned to a new controlled substance. FDA plans to provide guidance to the pharmaceutical industry on the development, implementation, and evaluation of risk management plans as a result of the reauthorization of the Prescription Drug User Fee Act of 1992 (PDUFA). FDA expects to issue this guidance by September 30, 2004. FDA defines a risk management program as a strategic safety program that is designed to decrease product risks by using one or more interventions or tools beyond the approved product labeling. Interventions used in risk management plans may include postmarketing surveillance, education and outreach programs to health professionals or consumers, informed consent agreements for patients, limitations on the supply or refills of products, and restrictions on individuals who may prescribe and dispense drug products. All drug manufacturers have the option to develop and submit risk management plans to FDA as part of their new drug applications. DEA is the primary federal agency responsible for enforcing the Controlled Substances Act. DEA has the authority to regulate transactions involving the sale and distribution of controlled substances at the manufacturer and wholesale distributor levels. DEA registers legitimate handlers of controlled substances—including manufacturers, distributors, hospitals, pharmacies, practitioners, and researchers—who must comply with regulations relating to drug security and accountability through the maintenance of inventories and records. All registrants, including pharmacies, are required to maintain records of controlled substances that have been manufactured, purchased, and sold. Manufacturers and distributors are also required to report their annual inventories of controlled substances to DEA. The data provided to DEA are available for use in monitoring the distribution of controlled substances throughout the United States and identifying retail-level registrants that received unusual quantities of controlled substances. DEA regulations for schedule II prescription drugs, unlike those for other prescription drugs, require that each prescription must be written and signed by the physician and may not be telephoned in to the pharmacy except in an emergency. Also, a prescription for a schedule II drug may not be refilled. A physician is required to provide a new prescription each time a patient obtains more of the drug. DEA also sets limits on the quantity of schedule II controlled substances that may be produced in the United States in any given year. Specifically, DEA sets aggregate production quotas that limit the production of bulk raw materials used in the manufacture of controlled substances. DEA determines these quotas based on a variety of data including sales, production, inventories, and exports. Individual companies must apply to DEA for manufacturing or procurement quotas for specific pharmaceutical products. For example, Purdue has a procurement quota for oxycodone, the principle ingredient in OxyContin, that allows the company to purchase specified quantities of oxycodone from bulk manufacturers. State laws govern the prescribing and dispensing of prescription drugs by licensed health care professionals. Each state requires that physicians practicing in the state be licensed, and state medical practice laws generally outline standards for the practice of medicine and delegate the responsibility of regulating physicians to state medical boards. States also require pharmacists and pharmacies to be licensed. The regulation of the practice of pharmacy is based on state pharmacy practice acts and regulations enforced by the state boards of pharmacy. According to the National Association of Boards of Pharmacy, all state pharmacy laws require that records of prescription drugs dispensed to patients be maintained and that state pharmacy boards have access to the prescription records. State regulatory boards face new challenges with the advent of Internet pharmacies, because they enable pharmacies and physicians to anonymously reach across state borders to prescribe, sell, and dispense prescription drugs without complying with state requirements. In some cases, consumers can purchase prescription drugs, including controlled substances, such as OxyContin, from Internet pharmacies without a valid prescription. In addition to these regulatory boards, 15 states operate prescription drug monitoring programs as a means to control the illegal diversion of prescription drugs that are controlled substances. Prescription drug monitoring programs are designed to facilitate the collection, analysis, and reporting of information on the prescribing, dispensing, and use of controlled substances within a state. They provide data and analysis to state law enforcement and regulatory agencies to assist in identifying and investigating activities potentially related to the illegal prescribing, dispensing, and procuring of controlled substances. For example, physicians in Kentucky can use the program to check a patient’s prescription drug history to determine if the individual may be “doctor shopping” to seek multiple controlled substance prescriptions. An overriding goal of prescription drug monitoring programs is to support both the state laws ensuring access to appropriate pharmaceutical care by citizens and the state laws deterring diversion. As we have reported, state prescription drug monitoring programs offer state regulators an efficient means of detecting and deterring illegal diversion. However, few states proactively analyze prescription data to identify individuals, physicians, or pharmacies that have unusual use, prescribing, or dispensing patterns that may suggest potential drug diversion or abuse. Although three states can respond to requests for information within 3 to 4 hours, providing information on suspected illegal prescribing, dispensing, or doctor shopping at the time a prescription is written or sold would require states to improve computer capabilities. In addition, state prescription drug monitoring programs may require additional legal authority to analyze data proactively. At the time that OxyContin was first marketed, there were no industry or federal guidelines for the promotion of prescription drugs. Voluntary guidelines regarding how drug companies should market and promote their drugs to health care professionals were issued in July 2002 by the Pharmaceutical Research and Manufacturers of America (PhRMA). In April 2003, HHS’s Office of Inspector General issued voluntary guidelines for how drug companies should market and promote their products to federal health care programs. Neither set of guidelines distinguishes between controlled and noncontrolled substances. PhRMA’s voluntary code of conduct for sales representatives states that interactions with health care professionals should be to inform these professionals about products, to provide scientific and educational information, and to support medical research and education. The question-and-answer section of the code addresses companies’ use of branded promotional items, stating, for example, that golf balls and sports bags should not be distributed because they are not primarily for the benefit of patients, but that speaker training programs held at golf resorts may be acceptable if participants are receiving extensive training. Purdue adopted the code. In April 2003, HHS’s Office of Inspector General issued final voluntary guidance for drug companies’ interactions with health care professionals in connection with federal health care programs, including Medicare and Medicaid. Among the guidelines were cautions for companies against offering inappropriate travel, meals, and gifts to influence the prescribing of drugs; making excessive payments to physicians for consulting and research services; and paying physicians to switch their patients from competitors’ drugs. Purdue conducted an extensive campaign to market and promote OxyContin that focused on encouraging physicians, including those in primary care specialties, to prescribe the drug for noncancer as well as cancer pain. To implement its OxyContin campaign, Purdue significantly increased its sales force and used multiple promotional approaches. OxyContin sales and prescriptions grew rapidly following its market introduction, with the growth in prescriptions for noncancer pain outpacing the growth in prescriptions for cancer pain. DEA has expressed concern that Purdue marketed OxyContin for a wide variety of conditions to physicians who may not have been adequately trained in pain management. Purdue has been cited twice by FDA for OxyContin advertisements in medical journals that violated the FD&C Act. FDA has also taken similar actions against manufacturers of two of the three comparable schedule II controlled substances we examined, to ensure that their marketing and promotion were truthful, balanced, and accurately communicated. In addition, Purdue provided two promotional videos to physicians that, according to FDA appear to have made unsubstantiated claims and minimized the risks of OxyContin. The first video was available for about 3 years without being submitted to FDA for review. From the outset of the OxyContin marketing campaign, Purdue promoted the drug to physicians for noncancer pain conditions that can be caused by arthritis, injuries, and chronic diseases, in addition to cancer pain. Purdue directed its sales representatives to focus on the physicians in their sales territories who were high opioid prescribers. This group included cancer and pain specialists, primary care physicians, and physicians who were high prescribers of Purdue’s older product, MS Contin. One of Purdue’s goals was to identify primary care physicians who would expand the company’s OxyContin prescribing base. Sales representatives were also directed to call on oncology nurses, consultant pharmacists, hospices, hospitals, and nursing homes. From OxyContin’s launch until its July 2001 label change, Purdue used two key promotional messages for primary care physicians and other high prescribers. The first was that physicians should prescribe OxyContin for their pain patients both as the drug “to start with and to stay with.” The second contrasted dosing with other opioid pain relievers with OxyContin dosing as “the hard way versus the easy way” to dose because OxyContin’s twice-a-day dosing was more convenient for patients. Purdue’s sales representatives promoted OxyContin to physicians as an initial opioid treatment for moderate-to-severe pain lasting more than a few days, to be prescribed instead of other single-entity opioid analgesics or short-acting combination opioid pain relievers. Purdue has stated that by 2003 primary care physicians had grown to constitute nearly half of all OxyContin prescribers, based on data from IMS Health, an information service providing pharmaceutical market research. DEA’s analysis of physicians prescribing OxyContin found that the scope of medical specialties was wider for OxyContin than five other controlled-release, schedule II narcotic analgesics. DEA expressed concern that this resulted in OxyContin’s being promoted to physicians who were not adequately trained in pain management. Purdue’s promotion of OxyContin for the treatment of noncancer pain contributed to a greater increase in prescriptions for noncancer pain than for cancer pain from 1997 through 2002. According to IMS Health data, the annual number of OxyContin prescriptions for noncancer pain increased nearly tenfold, from about 670,000 in 1997 to about 6.2 million in 2002. In contrast, during the same 6 years, the annual number of OxyContin prescriptions for cancer pain increased about fourfold, from about 250,000 in 1997 to just over 1 million in 2002. The noncancer prescriptions therefore increased from about 73 percent of total OxyContin prescriptions to about 85 percent during that period, while the cancer prescriptions decreased from about 27 percent of the total to about 15 percent. IMS Health data indicated that prescriptions for other schedule II opioid drugs, such as Duragesic and morphine products, for noncancer pain also increased during this period. Duragesic prescriptions for noncancer pain were about 46 percent of its total prescriptions in 1997, and increased to about 72 percent of its total in 2002. Morphine products, including, for example, Purdue’s MS Contin, also experienced an increase in their noncancer prescriptions during the same period. Their noncancer prescriptions were about 42 percent of total prescriptions in 1997, and increased to about 65 percent in 2002. DEA has cited Purdue’s focus on promoting OxyContin for treating a wide range of conditions as one of the reasons the agency considered Purdue’s marketing of OxyContin to be overly aggressive. Purdue significantly increased its sales force to market and promote OxyContin to physicians and other health care practitioners. In 1996, Purdue began promoting OxyContin with a sales force of approximately 300 representatives in its Prescription Sales Division. Through a 1996 copromotion agreement, Abbott Laboratories provided at least another 300 representatives, doubling the total OxyContin sales force. By 2000, Purdue had more than doubled its own internal sales force to 671. The expanded sales force included sales representatives from the Hospital Specialty Division, which was created in 2000 to increase promotional visits on physicians located in hospitals. (See table 1.) The manufacturers of two of the three comparable schedule II drugs have smaller sales forces than Purdue. Currently, the manufacturer of Kadian has about 100 sales representatives and is considering entering into a copromotion agreement. Elan, the current owner of Oramorph SR, has approximately 300 representatives, but told us that it is not currently marketing Oramorph SR. The manufacturer of Avinza had approximately 50 representatives at its product launch. In early 2003, Avinza’s manufacturer announced that more than 700 additional sales representatives would be promoting the drug under its copromotion agreement with the pharmaceutical manufacturer Organon—for a total of more than 800 representatives. By more than doubling its total sales representatives, Purdue significantly increased the number of physicians to whom it was promoting OxyContin. Each Purdue sales representative has a specific sales territory and is responsible for developing a list of about 105 to 140 physicians to call on who already prescribe opioids or who are candidates for prescribing opioids. In 1996, the 300-plus Purdue sales representatives had a total physician call list of approximately 33,400 to 44,500. By 2000, the nearly 700 representatives had a total call list of approximately 70,500 to 94,000 physicians. Each Purdue sales representative is expected to make about 35 physician calls per week and typically calls on each physician every 3 to 4 weeks. Each hospital sales representative is expected to make about 50 calls per week and typically calls on each facility every 4 weeks. Purdue stated it offered a “better than industry average” salary and sales bonuses to attract top sales representatives and provide incentives to boost OxyContin sales as it had done for MS Contin. Although the sales representatives were primarily focused on OxyContin promotion, the amount of the bonus depended on whether a representative met the sales quotas in his or her sales territory for all company products. As OxyContin’s sales increased, Purdue’s growth-based portion of the bonus formula increased the OxyContin sales quotas necessary to earn the same base sales bonus amounts. The amount of total bonuses that Purdue estimated were tied to OxyContin sales increased significantly from about $1 million in 1996, when OxyContin was first marketed, to about $40 million in 2001. Beginning in 2000, when the newly created hospital specialty representatives began promoting OxyContin, their estimated total bonuses were approximately $6 million annually. In 2001, the average annual salary for a Purdue sales representative was $55,000, and the average annual bonus was $71,500. During the same year, the highest annual sales bonus was nearly $240,000, and the lowest was nearly $15,000. In 2001, Purdue decided to limit the sales bonus a representative could earn based on the growth in prescribing of a single physician after a meeting with the U.S. Attorney for the Western District of Virginia at which the company was informed of the possibility that a bonus could be based on the prescribing of one physician. In addition to expanding its sales force, Purdue used multiple approaches to market and promote OxyContin. These approaches included expanding its physician speaker bureau and conducting speaker training conferences, sponsoring pain-related educational programs, issuing OxyContin starter coupons for patients’ initial prescriptions, sponsoring pain-related Web sites, advertising OxyContin in medical journals, and distributing OxyContin marketing items to health care professionals. In our report on direct-to-consumer advertising, we found that most promotional spending is targeted to physicians. For example, in 2001, 29 percent of spending on pharmaceutical promotional activities was related to activities of pharmaceutical sales representatives directed to physicians, and 2 percent was for journal advertising—both activities Purdue uses for its OxyContin promotion. The remaining 69 percent of pharmaceutical promotional spending involved sampling (55 percent), which is the practice of providing drug samples during sales visits to physician offices, and direct-to-consumer advertising (14 percent)—both activities that Purdue has stated it does not use for OxyContin. According to DEA’s analysis of IMS Health data, Purdue spent approximately 6 to 12 times more on promotional efforts during OxyContin’s first 6 years on the market than it had spent on its older product, MS Contin, during its first 6 years, or than had been spent by Janssen Pharmaceutical Products, L.P., for one of OxyContin’s drug competitors, Duragesic. (See fig. 1.) During the first 5 years that OxyContin was marketed, Purdue conducted over 40 national pain management and speaker training conferences, usually in resort locations such as Boca Raton, Florida, and Scottsdale, Arizona, to recruit and train health care practitioners for its national speaker bureau. The trained speakers were then made available to speak about the appropriate use of opioids, including oxycodone, the active ingredient in OxyContin, to their colleagues in various settings, such as local medical conferences and grand round presentations in hospitals involving physicians, residents, and interns. Over the 5 years, these conferences were attended by more than 5,000 physicians, pharmacists, and nurses, whose travel, lodging, and meal costs were paid by the company. Purdue told us that less than 1 percent annually of the physicians called on by Purdue sales representatives attended these conferences. Purdue told us it discontinued conducting these conferences in fall 2000. Purdue’s speaker bureau list from 1996 through mid-2002 included nearly 2,500 physicians, of whom over 1,000 were active participants. Purdue has paid participants a fee for speaking based on the physician’s qualifications; the type of program and time commitment involved; and expenses such as airfare, hotel, and food. The company currently marketing the comparable drug Avinza has a physician speaker bureau, but does not sponsor speaker training and conferences at resort locations. Kadian’s current company does not have a physician speaker bureau and has not held any conferences. From 1996, when OxyContin was introduced to the market, to July 2002, Purdue has funded over 20,000 pain-related educational programs through direct sponsorship or financial grants. These grants included support for programs to provide physicians with opportunities to earn required continuing medical education credits, such as grand round presentations at hospitals and medical education seminars at state and local medical conferences. During 2001 and 2002, Purdue funded a series of nine programs throughout the country to educate hospital physicians and staff on how to comply with JCAHO’s pain standards for hospitals and to discuss postoperative pain treatment. Purdue was one of only two drug companies that provided funding for JCAHO’s pain management educational programs. Under an agreement with JCAHO, Purdue was the only drug company allowed to distribute certain educational videos and a book about pain management; these materials were also available for purchase from JCAHO’s Web site. Purdue’s participation in these activities with JCAHO may have facilitated its access to hospitals to promote OxyContin. For the first time in marketing any of its products, Purdue used a patient starter coupon program for OxyContin to provide patients with a free limited-time prescription. Unlike patient assistance programs, which provide free prescriptions to patients in financial need, a coupon program is intended to enable a patient to try a new drug through a one-time free prescription. A sales representative distributes coupons to a physician, who decides whether to offer one to a patient, and then the patient redeems it for a free prescription through a participating pharmacy. The program began in 1998 and ran intermittently for 4 years. In 1998 and 1999, each sales representative had 25 coupons that were redeemable for a free 30-day supply. In 2000 each representative had 90 coupons for a 7-day supply, and in 2001 each had 10 coupons for a 7-day supply. Approximately 34,000 coupons had been redeemed nationally when the program was terminated following the July 2001 OxyContin label change. The manufacturers of two of the comparable drugs we examined—Avinza and Kadian—used coupon programs to introduce patients to their products. Avinza’s coupon program requires patients to make a copayment to cover part of the drug’s cost. Purdue has also used Web sites to provide pain-related information to consumers and others. In addition to its corporate Web site, which provides product information, Purdue established the “Partners Against Pain” Web site in 1997 to provide consumers with information about pain management and pain treatment options. According to FDA, the Web site also contained information about OxyContin. Separate sections provide information for patients and caregivers, medical professionals, and institutions. The Web site includes a “Find a Doctor” feature to enable consumers to find physicians who treat pain in their geographic area. As of July 2002, over 33,000 physicians were included. Ligand, which markets Avinza, one of the comparable drugs, has also used a corporate Web site to provide product information. Purdue has also funded Web sites, such as FamilyPractice.com, that provide physicians with free continuing medical educational programs on pain management. Purdue has also provided funding for Web site development and support for health care groups such as the American Chronic Pain Association and the American Academy of Pain Medicine. In addition, Purdue is one of 28 corporate donors—which include all three comparable drug companies—listed on the Web site of the American Pain Society, the mission of which is to improve pain-related education, treatment, and professional practice. Purdue also sponsors painfullyobvious.com, which it describes as a youth-focused “message campaign designed to provide information—and stimulate open discussions—on the dangers of abusing prescription drugs.” Purdue also provided its sales representatives with 14,000 copies of a promotional video in 1999 to distribute to physicians. Entitled From One Pain Patient to Another: Advice from Patients Who Have Found Relief, the video was to encourage patients to report their pain and to alleviate patients’ concerns about taking opioids. Purdue stated that the video was to be used “in physician waiting rooms, as a ‘check out’ item for an office’s patient education library, or as an educational tool for office or hospital staff to utilize with patients and their families.” Copies of the video were also available for ordering on the “Partners Against Pain” Web site from June 2000 through July 2001. The video did not need to be submitted to FDA for its review because it did not contain any information about OxyContin. However, the video included a statement that opioid analgesics have been shown to cause addiction in less than 1 percent of patients. According to FDA, this statement has not been substantiated. As part of its marketing campaign, Purdue distributed several types of branded promotional items to health care practitioners. Among these items were OxyContin fishing hats, stuffed plush toys, coffee mugs with heat-activated messages, music compact discs, luggage tags, and pens containing a pullout conversion chart showing physicians how to calculate the dosage to convert a patient to OxyContin from other opioid pain relievers. In May 2002, in anticipation of PhRMA’s voluntary guidance for sales representatives’ interactions with health care professionals, Purdue instructed its sales force to destroy any remaining inventory of non-health- related promotional items, such as stuffed toys or golf balls. In early 2003, Purdue began distributing an OxyContin branded goniometer—a range and motion measurement guide. According to DEA, Purdue’s use of branded promotional items to market OxyContin was unprecedented among schedule II opioids, and was an indicator of Purdue’s aggressive and inappropriate marketing of OxyContin. Another approach Purdue used to promote OxyContin was to place advertisements in medical journals. Purdue’s annual spending for OxyContin advertisements increased from about $700,000 in 1996 to about $4.6 million in 2001. All three companies that marketed the comparable drugs have also used medical journal advertisements to promote their products. Purdue has been cited twice by FDA for using advertisements in professional medical journals that violated the FD&C Act. In May 2000, FDA issued an untitled letter to Purdue regarding a professional medical journal advertisement for OxyContin. FDA noted that among other problems, the advertisement implied that OxyContin had been studied for all types of arthritis pain when it had been studied only in patients with moderate-to-severe osteoarthritis pain, the advertisement suggested OxyContin could be used as an initial therapy for the treatment of osteoarthritis pain without substantial evidence to support this claim, and the advertisement promoted OxyContin in a selected class of patients— the elderly—without presenting risk information applicable to that class of patients. Purdue agreed to stop dissemination of the advertisement. The second action taken by FDA was more serious. In January 2003, FDA issued a warning letter to Purdue regarding two professional medical journal advertisements for OxyContin that minimized its risks and overstated its efficacy, by failing to prominently present information from the boxed warning on the potentially fatal risks associated with OxyContin and its abuse liability, along with omitting important information about the limitations on the indicated use of OxyContin. The FDA requested that Purdue cease disseminating these advertisements and any similar violative materials and provide a plan of corrective action. In response, Purdue issued a corrected advertisement, which called attention to the warning letter and the cited violations and directed the reader to the prominently featured boxed warning and indication information for OxyContin. The FDA letter was one of only four warning letters issued to drug manufacturers during the first 8 months of 2003. In addition, in follow-up discussions with Purdue officials on the January 2003 warning letter, FDA expressed concerns about some of the information on Purdue’s “Partners Against Pain” Web site. The Web site appeared to suggest unapproved uses of OxyContin for postoperative pain that may have been inconsistent with OxyContin’s labeling and lacked risk information about the drug. For example, one section of the Web site did not disclose that OxyContin is not indicated for pain in the immediate postoperative period—the first 12 to 24 hours following surgery—for patients not previously taking the drug, because its safety in this setting has not been established. The Web site also did not disclose that OxyContin is indicated for postoperative pain in patients already taking the drug or for use after the first 24 hours following surgery only if the pain is moderate to severe and expected to persist for an extended period of time. Purdue voluntarily removed all sections of the Web site that were of concern to FDA. FDA has also sent enforcement letters to other manufacturers of controlled substances for marketing and promotion violations of the FD&C Act. For example, in 1996, FDA issued an untitled letter to Zeneca Pharmaceuticals, at the time the promoter of Kadian, for providing information about the drug to a health professional prior to its approval in the United States. Roxane Laboratories, the manufacturer of Oramorph SR, was issued four untitled letters between 1993 and 1995 for making misleading and possibly false statements. Roxane used children in an advertisement even though Oramorph SR had not been evaluated in children, and a Roxane sales representative issued a promotional letter to a pharmacist that claimed, among other things, that Oramorph SR was superior to MS Contin in providing pain relief. FDA has sent no enforcement letters to Ligand Pharmaceuticals concerning Avinza. Beginning in 1998, Purdue, as part of its marketing and promotion of OxyContin, distributed 15,000 copies of an OxyContin video to physicians without submitting it to FDA for review. This video, entitled I Got My Life Back: Patients in Pain Tell Their Story, presented the pain relief experiences of various patients and the pain medications, including OxyContin, they had been prescribed. FDA regulations require pharmaceutical manufacturers to submit all promotional materials for approved prescription drug products to the agency at the time of their initial use. Because Purdue did not comply with this regulation, FDA did not have an opportunity to review the video to ensure that the information it contained was truthful, balanced, and accurately communicated. Purdue has acknowledged the oversight of not submitting the video to FDA for review. In February 2001, Purdue submitted a second version of the video to FDA, which included information about the 160-milligram OxyContin tablet. FDA did not review this second version until October 2002, after we inquired about its content. FDA told us it found that the second version of the video appeared to make unsubstantiated claims regarding OxyContin’s effect on patients’ quality of life and ability to perform daily activities and minimized the risks associated with the drug. The 1998 video used a physician spokesperson to describe patients with different pain syndromes and the limitations that each patient faced in his or her daily activities. Each patient’s pain treatment was discussed, along with the dose amounts and brand names of the prescription drugs, including OxyContin, that either had been prescribed in the past or were being prescribed at that time. The physician in the videos also stated that opioid analgesics have been shown to cause addiction in less than 1 percent of patients—a fact that FDA has stated has not been substantiated. At the end of the video, the OxyContin label was scrolled for the viewer. In 2000, Purdue submitted another promotional video to FDA entitled I Got My Life Back: A Two Year Follow up of Patients in Pain, and it submitted a second version of this video in 2001, which also included information on the 160-milligram OxyContin tablet. Purdue distributed 12,000 copies of these videos to physicians. Both versions scrolled the OxyContin label at the end of the videos. FDA stated that it did not review either of these videos for enforcement purposes because of limited resources. Distribution of all four Purdue videos was discontinued by July 2001, in response to OxyContin’s labeling changes, which required the company to modify all of its promotional materials, but copies of the videos that had already been distributed were not retrieved and destroyed. FDA said that it receives numerous marketing and promotional materials for promoted prescription drugs and that while every effort is made to review the materials, it cannot guarantee that all materials are reviewed because of limited resources and competing priorities. FDA officials also stated that pharmaceutical companies do not always submit promotional materials as required by regulations and that in such instances FDA would not have a record of the promotional pieces. There are several factors that may have contributed to the abuse and diversion of OxyContin. OxyContin’s formulation as a controlled-release opioid that is twice as potent as morphine may have made it an attractive target for abuse and diversion. In addition, the original label’s safety warning advising patients not to crush the tablets because of the possible rapid release of a potentially toxic amount of oxycodone may have inadvertently alerted abusers to possible methods for misuse. Further, the rapid growth in OxyContin sales increased the drug’s availability in the marketplace and may have contributed to opportunities to obtain the drug illicitly. The history of abuse and diversion of prescription drugs in some geographic areas, such as those within the Appalachian region, may have predisposed some states to problems with OxyContin. However, we could not assess the relationship between the growth in OxyContin prescriptions or increased availability with the drug’s abuse and diversion because the data on abuse and diversion are not reliable, comprehensive, or timely. While OxyContin’s potency and controlled-release feature may have made the drug beneficial for the relief of moderate-to-severe pain over an extended period of time, DEA has stated that those attributes of its formulation have also made it an attractive target for abuse and diversion. According to recent studies, oxycodone, the active ingredient in OxyContin, is twice as potent as morphine. In addition, OxyContin’s controlled-release feature allows a tablet to contain more active ingredient than other, non-controlled-release oxycodone-containing drugs. One factor that may have contributed to the abuse and diversion of OxyContin was FDA’s original decision to label the drug as having less abuse potential than other oxycodone products because of its controlled- release formulation. FDA officials said when OxyContin was approved the agency believed that the controlled-release formulation would result in less abuse potential because, when taken properly, the drug would be absorbed slowly, without an immediate rush or high. FDA officials acknowledged that the initial wording of OxyContin’s label was “unfortunate” but was based on what was known about the product at that time. FDA officials told us that abusers typically seek a drug that is intense and fast-acting. When OxyContin was approved, FDA did not recognize that if the drug is dissolved in water and injected its controlled-release characteristics could be disrupted, creating an immediate rush or high and thereby increasing the potential for misuse and abuse. DEA officials told us that OxyContin became a target for abusers and diverters because the tablet contained larger amounts of active ingredient and the controlled- release formulation was easy for abusers to compromise. The safety warning on the OxyContin label may also have contributed to the drug’s potential for abuse and diversion, by inadvertently providing abusers with information on how the drug could be misused. The label included the warning that the tablets should not be broken, chewed, or crushed because such action could result in the rapid release and absorption of a potentially toxic dose of oxycodone. FDA places similar safety warnings on other drugs to ensure that they are used properly. FDA officials stated that neither they nor other experts anticipated that crushing the controlled-release tablet and intravenously injecting or snorting the drug would become widespread and lead to a high level of abuse. The large amount of OxyContin available in the marketplace may have increased opportunities for abuse and diversion. Both DEA and Purdue have stated that an increase in a drug’s availability in the marketplace may be a factor that attracts interest by those who abuse and divert drugs. Following its market introduction in 1996, OxyContin sales and prescriptions grew rapidly through 2002. In 2001 and 2002 combined, sales of OxyContin approached $3 billion, and over 14 million prescriptions for the drug were dispensed. (See table 2.) OxyContin also became the top- selling brand-name narcotic pain reliever in 2001 and was ranked 15th on a list of the nation’s top 50 prescription drugs by retail sales. According to DEA, the abuse and diversion of OxyContin in some states may have reflected the geographic area’s history of prescription drug abuse. The White House Office of National Drug Control Policy (ONDCP) designates geographic areas with illegal drug trade activities for allocation of federal resources to link local, state, and federal drug investigation and enforcement efforts. These areas, known as High-Intensity Drug Trafficking Areas (HIDTA), are designated by ONDCP in consultation with the Attorney General, the Secretary of the Treasury, heads of drug control agencies, and governors in the states involved. According to a 2001 HIDTA report, the Appalachian region, which encompasses parts of Kentucky, Tennessee, Virginia, and West Virginia, has been severely affected by prescription drug abuse, particularly pain relievers, including oxycodone, for many years. Three of the four states— Kentucky, Virginia, and West Virginia—were among the initial states to report OxyContin abuse and diversion. Historically, oxycodone, manufactured under brand names such as Percocet, Percodan, and Tylox, was among the most diverted prescription drugs in Appalachia. According to the report, OxyContin has become the drug of choice of abusers in several areas within the region. The report indicates that many areas of the Appalachian region are rural and poverty-stricken, and the profit potential resulting from the illicit sale of OxyContin may have contributed to its diversion and abuse. In some parts of Kentucky, a 20-milligram OxyContin tablet, which can be purchased by legitimate patients for about $2, can be sold illicitly for as much as $25. The potential to supplement their incomes can lure legitimate patients into selling some of their OxyContin to street dealers, according to the HIDTA report. The databases DEA uses to track the abuse and diversion of controlled substances all have limitations that prevent an assessment of the relationship between the availability of OxyContin and areas where the drug is being abused or diverted. Specifically, these databases, which generally do not provide information on specific brand-name drugs such as OxyContin, are based on data gathered from limited sources in specific geographic areas and have a significant time lag. As a result, they do not provide reliable, complete, or timely information that could be used to identify abuse and diversion of a specific drug. DEA officials told us that it is difficult to obtain reliable data on what controlled substances are being abused by individuals and diverted from pharmacies because available drug abuse and diversion tracking systems do not capture data on a specific brand-name product or indicate where a drug product is being abused and diverted on a state and local level. Because of the time lags in reporting information, the data reflect a delayed response to any emerging drug abuse and diversion problem. For example, the Drug Abuse Warning Network (DAWN) estimates national drug-related emergency department visits or deaths involving abused drugs using data collected by the Substance Abuse and Mental Health Services Administration (SAMHSA). The data are collected from hospital emergency departments in 21 metropolitan areas that have agreed to voluntarily report drug-abuse-related information from a sample of patient medical records, and from medical examiners in 42 metropolitan areas. However, DAWN cannot make estimates for rural areas, where initial OxyContin abuse and diversion problems were reported to be most prevalent, nor does it usually provide drug-product-specific information, and its data have a lag time of about 1 year. DEA stated that development of enhanced data collection systems is needed to provide “credible, legally defensible evidence concerning drug abuse trends in America.” DEA relies primarily on reports from its field offices to determine where abuse and diversion are occurring. DEA officials stated that the initial areas that experienced OxyContin abuse and diversion problems included rural areas within 8 states—Alaska, Kentucky, Maine, Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. In July 2002, DEA told us that it learned that OxyContin abuse and diversion problems had spread into larger areas of the initial 8 states, as well as parts of 15 other states, to involve almost half of the 50 states. According to DEA officials, while DEA field offices continue to report OxyContin as a drug of choice among abusers, OxyContin has not been and is not now considered the most highly abused and diverted prescription drug nationally. OxyContin is the most abused single-entity prescription product according to those DEA state and divisional offices that report OxyContin abuse. Since becoming aware of reports of abuse and diversion of OxyContin, federal and state agencies and Purdue have taken actions intended to address these problems. To protect the public health, FDA has strengthened OxyContin label warnings and requested that Purdue develop and implement an OxyContin risk management plan. In addition, DEA has stepped up law enforcement actions to prevent abuse and diversion of OxyContin. State Medicaid fraud control units have also attempted to identify those involved in the abuse and diversion of OxyContin. Purdue has initiated drug abuse and diversion education programs, taken disciplinary actions against sales representatives who improperly promote OxyContin, and referred physicians who were suspected of improperly prescribing OxyContin to the appropriate authorities. However, until fall 2002 Purdue did not analyze its comprehensive physician prescribing reports, which it routinely uses in marketing and promoting OxyContin, and other indicators to identify possible physician abuse and diversion. Reports of abuse and diversion of OxyContin that were associated with an increasing incidence of addiction, overdose, and death prompted FDA to revise the drug’s label and take other actions to protect the public health. In July 2001, FDA reevaluated OxyContin’s label and made several changes in an effort to strengthen the “Warnings” section of the label. FDA added a subsection—“Misuse, Abuse, and Diversion of Opioids”—to stress that physicians and pharmacists should be alert to the risk of misuse, abuse, and diversion when prescribing or dispensing OxyContin. FDA also added a black box warning—the highest level of warning FDA can place on an approved drug product. FDA highlighted the language from the original 1995 label—stating that OxyContin is a schedule II controlled substance with an abuse liability similar to morphine—by moving it into the black box. Also, while the original label suggested that taking broken, chewed, or crushed OxyContin tablets “could lead to the rapid release and absorption of a potentially toxic dose of oxycodone,” a more strongly worded warning in the black box stated that taking the drug in this manner “leads to rapid release and absorption of a potentially fatal dose of oxycodone” (emphasis added). (See table 3.) In addition to the black box warning, FDA also changed the language in the original label that described the incidence of addiction inadvertently induced by physician prescribing as rare if opioids are legitimately used in the management of pain. The revised label stated that data are not available to “establish the true incidence of addiction in chronic patients.” As mentioned earlier, the indication described in the original label was also revised to clarify the appropriate time period for which OxyContin should be prescribed for patients experiencing moderate-to-severe pain. The language in the 1995 label was changed from “where use of an opioid analgesic is appropriate for more than a few days” to “when a continuous, around-the-clock analgesic is needed for an extended period of time.” (See table 4.) A summary of changes made by FDA to the original OxyContin label is given in appendix II. Beginning in early 2001, FDA collaborated with Purdue to develop and implement a risk management plan to help identify and prevent abuse and diversion of OxyContin. As a part of the risk management plan in connection with the labeling changes, Purdue was asked by FDA to revise all of its promotional materials for OxyContin to reflect the labeling changes. In August 2001, FDA sent a letter to Purdue stating that all future promotional materials for OxyContin should prominently disclose the information contained in the boxed warning; the new warnings that address misuse, abuse, diversion, and addiction; and the new precautions and revised indication for OxyContin. Purdue agreed to comply with this request. FDA officials told us that it is standard procedure to contact a drug manufacturer when the agency becomes aware of reports of abuse and diversion of a drug product so that FDA and the drug manufacturer can tailor a specific response to the problem. While FDA’s experience with risk management plans is relatively new, agency officials told us that OxyContin provided the opportunity to explore the use of the plans to help identify abuse and diversion problems. FDA is currently making decisions about whether risk management plans will be requested for selected opioid products. Also, in September 2003, FDA’s Anesthetic and Life Support Drugs Advisory Committee held a public hearing to discuss its current review of proposed risk management plans for opioid analgesic drug products to develop strategies for providing patients with access to pain treatment while limiting the abuse and diversion of these products. FDA has also taken other actions to address the abuse and diversion of OxyContin. It put information on its Web site for patients regarding the appropriate use of OxyContin. FDA worked with Purdue to develop “Dear Health Care Professional” letters, which the company distributed widely to health care professionals to alert them that the package insert had been revised to clarify the indication and strengthen the warnings related to misuse, abuse, and diversion. FDA also has worked with DEA, SAMHSA, the National Institute on Drug Abuse, ONDCP, and the Centers for Disease Control and Prevention to share information and insights on the problem of abuse and diversion of OxyContin. In April 2001, DEA developed a national action plan to deter abuse and diversion of OxyContin. According to DEA officials, this marked the first time the agency had targeted a specific brand-name product for monitoring because of the level and frequency of abuse and diversion associated with the drug. Key components of the action plan include coordinating enforcement and intelligence operations with other law enforcement agencies to target people and organizations involved in abuse and diversion of OxyContin, pursuing regulatory and administrative action to limit abusers’ access to OxyContin, and building national outreach efforts to educate the public on the dangers related to the abuse and diversion of OxyContin. DEA has also set Purdue’s procurement quota for oxycodone at levels lower than the levels requested by Purdue. DEA has increased enforcement efforts to prevent abuse and diversion of OxyContin. From fiscal year 1996 through fiscal year 2002, DEA initiated 313 investigations involving OxyContin, resulting in 401 arrests. Most of the investigations and arrests occurred after the initiation of the action plan. Since the plan was enacted, DEA initiated 257 investigations and made 302 arrests in fiscal years 2001 and 2002. Among those arrested were several physicians and pharmacists. Fifteen health care professionals either voluntarily surrendered their controlled substance registrations or were immediately suspended from registration by DEA. In addition, DEA reported that $1,077,500 in fines was assessed and $742,678 in cash was seized by law enforcement agencies in OxyContin-related cases in 2001 and 2002. Among several regulatory and administrative actions taken to limit abusers’ access to OxyContin and controlled substances, DEA’s Office of Diversion Control, in collaboration with the Department of Justice’s Office of Justice Programs, Bureau of Justice Assistance, provides grants to states for the establishment of prescription drug monitoring programs. The conference committee report for the fiscal year 2002 appropriation to the Department of Justice directed the Office of Justice Programs to make a $2 million grant in support of the Harold Rogers Prescription Drug Monitoring Program, which enhances the capacity of regulatory and law enforcement agencies to collect and analyze controlled substance prescription data. The program provided grants to establish new monitoring programs in Ohio, Pennsylvania, Virginia, and West Virginia. California, Kentucky, Massachusetts, Nevada, and Utah also received grants to enhance existing monitoring programs. DEA has also attempted to raise national awareness of the dangers associated with abuse and diversion of OxyContin. In October 2001 DEA joined 21 national pain and health organizations in issuing a consensus statement calling for a balanced policy on prescription medication use. According to the statement, such a policy would acknowledge that health care professionals and DEA share responsibility for ensuring that prescription medications, such as OxyContin, are available to patients who need them and for preventing these drugs from becoming a source of abuse and diversion. DEA and the health organizations also called for a renewed focus on educating health professionals, law enforcement, and the public about the appropriate use of opioid pain medications in order to promote responsible prescribing and limit instances of abuse and diversion. DEA is also working with FDA to encourage state medical boards to require, as a condition of their state licensing, that physicians obtain continuing medical education on pain management. When OxyContin was first introduced to the market in 1996, DEA granted Purdue’s initial procurement quota request for oxycodone. According to DEA, increases in the quota were granted for the first several years. Subsequently, concern over the dramatic increases in sales caused DEA to request additional information to support Purdue’s requests to increase the quota. In the last several years, DEA has taken the additional step of lowering the procurement quota requested by Purdue for the manufacture of OxyContin as a means for addressing abuse and diversion. However, DEA has cited the difficulty of determining an appropriate level while ensuring that adequate quantities were available for legitimate medical use, as there are no direct measures available to establish legitimate medical need. State Medicaid fraud control units and medical licensure boards have taken action in response to reports of abuse and diversion of OxyContin. State Medicaid fraud control units have conducted investigations of abuse and diversion of OxyContin, but generally do not maintain precise data on the number of investigations and enforcement actions completed. Although complete information was not available from directors of state Medicaid fraud control units in Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia with whom we spoke, each of those directors told us that abuse and diversion of OxyContin is a problem in his or her state. The directors told us that they had investigated cases that involved physicians or individuals who had either been indicted or prosecuted for writing medically unnecessary OxyContin prescriptions in exchange for cash or sexual relationships. State medical licensure boards have also responded to complaints about physicians who were suspected of abuse and diversion of controlled substances, but like the Medicaid fraud control units, the boards generally do not maintain data on the number of investigations that involved OxyContin. Representatives of state boards of medicine in Kentucky, Pennsylvania, Virginia, and West Virginia told us that they have received complaints from various sources, such as government agencies, health care professionals, and anonymous tipsters, about physicians suspected of abuse and diversion of controlled substances. However, each of the four representatives stated that his or her board does not track the complaints by specific drug type and consequently cannot determine whether the complaints received allege physicians’ misuse of OxyContin. Each of the four representatives also told us that his or her medical licensure board has adopted or strengthened guidelines or regulations for physicians on prescribing, administering, and dispensing controlled substances in the treatment of chronic pain. For example, in March 2001, the Kentucky Board of Medical Licensure adopted guidelines to clarify the board’s position on the use of controlled substances for nonterminal/nonmalignant chronic pain. The boards of medicine in Pennsylvania, Virginia, and West Virginia each have guidelines for the appropriate use of controlled substances that are similar to those adopted by Kentucky. In response to concerns about abuse and diversion of OxyContin, in April 2001 FDA and Purdue began to discuss the development of a risk management plan to help detect and prevent abuse and diversion of OxyContin. Purdue submitted its risk management plan to FDA for review in August 2001. The plan includes some actions that Purdue proposed to take, as well as others that it has already taken. Purdue’s risk management plan includes actions such as strengthening the safety warnings on OxyContin’s label for professionals and patients, training Purdue’s sales force on the revised label, conducting comprehensive education programs for health care professionals, and developing a database for identifying and monitoring abuse and diversion of OxyContin. Under the risk management plan, OxyContin’s label was strengthened, effective in July 2001, by revising the physician prescribing information and adding a black box warning to call attention to OxyContin’s potential for misuse, abuse, and diversion. (See app. II.) Purdue trained its sales force on the specifics of the revised label and provided sales representatives with updated information on the appropriate use of opioid analgesics, legal guidelines associated with promotion of its products, and their responsibility and role in reporting adverse events. Purdue also reiterated to its sales representatives that failure to promote products according to the approved label, promotional materials, and applicable FDA standards would result in disciplinary action by the company. According to Purdue, from April 2001 through May 2003 at least 10 Purdue employees were disciplined for using unapproved materials in promoting OxyContin. Disciplinary actions included warning letters, suspension without pay, and termination. Purdue also has provided education programs for health care professionals and the public under its risk management plan. For example, in 2001 Purdue supported seminars that examined ways health care professionals can help prevent abuse and diversion of opioids. Purdue worked with DEA and other law enforcement agencies to develop and implement antidiversion educational programs. In 2002, Purdue also launched the Web site painfullyobvious.com to educate teenagers, parents, law enforcement officers, and discussion leaders about the dangers of prescription drug abuse. Because reliable data on the abuse and diversion of controlled substance drugs are not available, Purdue developed the Researched Abuse, Diversion, and Addiction-Related Surveillance (RADARS) System, as part of its risk management plan, to study the nature and extent of abuse of OxyContin and other schedule II and III prescription medications and to implement interventions to reduce abuse and diversion. According to Purdue, RADARS collects and computes abuse, diversion, and addiction rates for certain drugs based on population and determines national and local trends. Since the launch of OxyContin, Purdue has provided its sales force with considerable information to help target physicians and prioritize sales contacts within a sales territory. Sales representatives routinely receive daily, weekly, monthly, and quarterly physician prescribing reports based on IMS Health data that specify the physicians who have written prescriptions for OxyContin and other opioid analgesics, and the number of prescriptions written. Although this information has always been available for use by Purdue and its sales representatives, it was not until fall 2002 that Purdue directed its sales representatives to begin using 11 indicators to identify possible abuse and diversion and to report the incidents to Purdue’s General Counsel’s Office for investigation. Among the possible indicators are a sudden unexplained change in a physician’s prescribing patterns that is not accounted for by changes in patient numbers, information from credible sources such as a pharmacist that a physician or his or her patients are diverting medications, or a physician who writes a large number of prescriptions for patients who pay with cash. As of September 2003, Purdue—through its own investigations—had identified 39 physicians and other health care professionals who were referred to legal, medical, or regulatory authorities for further action. Most of the 39 referrals stemmed from reports by Purdue’s sales force. Other actions included in the plan that were taken by Purdue prior to submission of its risk management plan include discontinuance of the 160- milligram tablet of OxyContin to reduce the risk of overdose from this dosage strength, the development of unique markings for OxyContin tablets intended for distribution in Mexico and Canada to assist law enforcement in identifying OxyContin illegally smuggled into the United States, and the distribution of free tamper-resistant prescription pads designed to prevent altering or copying of the prescription. Purdue also implemented a program in 2001 to attempt to predict “hot spots” where OxyContin abuse and diversion were likely to occur, but discontinued the program in 2002 when Purdue concluded that nearly two-thirds of the counties identified had no abuse and diversion. At present, both federal agencies and the states have responsibilities involving prescription drugs and their abuse and diversion. FDA is responsible for approving new drugs and ensuring that the materials drug companies use to market and promote these drugs are truthful, balanced, and accurate. However, FDA examines these promotional materials only after they have been used in the marketplace because the FD&C Act generally does not give FDA authority to review these materials before the drug companies use them. Moreover, the FD&C Act provisions governing drug approval and promotional materials make no distinction between controlled substances, such as OxyContin, and other prescription drugs. DEA is responsible for registering handlers of controlled substances, approving production quotas and monitoring distribution of controlled substances to the retail level. It is the states, however, that are responsible for overseeing the practice of medicine and pharmacy where drugs are prescribed and dispensed. Some states have established prescription drug monitoring programs to help them detect and deter abuse and diversion. However, these programs exist in only 15 states and most do not proactively analyze prescription data to identify individuals, physicians, or pharmacies that have unusual use, prescribing, or dispensing patterns that may suggest potential drug diversion or abuse. The significant growth in the use of OxyContin to treat patients suffering from chronic pain has been accompanied by widespread reports of abuse and diversion that have in some cases led to deaths. The problem of abuse and diversion has highlighted shortcomings at the time of approval in the labeling of schedule II controlled substances, such as OxyContin, and in the plans in place to detect misuse, as well as in the infrastructure for detecting and preventing the abuse and diversion of schedule II controlled substances already on the market. Addressing abuse and diversion problems requires the collaborative efforts of pharmaceutical manufacturers; the federal and state agencies that oversee the approval and use of prescription drugs, particularly controlled substances; the health care providers who prescribe and dispense them; and law enforcement. After the problems with OxyContin began to surface, FDA and Purdue collaborated on a risk management plan to help detect and prevent abuse and diversion. Although risk management plans were not in use when OxyContin was approved, they are now an optional feature of new drug applications. FDA plans to complete its guidance to the pharmaceutical industry on risk management plans by September 30, 2004. The development of this guidance, coupled with FDA’s current review of proposed risk management plans for modified-release opioid analgesics, provides an opportunity to help ensure that manufacturers include a strategy to monitor the use of these drugs and to identify potential problems with abuse and diversion. To improve efforts to prevent or identify the abuse and diversion of schedule II controlled substances, we recommend that the Commissioner of Food and Drugs ensure that FDA’s risk management plan guidance encourages pharmaceutical manufacturers that submit new drug applications for these substances to include plans that contain a strategy for monitoring the use of these drugs and identifying potential abuse and diversion problems. We provided a draft of this report to FDA, DEA, and Purdue, the manufacturer of OxyContin, for their review. FDA and DEA provided written comments. (See apps. IV and V.) Purdue’s representatives provided oral comments. FDA said that it agreed with our recommendation that its risk management plan guidance should encourage all pharmaceutical manufacturers submitting new drug applications for schedule II controlled substances to include strategies to address abuse and diversion concerns. FDA stated that the agency is working on the risk management plan guidance. FDA also noted that the FD&C Act makes no distinction between controlled substances and other prescription drugs in its provisions regulating promotion, but that as a matter of general policy, the agency more closely scrutinizes promotion of drugs with more serious risk profiles. However, FDA does not have written guidance that specifies that promotional materials for controlled substances receive priority or special attention over similar materials for other prescription drugs. Furthermore, our finding that FDA did not review any of the OxyContin promotional videos provided by Purdue until we brought them to the agency’s attention raises questions about whether FDA provides extra attention to promotional materials for controlled substances that by definition have a high potential for abuse and may lead to severe psychological or physical dependence. FDA recommended that we clarify our description of the content of the warning letter issued to Purdue and provide additional information describing the extent of the corrective action taken by Purdue. FDA also recommended noting in the report that part of the risk management plan in connection with the 2001 labeling changes was a requirement that all OxyContin promotional materials be revised to reflect the labeling changes and all future materials prominently disclose this information. Finally, FDA noted that the promotional videos discussed in the report were submitted by Purdue prior to the labeling change and discontinued as a result of the labeling change. As we note in the report, Purdue acknowledged that all the promotional videos were not submitted to FDA at the time they were distributed. Moreover, although Purdue told us that these videos were no longer distributed after the label change, those videos that had been distributed were not collected and destroyed. We revised the report to reflect FDA’s general comments. FDA also provided technical comments that we incorporated where appropriate. In its written comments, DEA agreed that the data on abuse and diversion are not reliable, comprehensive, or timely, as we reported. DEA reiterated its previous statement that Purdue’s aggressive marketing of OxyContin fueled demand for the drug and exacerbated the drug’s abuse and diversion. DEA also stated that Purdue minimized the abuse risk associated with OxyContin. We agree with DEA that Purdue conducted an extensive campaign to market and promote OxyContin using an expanded sales force and multiple promotional approaches to encourage physicians, including primary care specialists, to prescribe OxyContin as an initial opioid treatment for noncancer pain, and that these efforts may have contributed to the problems with abuse and diversion by increasing the availability of the drug in the marketplace. However, we also noted that other factors may have contributed to these problems. We also agree that Purdue marketed OxyContin as having a low abuse liability, but we noted that this was based on information in the original label approved by FDA. DEA also acknowledged that the lack of a real measure of legitimate medical need for a specific product (OxyContin), substance (oxycodone), or even a class of substances (controlled release opioid analgesics) makes it difficult to limit manufacturing as a means of deterring abuse and diversion. DEA also noted that it is essential that risk management plans be put in place prior to the introduction of controlled substances into the marketplace, consistent with our recommendation. We revised the report to provide some additional detail on problems associated with OxyContin and Purdue’s marketing efforts. DEA provided some technical comments on the draft report that we incorporated where appropriate. Purdue representatives provided oral comments on a draft of this report. In general, they thought the report was fair and balanced; however, they offered both general and technical comments. Specifically, Purdue stated that the report should add the media as a factor contributing to the abuse and diversion of OxyContin because media stories provided the public with information on how to “get high” from using OxyContin incorrectly. Our report notes that the safety warning on the original label may have inadvertently alerted abusers to a possible method for misusing the drug. However, we note that the original label was publicly available from FDA once OxyContin was approved for marketing. Purdue also suggested that we include Duragesic, also a schedule II opioid analgesic, as a fourth comparable drug to OxyContin. The three comparable drugs we used in the report were chosen in consultation with FDA as comparable opioid analgesics to OxyContin, because they were time-released, morphine- based schedule II drugs formulated as tablets like OxyContin. In contrast, Duragesic, which contains the opioid analgesic fentanyl and provides pain relief over a 72-hour period, is formulated as a skin patch to be worn rather than as a tablet. Purdue representatives also provided technical comments that were incorporated where appropriate. We also provided sections of this draft report to the manufacturers of three comparative drugs we examined. Two of the three companies with a drug product used as a comparable drug to OxyContin reviewed the portions of the draft report concerning their own product, and provided technical comments, which were incorporated where appropriate. The third company did not respond to our request for comments. As agreed with your offices, unless you publicly announce this report’s contents earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies of this report to the Commissioner of Food and Drugs, the Administrator of the Drug Enforcement Administration, Purdue, and the other pharmaceutical companies whose drugs we examined. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-7119 or John Hansen at (202) 512-7105. Major contributors to this report were George Bogart, Darryl Joyce, Roseanne Price, and Opal Winebrenner. To identify the strategies and approaches used by Purdue Pharma L.P. (Purdue) to market and promote OxyContin, we interviewed Purdue officials and analyzed company documents and data. Specifically, we interviewed Purdue officials concerning its marketing and promotional strategies for OxyContin, including its targeting of physicians with specific specialties and its sales compensation plan to provide sales representatives with incentives for the drug’s sales. We also interviewed selected Purdue sales representatives who had high and midrange sales during 2001 from Kentucky, Pennsylvania, Virginia, and West Virginia— four states that were initially identified by the Drug Enforcement Agency (DEA) as having a high incidence of OxyContin drug abuse and diversion—and from California, Massachusetts, and New Jersey—three states that DEA did not initially identify as having problems with OxyContin. We asked the sales representatives about their training, promotional strategies and activities, and targeting of physicians. We also interviewed physicians who were among the highest prescribers of OxyContin regarding their experiences with Purdue sales representatives, including the strategies used to promote OxyContin, as well as their experiences with sales representatives of manufacturers of other opioid analgesics. We reviewed Purdue’s quarterly action plans for marketing and promoting OxyContin for 1996 through 2003, Purdue’s sales representative training materials, and materials from ongoing OxyContin-related litigation. To obtain information on how Purdue’s marketing and promotion of OxyContin compared to that of other companies, we identified, in consultation with the Food and Drug Administration (FDA), three opioid analgesics that were similar to OxyContin. The three drugs— Avinza, Kadian, and Oramorph SR—are all time-released, morphine-based analgesics that are classified as schedule II controlled substances. We examined the promotional materials each drug’s manufacturer submitted to FDA and any actions FDA had taken against the manufacturers related to how the drugs were marketed or promoted. We also interviewed company officials about how they marketed and promoted their respective drugs. Because of their concerns about proprietary information, the three companies did not provide us with the same level of detail about their drugs’ marketing and promotion as did Purdue. To examine factors that contributed to the abuse and diversion of OxyContin, we reviewed DEA abuse and diversion data as part of an effort to compare them with DEA’s OxyContin state distribution data and with IMS Health data on the rates of OxyContin sales and prescription dispensing to determine if they occurred in similar geographic areas. We also analyzed the distribution of Purdue sales representatives by state and compared them with the availability of OxyContin and abuse and diversion data to determine whether states with high rates of OxyContin sales and prescription dispensing and abuse and diversion problems had more sales representatives per capita than other states. However, limitations in the abuse and diversion data prevent an assessment of the relationship between the availability of OxyContin and areas where the drug was abused and diverted. We also reviewed the High Intensity Drug Trafficking Area (HIDTA) reports on states with histories of illegal drug activities. We interviewed DEA and FDA officials, physicians who prescribed OxyContin, officials from physician licensing boards in selected states, officials from national health practitioner groups, and company officials and sales representatives about why OxyContin abuse and diversion have occurred. To determine the efforts federal and state agencies and Purdue have made to identify and prevent abuse and diversion of controlled substances such as OxyContin, we interviewed FDA officials and analyzed information from FDA regarding the marketing and promotion of controlled substances, specifically OxyContin; FDA’s decision to approve the original label for OxyContin; and FDA’s subsequent decision to revise OxyContin’s labeling, as well as FDA’s role in monitoring OxyContin’s marketing and advertising activities. We also interviewed DEA officials about the agency’s efforts to identify and prevent abuse and diversion, including its national action plan for OxyContin, and how it determines the prevalence of OxyContin abuse and diversion nationally. We also interviewed officials from national practitioner associations, Medicaid fraud control units, and physician licensing boards in states with initial reports of abuse and diversion—Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia—regarding concerns they had about the abuse and diversion of OxyContin. We reviewed Purdue’s OxyContin risk management plan submissions to FDA from 2001 through 2003 to identify actions taken by Purdue to address abuse and diversion of OxyContin. Table 5 provides a description of the changes made by FDA to sections of the original OxyContin approved label from June 1996 through July 2001. These changes included a black box warning, the strongest warning an FDA-approved drug can carry, and specifically addressed areas of concern related to the opioid characteristics of oxycodone and its risk of abuse and diversion. DEA uses several databases to monitor abuse and diversion of controlled substances, including OxyContin and its active ingredient oxycodone. Specifically, the agency monitors three major databases—the Drug Abuse Warning Network (DAWN), the National Forensic Laboratory Information System (NFLIS), and the System to Retrieve Information from Drug Evidence (STRIDE). DEA also monitors other data sources to identify trends in OxyContin abuse and diversion, such as the Substance Abuse and Mental Health Services Administration’s (SAMHSA) National Survey on Drug Use and Health, formerly the National Household Survey on Drug Abuse, and the Monitoring the Future Study funded by the National Institute on Drug Abuse. SAMHSA operates the DAWN system, which estimates national drug- related emergency department visits and provides death counts involving abused drugs. DAWN collects data semiannually on drug abuse from hospital emergency department admission and medical examiner data from 21 metropolitan areas and a limited number of metropolitan medical examiners who agree to voluntarily report medical record samples. The emergency department and medical examiner data generally do not differentiate oxycodone from OxyContin, unless the individual provides the information to the hospital or identifiable tablets are found with the person. Although samples from hospitals outside the 21 metropolitan areas are also available, DAWN is not able to make drug-related emergency department visit or death estimates for rural or suburban areas. NFLIS, a DEA-sponsored project initiated in 1997, collects the results of state and local forensic laboratories’ analyses of drugs seized as evidence by law enforcement agencies. NFLIS is used to track drug abuse and trafficking involving both controlled and noncontrolled substances and reports results by a drug’s substance, such as oxycodone, and not by its brand name. DEA stated that because new laboratories are being added, its data should not yet be used for trending purposes. As of March 2003, 35 state laboratories and 52 local or municipal laboratories participated in the project. STRIDE, another DEA database, reports the results of chemical evidence analysis done by DEA laboratories in drug diversion and trafficking cases. Oxycodone data are reported by combining single and combination oxycodone drugs and do not provide specific enough information to distinguish OxyContin cases and exhibits. The database’s lag time, which varies by laboratory, depends on how quickly the findings are entered after the seizure of the drug substance and its analysis. The National Survey on Drug Use and Health, another SAMHSA database, is used to develop national and state estimates of trends in drug consumption. Prior to 2001, the self-reported survey asked participants if they had illicitly used any drug containing oxycodone. In 2001, the survey included a separate section for pain relievers, and asked participants if they had used OxyContin, identifying it by its brand name, that had not been prescribed for them. State samples from the survey are combined to make national- and state-level estimates of drug use, and because the estimated numbers derived for OxyContin are so small, it is not possible to project illicit OxyContin use on a regional, state, or county basis. The Monitoring the Future Survey, funded by the National Institute on Drug Abuse and conducted by the University of Michigan, annually monitors the illicit use of drugs by adolescent students in the 8th, 10th, and 12th grades. The 2002 survey included new questions using the brand names of four drugs, including OxyContin, in its survey on the annual and 30-day prevalence of drug use. | Amid heightened awareness that many patients with cancer and other chronic diseases suffer from undertreated pain, the Food and Drug Administration (FDA) approved Purdue Pharma's controlled-release pain reliever OxyContin in 1995. Sales grew rapidly, and by 2001 OxyContin had become the most prescribed brandname narcotic medication for treating moderate-to-severe pain. In early 2000, reports began to surface about abuse and diversion for illicit use of OxyContin, which contains the opioid oxycodone. GAO was asked to examine concerns about these issues. Specifically, GAO reviewed (1) how OxyContin was marketed and promoted, (2) what factors contributed to the abuse and diversion of OxyContin, and (3) what actions have been taken to address OxyContin abuse and diversion. Purdue conducted an extensive campaign to market and promote OxyContin using an expanded sales force to encourage physicians, including primary care specialists, to prescribe OxyContin not only for cancer pain but also as an initial opioid treatment for moderate-to-severe noncancer pain. OxyContin prescriptions, particularly those for noncancer pain, grew rapidly, and by 2003 nearly half of all OxyContin prescribers were primary care physicians. The Drug Enforcement Administration (DEA) has expressed concern that Purdue's aggressive marketing of OxyContin focused on promoting the drug to treat a wide range of conditions to physicians who may not have been adequately trained in pain management. FDA has taken two actions against Purdue for OxyContin advertising violations. Further, Purdue did not submit an OxyContin promotional video for FDA review upon its initial use in 1998, as required by FDA regulations. Several factors may have contributed to the abuse and diversion of OxyContin. The active ingredient in OxyContin is twice as potent as morphine, which may have made it an attractive target for misuse. Further, the original label's safety warning advising patients not to crush the tablets because of the possible rapid release of a potentially toxic amount of oxycodone may have inadvertently alerted abusers to methods for abuse. Moreover, the significant increase in OxyContin's availability in the marketplace may have increased opportunities to obtain the drug illicitly in some states. Finally, the history of abuse and diversion of prescription drugs, including opioids, in some states may have predisposed certain areas to problems with OxyContin. However, GAO could not assess the relationship between the increased availability of OxyContin and locations of abuse and diversion because the data on abuse and diversion are not reliable, comprehensive, or timely. Federal and state agencies and Purdue have taken actions to address the abuse and diversion of OxyContin. FDA approved a stronger safety warning on OxyContin's label. In addition, FDA and Purdue collaborated on a risk management plan to help detect and prevent OxyContin abuse and diversion, an approach that was not used at the time OxyContin was approved. FDA plans to provide guidance to the pharmaceutical industry by September 2004 on risk management plans, which are an optional feature of new drug applications. DEA has established a national action plan to prevent abuse and diversion of OxyContin. State agencies have investigated reports of abuse and diversion. In addition to developing a risk management plan, Purdue has initiated several OxyContin-related educational programs, taken disciplinary action against sales representatives who improperly promoted OxyContin, and referred physicians suspected of improper prescribing practices to the authorities. |
The quality of water is described by a number of different measurements, such as its temperature, the amount of dissolved oxygen it contains, and its mineral content. One measurement for drinking water quality is its turbidity, which is the amount of suspended sediment in the water. Suspended sediment levels fluctuate with time and can change dramatically during a single day and within a short distance. In February 1996, western Oregon experienced its worst storm since December 1964. Prior to the storm, large amounts of precipitation during the fall and early winter months of 1995 and 1996 had saturated the soil in the Cascade and Coast mountain ranges and in the valley areas. During January 1996, heavy snow had accumulated in the mountains, followed by freezing temperatures. The storm arrived with warmer temperatures and heavy rainfall—8 to nearly 15 inches in 4 days in many locations. The warm rain on top of the snow (rain-on-snow), saturated soil, and frozen ground produced rapid snowmelt and runoff, resulting in severe flooding and erosion. Water quality during the storm was severely degraded as the turbidity increased dramatically. Because of the increased turbidity, the municipal water treatment system serving Salem, Oregon, was shut down for 8 days, threatening the city’s ability to provide its residents with safe drinking water. Other cities in western Oregon’s Willamette and Lower Columbia river basins—including Cottage Grove, Eugene, Portland, and Sandy—also reported high turbidity levels at the locations (intakes) where water flows into their water treatment systems. After the storm, Salem and certain environmental groups raised concerns about the extent to which the timber harvests and related roads on the lands managed by the U.S. Department of Agriculture’s Forest Service and the Department of the Interior’s Bureau of Land Management (BLM) contributed to the increased turbidity. The federal government owns nearly 40 percent of the more than 15 million acres of land in western Oregon, most of which are managed by the Forest Service and BLM. Less than 100,000 acres are managed by other federal agencies, including Interior’s National Park Service. The remaining lands are under various ownerships, including state and local governments and industrial and private landowners. In the Cascade mountain range, Forest Service lands are located primarily in the higher elevations, while BLM lands are located primarily in the lower elevations. Both agencies manage lands interspersed throughout the Coast mountain range. Several cities—both large and small—in western Oregon’s Willamette and Lower Columbia river basins obtain their drinking water from the streams that drain watersheds in the nearby Cascade and Coast mountain ranges.The Forest Service and BLM manage lands within many of these municipal watersheds, and the condition of their lands affects the quality of the water that flows from them. The Forest Service manages about 4.3 million acres of land in western Oregon. The laws guiding the management of the National Forest System require the agency to manage its lands under the principles of multiple use and sustained yield to meet the diverse needs of the American people. Under the Organic Administration Act of 1897, the national forests are to be established to improve and protect the forests within their boundaries or to secure favorable water flow conditions and provide a continuous supply of timber to citizens. The Multiple-Use Sustained-Yield Act of 1960 added the uses of outdoor recreation, range, watershed, and fish and wildlife. This act also requires the agency to manage its lands to provide high levels of all of these uses to current users while sustaining undiminished the lands’ ability to produce these uses for future generations (the sustained-yield principle). Under the National Forest Management Act of 1976 and its implementing regulations, the Forest Service is to (1) recognize wilderness as a use of the forests and (2) maintain the diversity of plant and animal communities (biological diversity). Similarly, the Federal Land Policy Management Act of 1976 requires BLM to manage its lands for multiple uses and sustained yield. The act defines multiple uses to include recreation; range; timber; minerals; watershed; fish and wildlife; and natural scenic, scientific, and historic values. About 2.6 million acres of Oregon and California Railroad and Coos Bay Wagon Road grant lands in western Oregon are managed primarily by BLM under the Oregon and California Grant Lands Act of 1937. Under the act, timber on these lands managed by BLM is to be sold, cut, and removed in conformity with the principle of sustained yield for the purpose of providing a permanent source of timber supply, protecting watersheds, regulating stream flow, contributing to the economic stability of local communities and industries, and providing recreational facilities. The Oregon and California Railroad grant lands managed by the Forest Service are subject to the same statutory and regulatory requirements as other lands within the National Forest System. Erosion is a natural process that has shaped the valleys and mountains of the Pacific Northwest (western Oregon, western Washington State, and northern California) for millions of years. Rare large rain-on-snow storms that occur at intervals of several decades or centuries are responsible in part for creating the many streams in this region, and the accompanying flooding and increased turbidity are recognized as natural aspects of healthy river and stream systems. The geologic origins and conditions of the Cascade and Coast mountain ranges have a significant impact on natural erosion and sedimentation, which affect water quality. Because of wet weather conditions and other factors, many of the rocks and soils within these mountain ranges have undergone physical changes that leave them unstable and subject to erosion. In addition, prior natural disturbances, such as windstorms and fires, leave the soil in the forests subject to erosion by destroying the trees and vegetation that holds soil on hillsides. Although the baseline rates at which erosion should naturally occur in large watersheds have not been identified for periods of accelerated sediment production during large storms, studies have shown that erosion increases in the presence of large, infrequent storms, and, from evidence in the forests, it appears that this process has occurred for centuries. In normal years, the first one or two large storms of the winter season transport much of the sediment that flows from a watershed during the entire year. However, when the rainy season is punctuated by a rare, large-scale storm, such as the ones in December 1964 and February 1996, a large amount of precipitation is delivered in a short period of time. The precipitation can cause considerable erosion and flooding and transport several decades of accumulated sediment through the region’s river systems. Senators Dale Bumpers and Ron Wyden asked us to examine the extent to which human activities may have contributed to the high turbidity levels in western Oregon’s municipal watersheds during a large storm in February 1996. As agreed with their offices, this report describes (1) the human activities that may have contributed to the high turbidity levels in five western Oregon municipal watersheds during and following the storm and (2) the efforts under way by federal, state, local, and private land managers and owners, as well as the affected cities, to ensure safe drinking water during future storms. The five watersheds serve the cities of Cottage Grove, Eugene, Portland, Salem, and Sandy. (See table 1.1.) We also obtained information on the Cedar River watershed, which serves Seattle, Washington, and compared and contrasted its management to the management of Portland’s Bull Run watershed. Seattle, like Portland, is one of the few large cities in the United States that relies primarily on unfiltered water. (Portland treats the water from the Bull Run watershed with chlorine.) In addition, both watersheds have long histories of timber harvesting, road construction, and water quality protection. We met with, and reviewed documents provided by, managers and staff in the Forest Service’s Pacific Northwest (Region 6) office and in the offices for three national forests—Willamette, Umpqua, and Mt. Hood. We also met with, and reviewed documents provided by, managers and staff in BLM’s Oregon State Office and in two districts—Salem and Eugene. In addition, we spoke with officials from the (1) U.S. Army Corps of Engineers concerning issues pertaining to dams in the Willamette River valley and (2) Environmental Protection Agency (EPA) concerning issues pertaining to protecting water quality. We also spoke with and obtained information from officials and individuals from (1) the six cities included in our review, (2) the McKenzie Watershed Council, (3) environmental groups, (4) scientific and academic communities, (5) private industry and its representative organizations, and (6) the state of Oregon. We also collected and reviewed published scientific studies of forestry practices and reports on water quality issues in Oregon and Washington as well as other documents provided by federal, state, and local officials; environmental and industry groups; and concerned individuals. (See the bibliography for the scientific studies that we reviewed.) We attended several conferences that addressed issues relating to the February 1996 storm and visited several of the municipal watersheds. We performed our work from July 1997 through June 1998 in accordance with generally accepted government auditing standards. We provided pertinent information from a draft of this report to officials in each of the cities included in our review and made changes in response to their comments. We also obtained comments on a draft of the report from the Forest Service and BLM. These agencies’ comments are presented in appendixes I and II, respectively. Our review of scientific studies and other documents showed that human activities—timber harvests and related roads as well as agricultural, industrial, urban, and residential development—can contribute to elevated sediment levels during large storms. These activities result in soil that is compacted, paved, covered, or cleared of most vegetation. Rain falling on such soil and surfaces can run off into streams, carrying with it eroded topsoil. This sediment from human activities in a municipal watershed, combined with the accelerated erosion that naturally occurs during storms, can shut down a municipality’s water treatment system, as occurred in Salem in February 1996. (See fig. 2.1.) All five of the cities included in our review have experienced timber harvesting and related road construction in their municipal watersheds. These activities can contribute to erosion. Our review of scientific studies and other documents showed that past timber-harvesting practices were often not designed to protect water quality and resulted in cleared and compacted areas that exposed soil to the erosive impact of rain and contributed sediment to streams, especially during large storms. In addition, older forest roads along streams and on hillsides were designed in ways that made them subject to erosion and failure. These roads have been found to be a major contributor of sediment to streams. The municipal watersheds for Cottage Grove, Eugene, Portland, Salem, and Sandy have all experienced varying levels of timber harvesting. For example, since 1960, approximately 28 percent of the national forest lands in Cottage Grove’s Layng Creek watershed have been harvested. Approximately 21 percent of the Forest Service lands in Salem’s North Santiam River watershed upstream from the Detroit Dam have been cut, and about 20 percent of Portland’s Bull Run Watershed Management Unit have been harvested. The fertile soil of the Cascade and Coast mountain ranges provides some of the best conditions in the United States for growing wood fiber, and federal Oregon and California grant lands are recognized as one of the nation’s most productive and valuable commercial forest properties. Timber has been an important component of the region’s economy, and timber harvesting on federal and nonfederal lands has generated considerable sums of money for counties in western Oregon. However, past timber-harvesting practices did not always protect water quality. Local governments and industries have often viewed timber harvesting as a desirable activity. By federal law, counties are entitled to up to 50 percent of the receipts from timber sales on federal lands located within their boundaries. In addition, Oregon, together with Washington and California, receives a specially legislated payment to compensate them for federal timber receipts lost as a result of the listing of the northern spotted owl as a threatened species under the Endangered Species Act. The funds can be used to benefit roads and schools in the counties where the receipts were earned. In addition, Oregon’s legislation emphasizes timber production on the about 875,000 acres of timberland administered by the Oregon Department of Forestry to maximize revenue over the long term for schools and counties. Another 8.6 million acres of timberland are owned by the private sector. The timber industry has historically provided many jobs in western Oregon that have contributed to the counties through taxes and discretionary spending. Furthermore, removing trees may increase the quantity of water delivered to streams, and ultimately to municipal and industrial users, by increasing runoff. Although removing trees along streams can increase the quantity of water available for municipal and industrial uses, it can also increase erosion and sedimentation, thus degrading water quality. For instance, until 1992, clear-cutting was commonly used to harvest timber from the national forests. Scientific studies have shown that this harvesting method, which removes all of the trees from a timber-harvesting site at one time, can contribute sediment to streams, especially during large storms. (See the bibliography for the scientific studies we reviewed on the impact of past timber-harvesting practices on water quality.) These studies have also shown that other past timber-harvesting practices can contribute to sedimentation during large storms. For example, ground-based logging practices, including the use of heavy equipment such as tractors to haul logs along trails to landings where they are loaded onto trucks, compact the soil and create ruts. Rain falling on these areas tends to run off the surface, following the ruts, allowing sediment to flow more easily into streams. Similarly, using fire to clear harvested areas of all vegetation before reforestation (broadcast burning) can destroy protective layers of organic debris and expose soil to the erosive impact of rain. Finally, vegetation along streams and large, woody debris in streams—both of which can trap and filter sediment—were often removed during timber harvesting. Without the vegetation and debris, water velocity increases, allowing streams to (1) carry more sediment and (2) cut more into stream banks, eroding them and transporting the sediment downstream. Harvesting timber has often required the construction of numerous miles of roads to move heavy equipment into the harvest areas and up and down hillsides. When sections of these roads fail, which occurs most often during large winter storms, erosion can result. Erosion from roads has been found to be a major contributor of sediment to riparian areas and streams. Initially, the easiest timber to reach was along streams, so streamside roads were constructed in these areas, primarily on private industrial lands. However, the increased demand for timber from federal lands to meet post-World War II housing construction needs and to replace the supply of timber from depleted industrial lands, resulted in roads being constructed on steep slopes on federal lands. Road construction on federal lands continued rapidly between 1950 and 1970. These roads were constructed using a “sidecast construction” design in which excavated soil was used to build much of the roadbed along a hillside. Roadside ditches were constructed to move water quickly from roadbeds into nearby streams, thereby reducing the damaging effects of the water to the roadbeds. Stream crossings consisted of culverts to pass water beneath the road. By the time of the December 1964 storm, which was similar in magnitude to the one that occurred in February 1996, road location, sidecast road construction, and culverts had been recognized as major contributors to sediment delivery to streams during large storms for a number of reasons. First, sidecast construction on hillsides had resulted in unstable roadbeds that were unconsolidated, not part of the natural slope of the hill, and subject to erosion and failure. Second, roadside ditches transported eroded topsoil from the roadbeds and hillsides and delivered it quickly into streams and rivers. And, finally, culverts became blocked, resulting in water flowing across the roadbeds and contributing to their erosion and failure. A Forest Service report prepared after the December 1964 storm concluded, among other things, that (1) road damage could have been avoided entirely or greatly reduced by better road location or design to cope with site conditions; (2) in some cases, the primary criterion for road location was apparently the “shortest distance from clearcut to clearcut;” (3) some of the most impressive storm damage was caused by sidecast road construction on steep slopes; and (4) the failure or impairment of drainage structures (i.e., ditches and culverts) was involved in almost all road-related storm damage. More recently, BLM has identified roads as a contributor to increased streamflows and sedimentation in some watersheds. For instance, in an analysis of the lower McKenzie River watershed—an area of mostly nonfederal ownership and mixed uses—BLM found that (1) some of the primary causes of increased peak and total water flows were an increase in compacted areas from roads, forest and agricultural activities, man-made structures, and other human development and an extension of the stream network resulting from the direct routing of water from roads to streams and (2) elevated sediment levels in a portion of the watershed were in part explained by the large number of hillside roads, many of which lacked proper drainage and roadside vegetation. BLM estimated that streamside roads contribute more than twice as much sediment per mile than other forest roads. (See the bibliography for the scientific studies we reviewed on the impact of forest roads on water quality.) During the 1970s and 1980s, the Forest Service and BLM made concerted efforts to reduce road failures through improved location, design, and maintenance. However, by then, the main road networks had been nearly completed, and only small secondary roads were required to obtain access to new timber harvest areas. Thus, the national forests and BLM lands contain a mixture of roads—of different ages and construction designs—that vary in their potential to deliver eroded soil to streams during large storms. Two of the watersheds—those serving Eugene and Salem—have agricultural, industrial, urban, and residential development. All of these activities have been shown to contribute to increased turbidity during large storms. In addition to being ideal for growing wood fiber, the fertile soil of the Willamette River basin provide some of the best conditions in the United States for growing agricultural products, including fruits and berries, vegetables, and ornamental plants. As a result, agriculture is a major economic activity in the basin. However, agricultural development in the Pacific Northwest has altered or removed natural plant communities and replaced them with pastures and industrial farming operations. Soil is compacted and land frequently may be cleared of most vegetation. Rain falling on this land can run off into streams, carrying with it eroded topsoil. A June 1993 report for Oregon’s Department of Environmental Qualitystated that nonpoint source pollution was a major contributor to water quality degradation in the Willamette River and its tributaries. Statewide, agriculture accounted for 39 percent—or more than double forestry’s 17 percent—of all nonpoint water pollution. Boating contributed another 14 percent, while urban runoff contributed an additional 12 percent. (See table 2.1.) A 1997 study commissioned by the governor of Oregon found that agriculture in the Willamette River basin contributes the greatest amount of suspended sediment to the river. The study also reported that an estimated 1.8 million tons of soil is lost each year from erosion on agricultural lands in the basin. The 1997 study also found that urban sites in the Willamette River basin contribute the greatest amount of suspended sediment to the river on a per acre basis. The basin’s population had increased from approximately 1.5 million in 1970 to about 2.2 million in 1995, or by 47 percent, and growth projections for the basin anticipate that this number will nearly double over the next 25 to 30 years. This growth in population has resulted in soil that is compacted, paved, covered, or cleared of most vegetation. For example, since the 1940s, residential development and related roads have nearly doubled in some watersheds. Development has increased the percentage of the basin covered by roofs, roads, parking lots, compacted areas, and other surfaces that prevent rain from penetrating into the soil. During storms, this increased runoff moves across barren or disturbed soil, eroding the soil, which can then be transported into streams. In addition, construction activities can contribute sediment to streams. For instance, without proper controls at construction sites, sediment loads can reach 35 to 45 tons per acre per year. Interstate highways, state and county roads, and other types of roads also contribute sediment to streams during large storms. According to information provided by two groups sponsored by the state of Oregon—the Willamette River Basin Task Force and the Willamette Valley Livability Forum—the basin’s roads (paved and unpaved, urban and rural) total over 46,500 miles—about enough to circle the earth twice. Both the North Santiam River watershed serving Salem and the McKenzie River watershed serving Eugene have highways that parallel the rivers upstream from the locations where water flows into the cities’ water treatment systems. Like those constructed to harvest timber, these streamside roads increase the likelihood that sediment will be delivered directly into streams during large storms. Increased populations in the Willamette and Lower Columbia river basins have also resulted in the construction of a large number of streambank stabilization projects to protect property from flooding. Nearly half of the original primary and secondary river channels in the Willamette River basin have been eliminated by channel straightening and other activities, and one-quarter of the remaining channel banks have been stripped of riparian vegetation and stabilized with rocks. As a result, floodplains, wetlands, and riparian areas are no longer able to function as intended—that is, to absorb excess water and dissipate its energy during storms and to provide buffers to filter suspended sediment from surface runoff before it reaches streams. Streambank stabilization projects also increase water velocity and the erosive power of the river on downstream reaches. For example, the settlement and development of the floodplain, as well as the lands around the mouths of many of the tributaries, within Eugene’s McKenzie River watershed have accelerated since World War II. As a result, essentially the entire lower portion of the river’s corridor has experienced landscaping, road construction, channel simplification, agricultural cropping and pasture, and residential development. According to a 1997 report by the Oregon Department of Environmental Quality on water quality in Eugene’s McKenzie River watershed, sites in the upper subbasin—primarily federally owned lands—were relatively free of point and nonpoint source pollution. Conversely, in the lower subbasin—on predominantly nonfederal lands—agricultural and urban runoff was loading the river with soil, organic materials, and other wastes and pollutants. Preliminary results from a pilot project to monitor storms, recently completed by the McKenzie Watershed Council, reached a similar conclusion. Although the Council cautions that information derived from repeated monitoring over a number of storms will be required before general conclusions can be reached on the patterns of water quality in the watershed, data from one storm indicated that the highest recorded turbidity levels came from a growing residential area east of Eugene and that turbidity levels measured from this area during the storm were about double those from agricultural lands and considerably higher than those from federal forest lands. In addition, a recent study for the Eugene Water & Electric Board identified runoff from road surfaces and agricultural and urbanized areas, along with fuel and chemical spills, roadside vegetation management, recreation, and forest practices, as the greatest risks to the city’s water supply. Despite the timber harvests and forest roads and agricultural, industrial, urban, and residential development in the Willamette and Lower Columbia river basins, the cities included in our review as well as others in western Oregon have a history of providing safe drinking water to their residents. However, during and following large storms, such as those that occurred in December 1964 and February 1996, cities in the Pacific Northwest, including those we reviewed, experienced elevated sediment levels at the locations where water flows into their water treatment systems. The accelerated erosion that naturally occurs during large storms, combined with the sediment from human activities in a municipal watershed, can shut down a city’s water treatment system. For instance, the increase in naturally occurring erosion and erosion resulting from human activities during the February 1996 storm resulted in Salem’s shutting down its water treatment system for 8 days. Salem uses a process known as “slow sand filtration,” which is unique to the Pacific Northwest, to filter its drinking water. Unlike the “rapid sand filtration” process used by Cottage Grove, Eugene, and Sandy—which pretreats the water with chemicals to cause sediment to settle out of the water prior to filtering it through sand beds—Salem’s process removes impurities and sediment as the water filters through large beds composed of sand and the biological mat that forms on the beds’ surface. This system, though inexpensive and not uncommon for small communities, is not used by any other city in the Pacific Northwest with a population of more than 100,000 people, according to a report prepared for Salem. According to documents that we reviewed, as it did during the 1964 storm, the Detroit Dam and Reservoir, located at the boundary of Forest Service lands and about 30 miles upstream from the location where water flows into Salem’s water treatment system, provided flood control during the 1996 storm by retaining the turbid water from the Willamette National Forest as well as from lands owned by the state of Oregon and private landowners. The dam, like other dams and flood retention structures, also acted like a giant sediment-settling pond. When flowing water entered the reservoir behind the dam, much of the sediment in the water fell out of suspension and settled to the bottom. However, according to a 1998 study of the 1996 storm in the North Santiam watershed—conducted by Salem, the Willamette National Forest, the Forest Service’s Pacific Northwest Research Station, and the Willamette Geological Services—sediment from natural erosion and human activities on primarily nonfederal lands in the lower portions of the watershed below the dam was transported down the city’s sole source of drinking water—the North Santiam River. This sediment shut down the city’s treatment system and rendered it inoperable on February 6, 1996. In addition, not all of the sediment in the water behind the Detroit Dam settled to the bottom of the reservoir. The North Santiam River watershed contains soils with high levels of microscopic clay particles. Although the larger clay particles carried by the storm water settled to the bottom of the Detroit Reservoir behind the Detroit Dam, the finer sediment remained suspended in the water retained by the dam. This material was delivered downstream when the U.S. Army Corps of Engineers began releasing flood waters from the reservoir on February 9, 1996. Without a secondary source of water, Salem nearly exhausted its reserve water supplies and had to take emergency measures, according to city officials. These measures included (1) drilling emergency wells, (2) purchasing water from neighboring communities, (3) constructing an emergency system to pretreat the water, (4) asking customers to curtail their use of water, and (5) banning all nonessential outdoor uses. Salem restarted its water treatment system on February 14, 1996. However, according to city officials, water use had to be curtailed for more than a month after the storm to reduce the demand on Salem’s crippled water treatment system. The system was also not able to adequately filter the turbid water being released from the Detroit Reservoir. Since the microscopic clay particles were able to pass through the water treatment system’s filter beds, the city had to obtain an exemption from the state in order to deliver to its customers drinking water that had a turbidity level exceeding drinking water standards through July 16, 1996. In addition, one of the system’s filters was damaged by the microscopic clay particles and has continued to create operational problems, according to city officials. Other western Oregon cities experienced elevated sediment levels during and following the February 1996 storm (see fig. 2.2) but were better prepared to continue to deliver safe drinking water to their customers. Specifically, Cottage Grove did not experience severe flooding, and although turbidity levels were slightly higher than those reported by Salem, the city was able to filter and deliver safe drinking water to its residents. In Eugene, turbidity levels were more than 20 times greater than those reported by Salem. Eugene shut down its water treatment system for about 12 hours and relied on its reserve water supplies until its water treatment system could be adjusted to handle the rapidly changing turbid water. Portland experienced considerably lower turbidity levels than Cottage Grove, Eugene, and Salem and relied on its backup water system—a well field along the Columbia River—for 5 days to provide safe drinking water during and following the storm, when water from its watershed was too turbid to meet safe drinking water standards. According to Sandy’s public works director, the city is usually prepared to continue to deliver safe drinking water to its customers during large storms. Sandy never shuts down its water treatment system but relies on a secondary source of water and reserve water supplies, rather than Alder Creek, to meet demand. However, the city’s secondary source of water had been severely damaged during a windstorm in late 1995 when large trees adjacent to a timber harvest clearcut on private land fell onto the source’s pipes and storage tanks. In addition, a malfunctioning sensing device in the city’s main storage reservoir led the city to believe that this reservoir was full, when in fact it was nearly empty. As a result, the city had to stop the delivery of water to its customers and rely instead on emergency water supplies, including bottled water and tank trucks, until its treatment system could again filter water from Alder Creek. After the storm, Salem and certain environmental groups expressed concerns about the extent to which the timber harvests and forest roads on federal lands contributed to increased turbidity. However, the 1998 study of the 1996 storm in the North Santiam watershed builds on the findings in previous studies on persistent turbidity. The 1998 study reaffirms earlier findings that the persistent turbidity in the Detroit Reservoir came from the microscopic clay particles that remained suspended in the water retained by the Detroit Dam. The main sources of these particles are (1) natural, large, deep-seated, slow-moving masses of earth (called earthflows) and (2) naturally occurring erosion from streambanks, which brings to the surface deep-seated clay deposits. The study notes that other types of erosion—including erosion from the failure of forest roads on federal lands and from past timber harvests—are minor sources of these clays. This persistent turbidity had also been observed in some Oregon reservoirs following the December 1964 storm. According to Salem’s water source supervisor at the time of the 1964 storm, turbidity persisted in the Detroit Reservoir for several months following the storm; however, drinking water standards did not exist at that time and Salem was able to deliver the turbid water to its customers. A 1994 report on a water system master plan for Salem recognized that the city’s reliance on the North Santiam River as its sole source of water left it vulnerable to emergency situations that could result in multiple-day closures of its treatment system and in a total loss of its water supply capability. At the time of the February 1996 storm, however, the city had done little to develop additional reserve water supplies or to expand its water treatment system, as recommended in the report. Since the February 1996 storm, the city has (1) constructed a permanent pretreatment basin to remove sediment from turbid storm water before delivering the water to the slow-sand filter beds and (2) continued to develop additional reserve water supplies. However, according to Salem officials, the type of fine sediments after the February 1996 flood would still result in a “treatment challenge” and “may result in finished water exceeding drinking water standards for turbidity.” Ongoing federal and nonfederal efforts have made significant progress in (1) mitigating the impact of human activities on water quality and in ensuring safe drinking water for cities in the Willamette and Lower Columbia river basins and (2) involving more key landowners and other stakeholders in discussing, understanding, and addressing watershed issues and concerns and in implementing restoration plans. Nevertheless, some key landowners have not been included in coordination efforts, and many efforts could benefit from a better understanding of, and data on, the condition of the watersheds. Federal land management agencies, the state of Oregon, the municipalities, and private landowners have made significant progress in mitigating the impact of human activities on water quality. Efforts to date have tended to focus primarily on timber and related roads; however, other efforts are now under way at the federal, state, and local levels in western Oregon to address other human activities that can contribute to increased turbidity during large storms. Federal efforts—including a new plan, requirements, and legislation—are intended to mitigate the impact of timber harvests and roads on water quality. An April 1994 plan—known as the Northwest Forest Plan—provides management direction for the 22.1 million acres of land managed by the Forest Service and BLM in the Pacific Northwest, including those in the Willamette and Lower Columbia river basins. The plan also begins to address the legacy of water quality degradation associated with past timber-harvesting and road construction practices. In addition, as discussed below, the Congress has enacted legislation to protect Portland’s watershed and its unfiltered water supply. In the late 1980s and early 1990s, timber sales on the lands managed by the Forest Service and BLM in the Pacific Northwest were brought to a virtual halt by federal injunctions. In various rulings, the federal courts enjoined the agencies from selling timber until they addressed issues related to the northern spotted owl and its habitat. The President directed his administration to develop a plan that would (1) satisfy the courts so they would lift the injunctions, (2) protect the environment, and (3) stabilize the regional economy. The result was the Northwest Forest Plan. In order to resurrect their timber programs under the Northwest Forest Plan, the Forest Service and BLM have (1) significantly reduced the volume of timber harvested; (2) deemphasized the use of clearcutting as the preferred method to harvest timber; (3) created requirements (standards and guidelines) to mitigate the impact of timber harvests and forest roads on water quality; (4) continued to implement practices or combinations of practices determined to be the most effective, practicable means of preventing or reducing sedimentation (best management practices); and (5) started to address the conditions created by past timber-harvesting and road construction practices. EPA has stated that the full implementation of the Northwest Forest Plan is a cornerstone of the recovery of water quality on federal lands within western Oregon’s watersheds. The volume of timber harvested from federal lands in the Pacific Northwest declined from 5.2 billion board feet in fiscal year 1989 to slightly more than .6 billion board feet in fiscal year 1997, a decrease of about 88 percent. In addition, between fiscal year 1992—when the Forest Service announced plans to reduce the volume of timber harvested by clearcutting—and fiscal year 1997, the percentage of all timber harvested by this method fell from 22 to 10 percent. The Northwest Forest Plan also refines requirements and best management practices for harvesting timber and constructing roads. These practices have evolved over the past several decades in response to new federal requirements and growing public concern about the impacts of these activities on the environment. (See the bibliography for the scientific studies we reviewed on the impact of newer timber-harvesting and road construction practices on water quality.) For example, riparian areas vital to protecting and enhancing aquatic and terrestrial resources are now preserved. In its 1996 report, the Oregon Natural Resources Council notes that maintaining riparian buffers protects streams from the effects of logging. Current timber-harvesting and road construction practices on federal lands are designed to mitigate these activities’ adverse effects on water quality. Specifically, timber harvesters have developed methods to remove timber from hillsides that are less damaging to the soil than older practices. These newer practices leave trees and large, woody debris in riparian buffers to trap and filter sediment before it reaches streams. Additionally, new forest roads are designed to be more stable and to reduce the potential for failure. Finally, road drainage systems have been improved to reduce the amount of water and sediment delivered to streams. Older forest roads constructed and timber-harvest areas cleared using past practices that were not designed to protect water quality can continue to contribute to increased turbidity during storms and affect other watershed values. EPA has noted that it will likely take watersheds decades to recover from the impacts of these practices. Under the Northwest Forest Plan, both the Forest Service and BLM are addressing these conditions, together with other issues, through watershed restoration efforts. Restoration efforts include controlling and preventing road-related runoff and sediment production by closing and stabilizing (decommissioning) some roads and upgrading others by removing soil from locations where there is a high potential for erosion, modifying road drainage systems to reduce the extent to which the road functions as an extension of the stream network, and reconstructing stream crossings. These efforts also include restoring riparian vegetation and, to prevent instream erosion, adding back large, woody debris into the streams from which it was removed. Over the past 100 years, the Congress has acted to protect Portland’s unfiltered drinking water. Almost all of Portland’s nearly 65,000-acre Bull Run watershed is owned by the federal government and managed by the Forest Service. Legislative and administrative decisions in the late 1890s and early 1900s protected the watershed from settlement and development. Public Law 95-200, enacted in 1977, established the Bull Run Watershed Management Unit as a special resources management unit to be administered as a watershed by the Secretary of Agriculture. In addition, title VI of the Oregon Resource Conservation Act of 1996, which amended Public Law 95-200, protects the watershed from timber harvesting that could adversely affect water quality but permits timber to be harvested to protect or enhance water quality or quantity. Forest Service officials estimate that they spend nearly $1 million a year managing federal lands in Portland’s watershed. Conversely, Seattle, Washington—which, like Portland, relies primarily on unfiltered water—has purchased or otherwise acquired all of the lands within its more than 90,000-acre Cedar River watershed from private timber companies (after the timber was harvested) and from the Forest Service. According to a city official, Seattle has harvested second-growth timber from its watershed since about 1940 and uses the revenue generated each year from timber sales to acquire habitat. Thus, while Seattle has incurred the costs to acquire, and generates revenue from, its watershed, the costs to protect and restore Portland’s watershed are paid primarily by federal taxpayers. The state of Oregon has implemented rules and regulations for timber harvesting on state and private lands. Although found by EPA to be less stringent than the requirements on federal lands, the state’s requirements also protect water quality. According to the Oregon Department of Forestry, Oregon was the first state in the nation to regulate timber harvesting on nonfederal lands to protect water quality. Oregon began legislating timber-harvesting activities with the passage of the Oregon Forest Conservation Act of 1941, which addressed reforestation and fire protection. According to a state official, this act was repealed in 1971 when the Oregon Forest Practices Act was enacted. Rules were first promulgated under the 1971 act in 1972. In 1979, the rules were certified by EPA as best management practices for controlling nonpoint source pollution from forestry in the state. Major amendments to the rules in 1987, 1991, and 1996 further increased protection for stream and water quality. The rules specify practices required to protect water quality, including (1) stabilizing soil and keeping it out of streams, (2) retaining ground cover to filter surface water flows, (3) protecting vegetation around stream channels, (4) limiting soil disturbance, and (5) maintaining stable roadbeds. The majority of the forest industry in the state has supported compliance with the act and its rules and has led efforts to update and refine them. The state monitors compliance with the rules during commercial timber harvesting on all nonfederal lands. In addition, motivated by concerns over the possibility that additional coastal salmon species would be listed as endangered or threatened under the Endangered Species Act, the governor of Oregon initiated an effort—the Coastal Salmon Restoration Initiative—in 1997 not only to prevent such a listing and improve fish habitat but also to protect water quality to support people, industry, fish, and wildlife. As part of this effort, landowners of industrial forests have agreed to implement a voluntary program to identify and address risks to water quality caused by forest roads. They have also promised about $130 million over the next 10 years to manage and upgrade older forest roads on these lands. The Oregon Department of Forestry and other state and private agencies will monitor the implementation of the initiative. Although they have been certified as best management practices by EPA, Oregon’s requirements to help protect water quality have been found by EPA to be less stringent than the requirements on federal lands. For example, according to EPA, the state’s Forest Practices Act, as amended, still affords substantially less protection to riparian areas, across all stream categories, than federal requirements. Although lagging behind the efforts to mitigate the effects of timber harvests and roads, efforts are under way at the state and local levels in Oregon to address other human activities that are known to contribute to increased turbidity during large storms. For example, a gubernatorial task force that assessed the current status of waters in the Willamette River basin reported in December 1997 that significant resources had been expended over the prior 8 years to study the impact of agricultural practices on groundwater and to develop techniques to reduce this impact. The report also noted that Oregon’s Department of Agriculture had recently stepped up efforts to develop water quality management area plans for agriculture in Willamette River subbasins that do not meet water quality standards under the Clean Water Act. Unlike its regulatory approach to timber harvesting and road construction under the Forest Practices Act, the state’s approach to agriculture depends on the voluntary cooperation and initiative of private landowners and farmers to reduce their contribution to water quality problems. Key building blocks of the state’s plan include water quality assessments, monitoring programs, education and outreach strategies, and technical assistance. However, the plan’s success depends on (1) the ability of the state to deliver technical and educational assistance to private landowners and (2) the willingness of the landowners to use this information to protect water quality. State agencies have started working with landowners to develop management plans to control erosion and reduce the contaminants entering streams. However, since compliance is voluntary, there is no assurance that landowners will participate. The gubernatorial task force also found that some cities in the Willamette River basin had significantly reduced the discharge of pollutants, including sediment, into the Willamette River and its tributaries. Approaches taken included (1) removing suspended sediment from stormwater, (2) educating the public on water quality, and (3) managing wetlands. In a June 1995 report on selected watershed projects, we noted that the major lesson to be learned from our review of two projects in western Oregon was that involving local stakeholders in planning and implementing a project can help overcome a community’s suspicion of government-sponsored initiatives and result in a cooperative partnership of community interests and government agencies. Our review indicated that collaboration between federal and nonfederal parties in the Willamette and Lower Columbia river basins is improving. In addition, local, voluntary watershed councils have been established to bring stakeholders together to discuss, understand, and address watershed problems and issues and to implement watershed restoration plans. The public has expressed its desire to become more involved in the decision-making processes of federal land management agencies and has demonstrated its preference for presenting its concerns, positions, and supporting documentation during, rather than after, an agency’s development of proposed plans and projects. The public has also signaled its intention to challenge decisions that it has not been involved in reaching. In western Oregon’s municipal watersheds, the Forest Service and BLM have involved the public in their decision-making by (1) working more closely with some municipal officials, local citizen groups, and other stakeholders in developing proposed plans and in designing projects, such as timber sales, and (2) entering into some formal agreements—called memorandums of understanding—with municipalities and the state of Oregon to address watershed issues. Specifically, the Forest Service and Portland have collaborated in the management of the city’s Bull Run watershed for decades. Cottage Grove has worked closely with the Forest Service since the 1970s to improve and protect water quality. Both the Forest Service and the city have worked to monitor water quality, and the agency has identified and mitigated sources of turbidity. The Forest Service has also acted to improve water quality by (1) reducing the volume of timber harvested in the city’s Layng Creek watershed, (2) maintaining roads and seeding roadside areas to prevent erosion, and (3) directing Layng Creek away from an earthflow and building a rock wall to stop the earthflow’s movement. According to monitoring data gathered by the Forest Service and Cottage Grove, these efforts have reduced turbidity and improved water quality. In 1997, Sandy entered into a formal memorandum of understanding with the Forest Service and BLM on activities within the Alder Creek watershed and on ways to gain a better understanding of how the watershed functions. That same year, Salem entered into a similar agreement with the Forest Service for the North Santiam River watershed. While the benefits of working together cooperatively often outweigh the costs of early and continuous public involvement, our prior work has shown that decision-making on managing federal lands is inherently contentious and that public involvement in the process should not be viewed as a panacea to legal challenges. Dissatisfaction with an agency’s process for public involvement often cannot be dissociated from dissatisfaction with the outcome of the process, and parties opposed to a particular activity, such as timber harvesting, can cause a federal agency to delay, alter, or withdraw projects by availing themselves of the opportunities for administrative appeal and judicial review that are provided by statute or regulation. The state of Oregon has recognized the important role of collaboration among watershed stakeholders and enacted legislation in 1995 to promote local, voluntary watershed councils to implement plans for watershed restoration. The state provides both funding for the councils and guidelines for their membership. In 1997, the state placed $20 million in a watershed enhancement fund and directed that the funds be used to support watershed councils as well as soil and water conservation districts, monitoring, and watershed improvements. One of the earliest and more advanced watershed councils in the Willamette River basin is the McKenzie Watershed Council. The Council has developed plans and objectives for improving water quality within the watershed and has begun to monitor ongoing efforts to better understand the impact of different activities on water quality. It has also provided public education and developed informational brochures and literature addressing different water quality issues. Although ongoing efforts within the Willamette and Lower Columbia river basins have made significant progress in addressing many of the activities that can contribute to turbidity and in increasing collaboration between federal and nonfederal parties, there are opportunities to improve the efficiency and effectiveness of these efforts. Specifically, some of the efforts could benefit from involving more key landowners in their decision-making, and many could benefit from a better understanding of, and data on, the condition of the watersheds. Our prior work has shown that, to be more effective, a watershed approach to protecting water quality and ensuring safe drinking water should include all the key landowners and other stakeholders. As more landowners and others within a watershed collaborate, more activities are likely to be coordinated and managed across the watershed. In our June 1995 report on selected watershed projects, we noted that participants in two projects in western Oregon emphasized that the projects—which addressed drinking water quality and other watershed issues—could not progress until the stakeholders had moved beyond blaming each other and begun concentrating on solutions. These participants also said that the stakeholders needed to be involved to ensure that all economic interests were represented and considered when defining the problem and developing a solution. However, memorandums of understanding between federal land management agencies and cities to address watershed issues and concerns in the Willamette and Lower Columbia river basins did not include key landowners, who are critical to understanding and addressing the condition of the watershed. For instance, the formal memorandum of understanding among the Forest Service, BLM, and Sandy on activities within the city’s municipal watershed does not include a large industrial forest landowner whose holdings include a significant portion of the watershed directly above the location where water flows into the city’s treatment system. Likewise, many human activities on lands owned by the state of Oregon, landowners of industrial forests, local communities, and private individuals both above and below the Detroit Dam probably contributed to the elevated sediment levels that initially shut down Salem’s water treatment system during the February 1996 storm. However, the memorandum of understanding between Salem and the Forest Service excludes both BLM and nonfederal landowners in the city’s watershed. Our review has shown that the extent to which human activities increased turbidity in the Willamette and Lower Columbia river basins during the February 1996 storm varied by watershed. Moreover, the condition of a municipal watershed can change over time as a result of storms and other natural disturbances and human activities. Therefore, in planning to protect water quality, a one-size-fits-all approach will not work. Rather, efforts to ensure safe drinking water must be tailored to address the activities occurring in a particular municipal watershed and should be based on an analysis of the overall condition of the watershed, including its land-use history and the impact of previous storms and human activities. However, (1) few of the watershed analyses we reviewed corresponded directly to the boundaries of a municipal watershed and (2) the data gathered by different federal agencies and nonfederal parties within a municipal watershed may not be comparable. As a result, the information obtained from the analyses may be of limited value in describing the condition of some municipal watersheds in the Willamette and Lower Columbia river basins and may not be useful to those responsible for municipal watersheds. As discussed in chapter 2, human activities vary by watershed. For example, all five of the cities included in our review have experienced timber harvesting and related road construction in their watersheds, but only two watersheds—those serving Eugene and Salem—also have agricultural, industrial, urban, and residential development. In addition, while some past and ongoing human activities may be contributing to increased sediment, others may not. For instance, a number of comprehensive, long-term scientific studies have shown that the effects on water quality of timber harvesting along streams decrease several years after the activity occurred. Similarly, studies of timber roads constructed between 1950 and the early 1970s have shown that (1) the highest levels of sediment delivered to streams occurred during storms shortly after the roads were built and (2) these levels generally declined as roadside vegetation increased and other natural stabilization occurred. Moreover, although few long-term studies have been conducted to support the water quality benefits of improved road location, design, and maintenance, timber-related roads constructed during the late 1970s and 1980s are likely to be less prone to failure than those built between 1950 and the early 1970s. Furthermore, several studies have noted that, since only a small portion of a large watershed may be logged at one time, timber harvests probably do not have a noticeable impact on downstream users in these watersheds. As a result, several studies have found that, despite decades of timber harvesting, water quality in Portland’s 65,000-acre Bull Run watershed remains excellent, with no detectable decline. Because human activities vary by watershed and the condition of a watershed changes over time, an analysis of the overall condition of a municipal watershed is considered essential to guide project planning and decision-making and identify the restoration activities with the greatest likelihood of success. A watershed analysis characterizes the human, aquatic, riparian, and terrestrial features, conditions, processes, and interactions within a watershed by collecting and compiling the analytical information essential for making sound management decisions concerning the type, location, and sequence of appropriate management activities within the watershed. However, few of the watershed analyses we reviewed corresponded directly to the boundaries of a municipal watershed, and the data gathered by different federal agencies and nonfederal parties within a municipal watershed may not be comparable. For example, Eugene’s McKenzie River watershed encompasses approximately 740,000 acres. Within its boundaries, the Forest Service has completed five analyses, and BLM and a large industrial forest landowner—Weyerhaeuser—have each completed two analyses. However, other areas of the watershed have not yet been analyzed, and the overall condition of Eugene’s municipal watershed is not known. Figure 3.2 shows the areas of the McKenzie River municipal watershed included in the nine different watershed analyses. The McKenzie Watershed Council has recently applied for a grant to fund an effort to synthesize the data from the various watershed analyses into a useful description of basinwide issues. However, our prior work and federal guidelines for watershed analyses have shown that the data gathered in the different analyses may not be comparable and may not be easily combined to assess the direct, indirect, and cumulative effects of human activities throughout the watershed. Sandy’s municipal watershed is much smaller than Eugene’s watershed. The Alder Creek watershed encompasses only about 4,600 acres, or less than 1 percent of the acreage in Eugene’s McKenzie River watershed. The Alder Creek watershed was included in a watershed analysis conducted by the Forest Service that covered almost 68,000 acres owned by over 900 different landowners. The analysis addressed the condition of Sandy’s municipal watershed as well as other issues and concerns. However, as the size of a watershed analysis increases, it becomes more difficult to provide meaningful information for planning and decision-making at the local level. Federal land management agencies, the state of Oregon, the municipalities, and private landowners have made significant progress in working together to mitigate the impact of human activities on water quality and to ensure safe drinking water to cities in the Willamette and Lower Columbia river basins. Nonetheless, there are opportunities to improve the efficiency and effectiveness of these efforts by involving more key landowners in the decision-making process and by developing a better understanding of, and data on, the condition of the watersheds. As more landowners within a watershed collaborate, more activities are likely to be coordinated and managed across the watershed. However, memorandums of understanding between federal land management agencies and cities to address watershed issues and concerns in the Willamette and Lower Columbia river basins have not included the key landowners who are critical to understanding and addressing the condition of the watershed. Moreover, because human activities vary by watershed and the condition of a watershed can change over time, an analysis of the overall condition of a municipal watershed is essential to (1) guide project planning and decision-making and identify the restoration activities with the greatest likelihood of success; (2) make sound management decisions concerning the type, location, and sequence of appropriate management activities within the watershed; and (3) dissociate concern about water quality from dissatisfaction over other land management issues, such as timber harvesting and road construction. However, many of the watershed analyses we reviewed may not be useful for municipal watershed planning because the analyses did not corresponded directly to the boundaries of a municipal watershed and/or the data gathered may not be comparable with data gathered by other federal agencies and nonfederal parties within a municipal watershed. To increase the efficiency and effectiveness of efforts to improve water quality and ensure safe drinking water to cities in western Oregon, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service and that the Secretary of the Interior direct the Director of BLM to include key landowners—who are critical to understanding and addressing the condition of a watershed—in memorandums of understanding with cities and in other agreements to address watershed issues and concerns. We also recommend that the Secretary of Agriculture direct the Chief of the Forest Service and that the Secretary of the Interior direct the Director of BLM to take the following actions when conducting watershed analyses: (1) at a minimum, gather data on municipal water quality that are comparable with the data gathered by other federally funded analyses; (2) when feasible, include water quality as a primary focus and/or conduct the analyses along the boundaries of the municipal watersheds; (3) to the extent possible, collaborate with nonfederal land managers and owners to gather data that are comparable and useful to municipal watershed decisionmakers; and (4) when practical, develop data on the impact of new timber-harvesting methods and road construction practices on water quality. We provided copies of a draft of this report to the Forest Service and BLM for their review and comment. The agencies’ comments appear in appendixes I and II, respectively. The agencies (1) stated that the report provides a comprehensive and objective view of the complexities and factors involved in watershed management in the Pacific Northwest; (2) agreed with, and promised to pursue the implementation of, the report’s recommendations; and (3) noted that they have made progress in developing data on the impact of new timber-harvesting methods and road construction practices on water quality. The agencies also provided comments on the factual content of the report, and changes were made as appropriate. | Pursuant to a congressional request, GAO provided information on five municipal watersheds in Oregon and the activities that contribute to increased turbidity during large storms, focusing on the: (1) human activities that may have contributed to the high turbidity levels in western Oregon's municipal watersheds in February 1996; and (2) efforts under way by federal, state, local, and private land managers and owners, as well as the affected cities, to ensure safe drinking water during future storms. GAO noted that: (1) human activities--timber harvests and related roads as well as agricultural, industrial, urban, and residential development--can contribute to elevated sediment levels during large storms; (2) these activities result in soil that is compacted, paved, covered, or cleared of most vegetation; (3) rain falling on compacted or cleared soil can run off into streams, carrying with it eroded topsoil; (4) in addition, rain falling on roofs, paved roads and parking lots, and other covered surfaces does not penetrate into the ground, thereby increasing the runoff that moves across barren or disturbed soil and eroding topsoil; (5) this sediment can then be transported into streams; (6) the sediment from human activities in a municipal watershed, combined with the accelerated erosion that naturally occurs during storms, can shut down a municipality's water treatment system, as occurred in Salem in February 1996; (7) ongoing federal and nonfederal efforts have made significant progress in: (a) mitigating the impact of human activities on water quality and ensuring safe drinking water to cities in the Willamette and Lower Columbia river basins; and (b) involving more key landowners and other stakeholders in discussing, understanding, and addressing watershed issues and concerns and in implementing restoration plans; and (8) nevertheless, some key landowners have not been included in coordination efforts, and many efforts could benefit from a better understanding of, and data on, the condition of the watersheds. |
Skilled nursing facilities (SNF) provide care for people who no longer require a hospital level of care but need a higher level of medical services than what could be provided in the home. Medicare’s payments for SNF services have grown from $456 million in fiscal year 1983 to an estimated $10.8 billion in fiscal year 1996. During this same period, the number of SNFs requesting and being granted payments for routine services higher than those normally allowed has also grown. The main reason cited by the SNF industry for the requests for higher rates is that some SNFs are caring for more complex and costly patients and, therefore, higher payments are justified. Medicare, authorized by title XVIII of the Social Security Act, is a federal health insurance program that covers almost all citizens 65 years of age or older and certain disabled people. About 38 million individuals are covered. The program has two parts. Part A, financed by payroll taxes, covers inpatient services in hospitals and SNFs as well as home health and hospice care. Part B, a voluntary program financed by enrollee premiums and general revenues, covers physician services and a wide range of other services such as laboratory tests and medical equipment used in the home. Medicare is administered by the Health Care Financing Administration (HCFA) within the Department of Health and Human Services (HHS). To qualify for SNF services, a Medicare beneficiary must have been hospitalized for 3 or more days, be admitted to the SNF on a medical professional’s order for a condition related to the hospitalization, and need daily skilled nursing or therapy services. When the beneficiary meets these conditions, Medicare covers all necessary services, including room and board, nursing care, and ancillary services such as drugs, laboratory tests, and physical therapy. Medicare pays the full amount for the first 20 days. For the 21st through the 100th day of covered care, the beneficiary pays coinsurance of up to $92 per day (in 1996), and Medicare pays the remainder. Medicare coverage ends after the 100th day. To be eligible to receive payment under the Medicare program, SNFs must meet a set of 15 requirements, each of which consists of a number of elements. These requirements are designed to ensure that the SNF is capable of providing quality care to patients in a safe environment and cover such areas as fire safety, cleanliness, nursing staff, and medical records. HCFA contracts with state health agencies to survey nonstate-owned SNFs to determine whether they meet the requirements, a process known as survey and certification. A team of health and safety professionals annually inspects the facility and reviews the care furnished to patients. The state team recommends to HCFA whether to certify the facility for participation, and HCFA makes the final decision. Medicare pays SNFs on the basis of reasonable costs, which Medicare defines as those costs that are appropriate, necessary, and related to patient care. The program has a set of cost reimbursement principles that are used to determine whether claimed costs meet the definition of reasonable costs. SNFs submit cost reports to Medicare annually that are the basis for determining the facilities’ reasonable costs. HCFA contracts with insurance companies such as Blue Cross and Blue Shield plans and Mutual of Omaha to process part A claims. These contractors are called intermediaries, and their functions for SNFs include paying claims, reviewing the necessity of care, and auditing cost reports. The intermediaries pay SNFs during the year on the basis of interim rates, which are designed to closely approximate reasonable costs. After reviewing, and perhaps auditing, a SNF’s cost report, the intermediary makes a final settlement, either paying any underpayment or recovering any overpayment. Under authority granted by section 223 of the Social Security Amendments of 1972, HCFA has established a limit on the amount of costs for routine services (room, board, general nursing, and administration costs) Medicare will recognize as reasonable. This routine cost limit (RCL) is set separately for freestanding urban, freestanding rural, hospital-based urban, and hospital-based rural SNFs. For freestanding SNFs the RCL is set at 112 percent of mean routine costs. Cost limits for hospital-based SNFs are set at the limit for freestanding SNFs plus 50 percent of the difference between the freestanding limit and 112 percent of mean routine costs of hospital-based SNFs. In 1996, this resulted in the RCL for urban hospital-based SNFs being about $39 per day higher than that for urban freestanding SNFs and about $26 per day higher for rural hospital-based versus rural freestanding SNFs. The RCL is adjusted for differences in wage rates across geographic areas. During SNFs’ first 3 years of operation, they can receive new provider exemptions from RCLs. The exemptions can last as long as 3 years and 11 months depending on when during the SNF’s cost-reporting year the exemption becomes effective. The reason for the exemption is that new providers often have higher than usual costs as they hire staff and gradually increase their occupancy rates. During the exemption period, SNFs are paid their full reasonable costs whether or not those costs exceed their RCLs. Any SNF that is not exempt from the RCL can request an exception if its routine costs exceed its limit. While there are five circumstances for exceptions, about 98 percent of exception requests are for the atypical services criterion. As defined by regulation (42 C.F.R. 413.30), atypical services are items or services furnished because of the special needs of the Medicare patients treated and necessary in the efficient delivery of needed health care. For example, a common claim by SNFs seeking exceptions for atypical services is that they have high nursing care costs. Regulations governing exemptions and exceptions were in existence when RCLs were first established in 1979. In 1994, HCFA issued Transmittal 378, the agency’s first written guidelines on the exception process. Transmittal 378 established comparative data for the four groups of SNFs for which RCLs are established, required SNFs to submit patient-specific data such as patient diagnosis, and imposed time deadlines on the intermediary and HCFA to handle exception requests. To obtain an exception, a SNF must submit a written request to the intermediary responsible for paying the SNF’s claims. The intermediary reviews the request using Transmittal 378 guidelines and sends the exception request and its recommendation to HCFA. The intermediary’s recommendation can be to approve the requested rate, approve at a lower rate, or deny the request. HCFA reviews the request and the intermediary’s recommendation and makes the final decision. (See app. I for a detailed description of the exception process). The Ranking Minority Member of the Senate Special Committee on Aging asked us to describe how Medicare’s SNF costs and usage have grown in relation to hospital use and to assess whether Medicare’s process for deciding whether SNFs warrant higher rates discriminates between SNFs that treat more complex cases and those that have high costs but do not treat more complex cases. He also asked us to ascertain whether there were differences between the Medicare patients treated by facilities that received higher rates and those that did not. To respond to this request, we addressed the following questions: How have SNF costs and use grown in relation to hospital use? How do Medicare patients in SNFs granted exceptions compare with Medicare patients in SNFs that have not received exceptions, including whether patients in SNFs granted exceptions need more intense or complex care? How do services provided by SNFs granted exceptions compare with services provided by SNFs that have not received exceptions (for example, nurse staffing levels, physician coverage, and therapy services)? Do patients in SNFs granted exceptions receive appropriate care? What information does HCFA gather to assess RCL exception requests, and does its process ensure that SNFs are furnishing atypical services before granting RCL exceptions? To identify growth in SNF use and its relation to hospital use, we obtained and analyzed HCFA data on Medicare beneficiary use of services in both settings. We also reviewed a number of studies and reports related to this area. To assess whether hospital length of stay was different when hospitals have SNF units, we examined changes in length of stay between fiscal years 1991 and 1994 for all Medicare patients and for 12 diagnoses that are likely to result in posthospital care. (See app. II for a description of the 12 diagnosis-related groups.) To address whether HCFA’s RCL exception process ensures that SNFs granted exceptions actually furnish atypical services, we reviewed HCFA’s statutory authority and responsibilities for establishing and administering Medicare’s SNF RCL exception process and HCFA’s regulations and guidance to intermediaries for reviewing exception requests filed by SNFs. In particular, we reviewed the current SNF exception request review process that was set out in HCFA’s Transmittal 378 instructions issued in July 1994. We also discussed the SNF exception process with HCFA officials in the Bureau of Policy Development. We visited 10 intermediaries to determine the SNF exception request review process employed by each and verify that their reviews complied with the guidance laid out in Transmittal 378 and subsequent written correspondence. In November 1995, HCFA provided us with a database that contained information on 1,379 approved exception requests. The 10 intermediaries processed 789, or 57 percent, of these exceptions. The intermediaries we visited included five that processed more than 50 exception requests, two that processed fewer than 20 requests, and three participating in HCFA’s experiment giving final approval authority to intermediaries. Two of the five selected high volume intermediaries also participated in the pilot project. To answer the questions about SNF patient characteristics and facility services, we analyzed (1) a compilation of HCFA-required resident assessment data (known as the Minimum Data Set (MDS)) about each nursing home resident in Maine, Missouri, Ohio, and Washington for calendar year 1994 and (2) Medicare claims file data for 1992 and 1994. In addition, for Maine and Ohio, we applied a HCFA method for classifying nursing home patients into homogenous groups according to common health characteristics and the amount and type of resources they use. To provide additional information on patient and facility characteristics, we visited five SNFs that had received exceptions in the past and continue to apply for exceptions. We chose these SNFs, located in California, Illinois, Indiana, Massachusetts, and Washington, with input from state officials and local nursing home ombudsmen. To assess whether the care Medicare beneficiaries received in SNFs granted exceptions was appropriate, we asked officials in the SNFs we visited to identify a universe of their Medicare patients who they believed needed or likely needed more intense or complex care. We then randomly selected 20 of these patients’ records from each facility that were sent to the peer review organization (PRO) located in the SNF’s state, where they were reviewed by registered nurses and physicians using HCFA evaluation guidelines for quality and appropriateness of care. We also asked the reviewers to judge the intensity and complexity of care needed by the patients. We did not independently examine the internal and automated data processing controls for automated systems from which we obtained data used in our analyses. HCFA subjects its data to periodic reviews and examinations and relies on the data obtained from these systems as evidence of Medicare-covered services and expenditures and to support its management and budgetary decisions. We did however, assess the reliability of the data by testing multiple data elements to confirm their expected relationships to one another, and individual data elements for specific attributes. The state-specific data we analyzed and the information from the site visits cannot be projected to the nation as a whole. (See app. III for a more detailed discussion of the methodology for analyzing patient characteristics, services provided, and appropriateness of care.) With this exception, we conducted our review from July 1995 to September 1996 in accordance with generally accepted government auditing standards. The average length of hospital stay for Medicare patients has gone down since the prospective payment system (PPS) was introduced in 1983. At the same time, SNF use has gone up, indicating that some substitution of SNF care for hospital care has occurred under PPS. Average length of hospital stay has decreased more for those patients whose diagnoses are more likely to lead to a SNF admission. Moreover, for patients with these diagnoses, hospitals with a SNF unit saw even larger decreases in average length of stay than hospitals without a SNF unit. Before Medicare introduced its hospital PPS in fiscal year 1984, hospitals could maximize their Medicare revenues by keeping beneficiaries in the hospital as long as possible. Each additional day of hospital stay meant more reimbursement. PPS changed financial incentives for hospitals by paying them a fixed amount per discharge that differs on the basis of the patient’s diagnosis. This encouraged hospitals to be more efficient and to control costs. One way for hospitals to control costs is to reduce the average length of patient stay, and one way to reduce the length of stay is to transfer patients to SNFs as soon as medically appropriate. As a result, it was expected that SNF use would increase after PPS. Table 2.1 shows for fiscal years 1983 through 1995 the number of discharges from hospitals and admissions to SNFs along with the average length of stay in each setting. Hospital average length of stay decreased by about 29 percent, and discharges per 1,000 beneficiaries also decreased by about 24 percent. The reduction in discharges per 1,000 beneficiaries can be explained in large part by the substitution of ambulatory and outpatient surgery for inpatient surgery. For example, in 1981, the base year for PPS, about 332,000 Medicare discharges were for cataract surgery, accounting for over 1 million days of care. Today, almost all cataract surgery is done on an outpatient basis. Even though the complexity of hospital cases, as measured by the mean hospital case mix index, has increased on average by almost 28 percent since PPS began, average length of stay has gone down. Some of the decrease can probably be explained by the substitution of SNF care for what would in the past have been the last few days of hospital care. Beneficiary use of SNF services has increased from 10 admissions per 1,000 beneficiaries in 1983 to 42 per 1,000 based on preliminary data for 1995, and the percentage of hospital discharges resulting in SNF admissions has increased from 2.7 percent to 13.3 percent. PPS’ effect on SNF use was initially smaller than expected and sometimes contrary to expectations. Medicare SNF admissions increased from 309,000 in 1983 to 353,000 in 1985. During the same period, Medicare SNF payments increased 5 percent, from $456 million to $480 million. However, between 1985 and 1987, this trend reversed. Medicare SNF admissions fell to 327,000, a 7 percent decline. Any PPS effect on Medicare SNF utilization was offset by intensified utilization review by Medicare intermediaries. Several events occurred in the late 1980s that resulted in increased SNF usage. In 1988, HCFA implemented revised SNF coverage guidelines in response to a lawsuit (Fox v. Bowen, 1987). The intent of these new guidelines was to make it easier for beneficiaries to obtain SNF coverage and to increase the consistency of coverage determinations. Enactment of the Medicare Catastrophic Coverage Act in 1988 also had a major effect by increasing coverage and reducing beneficiary cost sharing. These changes provided a strong incentive for providers to become certified as Medicare SNFs. Over 1,600 new SNFs and nearly 75,000 new beds were certified between December 1988 and December 1990. The combined effects of increased coverage and increased provider resources produced rapid growth in the use of the Medicare SNF benefit during calendar year 1989, the only year the catastrophic coverage provisions were fully in effect. Covered days of care more than doubled over the previous year, from 11.8 million to 28.6 million, while program payments increased from about $1 billion to $2.8 billion. With the repeal of the Medicare Catastrophic Coverage Act in 1989, the SNF benefit structure returned to that in effect in 1988 after settlement of the lawsuit. This, as expected, produced a drop in utilization and payments for Medicare SNF services in 1990. However, SNF utilization and payments remained well above pre-1989 levels, and by 1992 had surpassed the 1989 level. In 1991 the average length of stay for Medicare patients in PPS hospitals was 7.9 days. It fell to 6.9 days in 1994, a decrease of 12.9 percent. However, we found that for 12 diagnosis-related groups (DRG) that are likely to require posthospital-care services, the declines in length of stay were larger. As shown in table 2.2, the change in length of stay between 1991 and 1994 for these 12 DRGs ranged from 16.7 percent to over 27 percent. As shown in table 2.3, the average length of stay in PPS hospitals with SNFs was shorter than the average length of stay in PPS hospitals that did not have a SNF unit for all but 1 of the 12 DRGs included in our analysis. Lengths of stay ranged from 4 percent to almost 14 percent shorter in hospitals with SNF units. For the 12 DRGs analyzed, about 248,000 Medicare beneficiaries were discharged to a SNF from a PPS hospital during fiscal year 1994. This represented about 23 percent of discharges from PPS hospitals for these DRGs. As shown in table 2.4, for beneficiaries discharged to a SNF, the average length of stay for hospitals with SNFs was less than that for hospitals without SNFs for each of the 12 DRGs. The differences ranged from 0.3 to 2.7 days. Because SNFs with exceptions are supposed to be furnishing atypical services, they might be expected to have a higher proportion of patients requiring more nursing assistance or more complex care than SNFs without exceptions. However, in the four states we studied, we found no substantive differences between the characteristics of, and services received by, Medicare patients residing in SNFs granted exceptions and those in SNFs that did not receive exceptions. For example, we found no substantive differences in patients’ ability to perform activities of daily living (ADL), the types of patient diagnoses, or the frequency with which certain types of treatments and therapies were administered. PRO reviewers found that patients in the five SNFs with exceptions that we visited generally received appropriate care—that is, the right care at the right time. They did find instances in which inappropriate care had been furnished in several of the SNFs granted exceptions. However, except for one case, no adverse outcomes resulted. Although HCFA intends that exceptions be granted only to SNFs that care for patients requiring atypical services, when comparing SNFs with exceptions and those without, we found little difference in either the Medicare patients themselves or the services they were provided. For example, we found no substantive difference between the two groups of SNFs in terms of (1) patients’ ability to perform activities of daily living, (2) patients’ diagnoses, (3) patients’ cognitive status, or (4) patients’ prior nursing home stays. When comparing data about the characteristics of residents in SNFs that received exceptions and SNFs that did not, we found that facilities in both groups care for some Medicare patients who required complex care. However, we found no substantive differences between these groups of facilities in a number of areas that may reflect the overall complexity of patient care needs. (See app. IV for the results of certain patient characteristics we analyzed.) Furthermore, during their review of medical records of a sample of patients in the five SNFs with exceptions we visited, PRO reviewers found that a majority of patients in three SNFs sampled did not need complex or intense care, while half of the patients sampled in the other two SNFs did require more complex or intense care. We analyzed ADLs because they are a measure of patient need and the facility resources required to meet those needs. Lower ADL scores indicate patients with relatively fewer needs for assistance compared with patients with higher ADL scores. In each of the states we studied, according to the MDS data, patients in SNFs with exceptions and those in SNFs without exceptions had, on average, similar abilities to perform ADLs. For example, as figure 3.1 shows, patients in both groups of SNFs in Missouri had ADL scores of about 12, on average. Missouri SNFs with exceptions’ individual facility ADL scores ranged from 8 to 12. Missouri SNFs without exceptions had a median ADL score of 12, with 10 percent of the SNFs with exceptions having ADL scores of 10 or lower and 10 percent having ADL scores of 14 and higher. (See app. IV for information about patient ADLs in the other three states we analyzed.) To obtain information about diagnoses, we analyzed 1992 and 1994 data from HCFA’s Medicare provider analysis and review (MEDPAR) database, classifying the SNF patients into DRGs using software developed for HCFA for hospital prospective payment. We found few differences between the two groups of SNFs. For example, in 1994 the most common DRG for patients in both groups of Ohio SNFs was fractures of the hip and pelvis. Table 3.1 shows, for each group of Ohio SNFs, the five most common DRGs. (DRG information for the other three states, and for the nation as a whole, is in app. IV.) Higher nursing costs as a result of providing atypical services are the foremost reason HCFA cites in granting exceptions. As a result, it might be expected that patients in SNFs granted an exception would need—and the SNF would provide—more nursing care. To obtain additional information about patients’ need for nursing care in SNFs with and without RCL exceptions in Maine and Ohio, we estimated the nursing resources patients require. We used HCFA’s Resource Utilization Group, version III (RUG-III) model, a model for sorting nursing home residents into like groups according to common health characteristics and the amount and type of resources they use, to evaluate each patient’s nursing resource need. RUG-III considers patient characteristics, such as whether the patient is in a coma or has pneumonia, as well as services provided to the patient, such as kidney dialysis or physical therapy, and assigns the patient to 1 of 44 categories depending on the nursing resources that patient requires. Each category has a number, or score, associated with it, providing a relative measure of resource use compared with other categories. For example, a patient who has complex health problems requiring more nursing care would be placed in a higher category, and given a higher score, signifying more resources required, than a patient who has simpler health problems and requires less nursing care. When we analyzed the results of the RUG-III estimates, we observed that in Ohio, the distribution of Medicare patients among the categories was similar in SNFs with exceptions and in SNFs without. And, unexpectedly, in Maine the SNFs with exceptions had patients requiring fewer nursing resources when compared with patients in SNFs without exceptions. (See app. IV for additional information regarding the results of the RUG-III analysis.) In addition to calculating RUG-III scores for each patient, we used the results of the RUG-III patient analysis to calculate each facility’s case-mix index score—the average amount of nursing resources required to care for the facility’s overall patient population. In both Maine and Ohio, we found the case-mix scores to be similar when comparing each state’s SNFs with exceptions with its SNFs without exceptions. For example, as figure 3.2 shows, the two groups of SNFs in Maine had case-mix scores of approximately 1.3, indicating that the SNFs’ patients had generally similar nursing resource needs. Similarly, figure 3.3 shows that the two groups of Ohio SNFs had case-mix scores of about 1.4, indicating similar nursing resource needs among their patients. Both the RUG-III individual patient analysis and case-mix index scores indicate that there were patients in both SNFs with exceptions and SNFs without exceptions that required intense or complex care. For example, in Ohio, 1.1 percent of patients in SNFs with exceptions and 1.4 percent of patients in SNFs without exceptions were determined to need the highest category of nursing resource use. And, also in Ohio, there were a few SNFs in both groups—one SNF with an exception and several SNFs without exceptions—with overall case-mix index scores of 1.6 and higher, indicating a relatively larger proportion of patients with high nursing resource needs in these SNFs. MDS data also showed no substantive differences in patients’ cognitive status, a measure of the patients’ ability to make decisions about the tasks or activities of daily living, such as choosing items of clothing or determining mealtimes. Nor did the data show any substantive difference between SNFs with and without exceptions in the number of patients with a prior stay in a nursing home or other residential facility, a measure that may indicate those patients with a history of poor health. In each of the four states we studied, patients in both groups of SNFs were similar when measured across both of these elements. (See app. IV for additional information regarding these and other patient characteristics we analyzed.) We asked the PROs, as part of their medical record review, to evaluate the health care needs of a sample of 20 patients identified as having or likely having complex care needs by SNF staff in each of the five SNFs with exceptions we visited. The PRO evaluations were based on a five-point scale, with one representing the needs of a typical skilled nursing facility patient and five being the needs of a typical acute-care hospital patient. In three SNFs, all or almost all of the patients reviewed were judged to have the health care needs of a typical SNF patient, and, in fact, several patients in two of these SNFs were judged not to require SNF care at all. In the two remaining SNFs, half the patients reviewed were judged to have needs greater than those of a typical SNF patient. SNFs with exceptions receive that status because they have documented to HCFA’s satisfaction that they furnish patients atypical services. However, in the four states we studied, we found that the percentage of patients receiving certain special treatments, such as ventilator care, and certain therapies, such as physical therapy, was generally similar in SNFs with exceptions and SNFs without. Furthermore, the typical amount of therapy given to the patients in each group of SNFs was generally similar. During our five site visits to SNFs with exceptions, we found that staffing of nursing and therapy services as well as physician coverage varied. We analyzed MDS data about special treatments and therapies, items that could be indicative of different levels of SNF resource use. Generally, we found no substantive differences in the type and intensity of these services in SNFs with exceptions and in those without. (See app. IV for the results of certain facility service characteristics we analyzed.) The percentage of patients receiving certain treatments and procedures, such as suctioning and ventilator care, appeared similar in both groups of facilities. For example, as figure 3.4 shows, generally less than 5 percent of patients in each group of Ohio SNFs received suctioning. (See app. IV for additional information regarding special treatments.) The percentage of patients receiving therapies, such as speech, occupational, and physical therapy, appeared similar in both groups of facilities in all four states. For example, as figure 3.5 shows, generally less than 20 percent of patients in each group of Maine SNFs received speech therapy. Likewise, the number of days of therapy patients received appeared similar. As shown in figure 3.6, patients in each group of Washington SNFs received about 10 days of therapy, on average. We also analyzed Maine and Ohio data regarding minutes of therapy provided and generally found no differences between the two groups. (See app. IV for additional information regarding therapies. Also, see app. IV for a listing of other variables analyzed.) MDS, MEDPAR, and other nationally available databases did not contain information about staffing, training, and other areas you were interested in, such as nursing care, therapy services, and physician coverage. Therefore, to provide information about these issues, we can only describe our observations during our site visits to five SNFs with exceptions. These observations cannot be assumed to be representative of SNFs in general. According to officials at the SNFs we visited, SNFs attempt to staff according to the complexity or intensity of the patients’ needs. For example, patients with more complex needs require more licensed nursing care; thus, a higher licensed-nurse-to-patient ratio is desirable. Patients with less complex needs might allow SNFs to staff with more certified nurse assistants and fewer licensed nurses. However, other factors, such as financial constraints or inability to recruit qualified personnel, may influence staffing ratios. Licensed-nurse-to-patient staffing ratios reported by SNF officials varied considerably among the five SNFs we visited. For example, daytime licensed-nurse-to-patient ratios ranged from 1:6 to 1:15; nighttime licensed nursing ratios ranged from 1:18 to 1:31. (See app. IV for information on nurse staffing levels.) The SNF with the lowest daytime licensed-nurse-to-patient staffing ratio, according to officials at the SNF, had adopted a system under which registered nurses performed most patient care tasks because the SNF had difficulty finding and retaining qualified nurse aides. Officials at most of the SNFs we visited said they preferred to have nurses with hospital experience on their staff to care for patients with complex medical needs. Hospital acute-care experience—as opposed to only long-term care experience—gives nurses the requisite skill and training to provide appropriate care to patients with complex needs, according to these officials. We did not determine the number of nurses with acute-care experience at each SNF we visited. However, many of the nursing staff at one SNF—which had a predominantly orthopedic patient population—had acute-care experience, and several of the nursing staff at this SNF were in the process of securing recognition as certified registered rehabilitation nurses. We also found that most of the SNFs had established on-the-job training programs for their nursing staffs to maintain and increase their skills. All the SNFs we visited provided physical, occupational, and speech therapies, and three of them also performed respiratory therapy. As estimated by SNF officials, the percentage of Medicare patients in each SNF receiving therapy varied widely, from a low of 40 percent in one SNF to almost 90 percent in another. SNFs attempt to provide the number and type of therapists—such as physical or occupational therapists—appropriate to their patients’ needs. The SNFs we visited predominantly contracted with outside vendors for therapists and therapy aides, with only one facility using mostly in-house staff. Following is an example of how one SNF uses therapy services to meet its patients’ needs. Therapy services in this SNF are available 7 days a week, but not all patients receive therapy on weekends. Most patients receive at least 1 hour of physical therapy and 1 hour of occupational therapy each day, as well as participate in an exercise group. On average, complex care patients receive about 2-1/2 hours of total therapy per day. All patients are screened for speech therapy. According to experts, aside from physicians acting in administrative capacities as medical directors, SNFs generally do not have physicians on staff. As in hospitals, SNF patients have their own attending physicians who direct their care. However, unlike hospital patients, most SNF patients’ conditions generally do not require a daily physician visit. As a result, physicians often rely on SNFs’ nursing staffs to keep them informed of the patients’ conditions. One SNF we visited arranged for more physician coverage through an agreement with nearby hospitals under which the hospitals provided physicians to follow up on SNF patients, seeing them two or three times a week. In three of the five SNFs we visited, some staff expressed concern that physicians did not visit their patients as frequently as they should, particularly the sicker patients. One SNF medical director expressed concern that physicians were relying on nurses to notify them of their patients’ conditions rather than visiting the patient, which she believed may be inappropriate for sicker patients. At another SNF we visited, a staff person indicated that some attending physicians failed to visit their SNF patients in person or oversee their care at the facility. PRO physician reviewers found that the services provided at the five SNFs with exceptions we visited were almost always appropriate to the patients’ needs for those cases reviewed. However, several problems with quality of care, such as errors in administering medication and delays in contacting physicians when problems arose, were identified during the review of medical records collected at the SNFs we visited. Except for one patient who required hospital outpatient treatment as a result of a quality problem the PROs identified, no other adverse outcomes resulted from the problems noted. In reviewing the medical records of 100 SNF patients (20 patients at each facility) identified by SNF staff as needing complex care, the PROs found the following quality problems:five instances of medication errors; three instances of delays in contacting a physician upon change in patient’s condition; two instances of not notifying a physician upon a change in a patient’s condition; two instances of falls, indicating a failure to develop a system to assess patients with an increased risk of falling and to implement preventive measures; and one instance of failure to provide necessary treatment. Furthermore, the PROs noted 55 instances in which documentation of the patient’s condition or progress was inadequate or inconsistent. Generally, reviewers assume that care not documented was not furnished. Following are some specific examples of problems identified by the PROs. For one SNF, failure to follow medically prescribed procedures resulted in a complication. Physician orders instructed SNF staff to irrigate on a weekly basis a patient’s central venous catheter. The PRO reviewers found that this procedure was not followed. As a result, problems with the catheter developed, and the patient was sent to the hospital for outpatient care. At another facility a patient was given twice the ordered dosage of medication for at least a week before the error was noticed and the physician notified. In yet another facility, the issue of physician notification was raised after abnormal laboratory test results were returned but the physician was not informed until 3 days later. The number of SNFs granted exceptions to routine cost limits (RCL) is growing rapidly, with exception approvals increasing from 184 to 552 from fiscal year 1993 to fiscal year 1995. The extra payments associated with these approvals also increased from $35 million in fiscal year 1993 to $98 million in fiscal year 1995. However, HCFA’s exception review process is not adequate for discerning SNFs that have higher costs because they furnish atypical services, and thereby qualify for an exception, from SNFs that have higher costs for other reasons, such as inefficiency. The primary reasons for this situation are that benchmarks used to screen for exception eligibility rely almost entirely on a SNF’s proportion of Medicare patients, and patient-specific information submitted by SNFs on Medicare patients is not used. In effect, if a nursing home can demonstrate it has a higher than average proportion of Medicare patients and high costs, it can receive an exception to the RCL, which in turn defeats the cost-control incentives of RCLs. From the time RCLs were first established in 1979 through fiscal year 1992, a total of only 80 exceptions were granted. More than twice as many were granted in fiscal year 1993 alone, and more than 550 were granted in fiscal year 1995 (see table 4.1). Moreover, HCFA and industry officials expect that the number of exception requests and approvals is likely to continue to grow, and data in table 4.1 covering part of fiscal year 1996 suggest this will happen. Although data for fiscal year 1996 are based on part of the year, these data indicate a continued increase in approvals. During approximately the first 10 months of fiscal year 1996, HCFA approved 417 exceptions, which would be worth about $70 million to the SNFs. In addition, the six intermediaries with final approval authority approved 190 exceptions during the first 9 months of fiscal year 1996, which were worth about $29 million to the SNFs. If these trends continue, approved exceptions by all intermediaries during fiscal year 1996 could total about 750 and cost the Medicare program about $120 million. Besides the fact that SNFs that receive exceptions in one year are likely to continue receiving exceptions, another factor that could continue the trend to more exceptions in the future is the number of exemptions to RCLs currently in effect. Historically, over 20 percent of SNFs with new provider exemptions received exceptions after their exemption period ended. As of September 30, 1995, 2,422 SNFs had obtained exemptions from RCLs since 1979. More than 80 percent of the 2,422 exemptions were approved after fiscal year 1989, with 35 percent of the exemptions (846) approved during fiscal years 1994 and 1995. Thus, over the next few years, a substantial number of SNFs will be completing their RCL exemption periods and likely will be requesting exceptions. The first step a SNF must take to gain an exception to the RCL is to demonstrate that it meets at least one of three benchmarks established by HCFA. The benchmarks are as follows: The SNF has a shorter length of stay than the average of its peer group. Shorter lengths of stay can indicate, for example, that services are furnished more intensively so patients can be released sooner. The SNF has higher average ancillary costs per day than its peer group. Higher ancillary costs can indicate, for example, that the SNF treats a higher proportion of patients needing rehabilitation services or drug infusion therapy. The SNF treats a higher proportion of Medicare patients than its peer group. As the ratio of Medicare to total patients rises, SNF costs can grow because Medicare patients generally have more acute conditions in need of more health services than other patients, who often need more long-term and custodial care. Benchmarks are set on the basis of the average value of four peer groups—rural and urban groups for both hospital-based and freestanding facilities. In establishing the peer group averages, HCFA officials told us they used data on all patients (in Medicare-certified units) in the SNFs, not just Medicare patients, because Medicare’s cost reimbursement method is designed to pay on the basis of average costs of all patients in a SNF for routine services, up to the RCL. However, Medicare patients are different from other nursing home patients. Medicare patients are admitted because they have been discharged from a hospital but need continued care because of the acute condition that resulted in the hospitalization. Other patients need long-term care for chronic conditions, which involves more custodial-type care. In effect, for most SNFs, the three benchmarks all depend on the same factor—the percentage of a SNF’s patients who are Medicare beneficiaries. Therefore, treating a higher proportion of Medicare patients will usually get a SNF past the benchmarks, but this does not mean the patients require atypical services. The next and final stage of the process as it operates only requires a SNF to demonstrate that its costs are higher than its peer group. The process does not require a SNF to demonstrate that its costs are high because atypical services are needed and furnished. Therefore, SNFs that are simply inefficient in their operations can gain RCL exceptions. Tables 4.2, 4.3, and 4.4 give the benchmarks and actual Medicare averages for length of stay, ancillary costs, and portion of Medicare-covered days, respectively. Table 4.2 contains the peer group benchmarks for average length of stay and the actual average for Medicare-covered SNF patients in fiscal year 1994. The average length of stay of Medicare patients is so much less than the benchmark that it is unlikely this benchmark can distinguish facilities that provide atypical services to Medicare beneficiaries from facilities that do not. Furthermore, each of the four peer group benchmark values exceed the maximum Medicare benefit of 100 days. Table 4.3 presents a similar comparison for ancillary costs. The actual peer group ancillary costs are so much larger than the benchmarks that ancillary costs also are unlikely to be a good indicator of whether a SNF provides atypical services to Medicare patients. The actual average costs range from 2.3 to 4.4 times the benchmarks. A primary reason for these differences in costs is that Medicare patients are different from most other patients in nursing homes. Medicare patients typically have been recently discharged from hospitals after treatment for acute conditions. The majority of non-Medicare patients in nursing homes are Medicaid patients with chronic conditions and long-term and custodial care needs. Thus, basing a benchmark on the ancillary costs for all patients produces a benchmark that does not adequately distinguish facilities that do provide atypical services to Medicare patients from those that do not. A comparison based on the third benchmark, proportion of Medicare patients, is shown in table 4.4. This benchmark is of little or no value in identifying facilities that provide atypical services. For example, in fiscal year 1994, Medicare patients made up about 36 percent of the patients in hospital-based urban nursing homes. If a nursing home had a Medicare population of, say, 60 percent (above the benchmark), this merely indicates that the nursing home had an atypical population mix, not that it was providing atypical services. A nursing home could have a low proportion of Medicare patients and provide atypical services to every one of its Medicare patients. Furthermore, the benchmarks are out of date. The benchmarks were computed from data spanning the periods October 31, 1988, through September 30, 1989, for hospital-based facilities and June 30, 1989, through May 31, 1990, for freestanding facilities. For each type of facility, the base data included substantial time under the Medicare Catastrophic Coverage Act of 1988 coverage criteria, which, as discussed, substantially liberalized Medicare coverage criteria for SNFs. The benchmarks, then, were computed on data representing an atypical year in the number and type of Medicare patients who were admitted to SNFs. Data describing patient characteristics submitted as part of an exception request generally are not used in the exception review process. Transmittal 378 requires SNFs to submit patient data, showing patients’ diagnoses and ability to perform ADLs, for a random sample of all patients treated at their facilities. Although Transmittal 378 requires a random sample, HCFA officials told us that they have verbally communicated to various intermediary and SNF officials that they expect the SNF to submit clinical data for all patients treated during the year for which an exception is requested. None of the intermediaries we visited knew of HCFA’s expectation. Transmittal 378 says the intermediary should use the patient-specific data to determine whether the nursing staff level of a SNF is excessive, and if so, the intermediary should adjust the SNF’s costs before comparing the costs to the peer group. A HCFA official told us that HCFA expects the intermediaries to follow the instructions in Transmittal 378 and evaluate whether the nursing staff level of a SNF is excessive. He told us that HCFA expected the intermediaries’ professional health staff to make decisions on excessive staffing levels, although HCFA has provided no specific criteria to judge whether nursing staff levels are excessive. Although 3 of the 10 intermediaries visited told us that they used patient-specific data in their review of exception requests, none of the 10 had ever referred a request to its professional health staff for an opinion on the appropriateness of nursing staff levels. Officials at two of the three intermediaries using patient-specific data told us that HCFA had verbally told them to verify that the ADL scores of the applicant’s patients are higher than the ADL scores presented in a 1985 national survey of nursing home populations. An intermediary official told us that higher ADL scores indicate a need for additional nursing personnel. An official at a third intermediary we visited told us that, although the intermediary received no guidance from HCFA, it requires a SNF applying for exception to clarify its ADL data by interpreting in writing how its ADL data demonstrate that the SNF is providing atypical services. HCFA’s Transmittal 378 also requires SNFs to submit a listing of the discharge destination for all patients. Officials for all 10 intermediaries we visited told us they verify that this information is submitted, but because HCFA has not provided any criteria to determine its significance, they do not use this information when reviewing an exception request. HCFA officials told us the discharge data should show a large number of patients going home if the SNF is atypical. However, they told us that there are no plans to establish a benchmark for discharge data because setting such a benchmark for the number or percentage of patients discharged to their homes would be difficult. The use of SNF services by Medicare beneficiaries and Medicare’s payments for these services have grown dramatically during the 1990s. One reason for this growth is that Medicare guidelines for when SNF services are covered were liberalized in 1988 in response to a court decision. Another reason is that some substitution of SNF care has occurred for what in the past would have been the last few days of hospital care. This was an expected result of Medicare’s hospital PPS. The number of SNFs requesting exceptions to the RCL has grown rapidly and is expected to continue to grow. Over 500 requests were processed and approved in 1995, and as many as 750 may be processed in 1996. Almost all exception requests claim that routine costs are higher than the RCL because the SNF provides atypical services. However, HCFA’s current screening benchmarks for exception requests are unlikely to differentiate between SNFs that provide atypical services and those that do not. Moreover, the patient-specific information submitted with exception requests is not used to evaluate them. Thus, if a SNF can show that its costs are higher than the RCL, it will receive an exception without demonstrating that it does, in fact, furnish atypical services. Our analysis of four states’ Medicare patients in SNFs with and without exceptions found virtually the same ADL scores for patients in both groups of SNFs; no substantive differences in the patients’ diagnoses; RUG-III scores that indicated a need for the same level of nursing resources to treat both groups of patients; and similar amounts of therapy and special treatments. Moreover, despite the fact that SNFs with exceptions were expected to have sicker patients, PRO review of 100 patients identified as requiring complex care by staff in the SNFs we visited showed that all or almost all patients in three of five SNFs were typical SNF patients. Only half of the selected patients in the other two SNFs needed complex care. PRO review did find that services furnished to the selected patients were almost always appropriate to patients’ needs. Weaknesses in HCFA’s exception request review process make it unlikely that it limits exception approvals to SNFs furnishing atypical routine services and likely that SNFs will receive approval for merely showing higher than normal costs. Our analyses of SNF patient characteristics also showed no significant difference between patients in SNFs with and without RCL exceptions, giving further evidence that HCFA’s review process is not working as intended. The Secretary of HHS should direct the Administrator of HCFA to revise the SNF exception to the RCL review process so that it can differentiate between SNFs that furnish atypical routine services to Medicare patients and SNFs that merely have higher than normal costs. Looking at factors that reflect Medicare patients rather than all SNF patients occupying Medicare-certified beds might be one way to do so. Using patient-specific data, some of which are currently submitted but not used, might be another way. In commenting on a draft of this report, HHS generally agreed with our recommendation to revise the exception review process to enable HCFA to better differentiate between SNFs that furnish atypical services and those that merely have higher costs. Specifically, HHS concurred with our suggestion to expand the use of patient-specific data in the review process. HHS said that HCFA’s ongoing SNF payment method demonstration project using the RUG-III classification system will provide the data necessary to cost-out atypical services and items and begin to integrate patient-specific data into the exception process. However, HHS disagreed with our suggestion that looking at factors that pertain to Medicare patients rather than all SNF patients might be one way to enhance the exception review process. HHS said this suggestion failed to take into account the fact that Medicare patients are often the most resource-intensive patients a SNF treats and that the proportion of Medicare patients in a SNF is a valid indicator of case mix. HHS added that the RCLs are based on the average cost of all patients and that use of data on only Medicare patients would be inappropriate. We discuss in the report the differences between Medicare and other SNF patients and the rationale for using data on all patients in establishing the benchmarks used in evaluating exception requests. We did not recommend that HCFA substitute data on only Medicare patients for the current benchmark. Rather, we recommended that HCFA look at such data as one way to revise the process and give exception request reviewers additional data upon which to base decisions. We envision that the data could be a useful supplement to the existing process to help differentiate between SNFs furnishing atypical services and those that merely have higher costs. For this reason, we do not believe that our suggestion would be inconsistent with Medicare’s principles of cost reimbursement. HHS also disagreed with our suggestion to look at data on only Medicare patients because the suggestion was derived from what HHS considers to be a methodological flaw in our analysis of SNF patients. HHS considers the methodology flawed because it compared only Medicare patients in SNFs with exceptions with Medicare patients in SNFs without exceptions, which does not consider HCFA’s proxy for case mix—the facility’s percentage of Medicare patients. First, our suggestion was based primarily on our review of HCFA’s exception process discussed in chapter 4. We found that in general the only factor that affected a determination of whether a facility met the atypical services criterion was its proportion of Medicare patients, but a higher than average proportion in itself does not mean a SNF furnishes atypical services. Thus, we recommended that the review process be revised and suggested several types of information that might be useful to differentiate SNFs that furnish atypical services from those that merely have higher than normal costs. Second, as stated in chapter 1’s scope and methodology section, our analysis of SNF patients was designed to answer questions about the characteristics of and services received by Medicare patients in facilities with and without RCL exceptions. The analysis is valid for these purposes. Moreover, we would expect that at least some differences between patients in the two SNF groups would be shown by such an analysis, and the fact that no differences emerged lends additional support to our suggestion to look at using Medicare-only data during the exception review process. HHS also noted that, in concert with the Congress, it is working on development of a PPS for SNFs that is expected to be sensitive to a facility’s case mix. HHS believes that such a payment method would eliminate the need for an exception process. A SNF PPS that is sensitive to case mix might lessen the need for an exception process, but we suspect that some exception-type process would remain either for individual cases or facilities. Prospective payment methods generally retain such features. For example, Medicare’s inpatient hospital PPS provides for paying sole community hospitals differently because of their special circumstances and provides a way for hospitals to receive additional payments for outlier cases that are extremely costly. | Pursuant to a congressional request, GAO reviewed: (1) the growth of skilled nursing facility (SNF) costs and SNF use in relation to hospital use; (2) the characteristics of Medicare SNF patients and the types of services they receive in SNFs being paid higher than normal amounts compared to other SNFs, as well as whether patients in such facilities receive appropriate care; and (3) whether the Health Care Financing Administration's (HCFA) process for assessing requests for higher payments ensures that only SNFs furnishing atypical services are granted exceptions. GAO found that: (1) SNF use has increased since 1983 when the Medicare hospital prospective payment system (PPS), which pays a predetermined amount per hospital discharge, was introduced and gave hospitals a financial incentive to shorten lengths of stay; (2) the average length of hospital stay for Medicare patients has decreased from 10 days in 1983 to 7.1 days in 1995, indicating that, as expected, some substitution of SNF care for hospital care has occurred; (3) the average length of hospital stay decreased more for those Medicare patients whose diagnoses were more likely to lead to a SNF admission, such as hip fractures, than for Medicare patients as a whole; (4) considering patients with these types of diagnoses, hospitals with SNF units saw larger decreases in the average patient length of stay than did hospitals without SNF units; (5) the increasing number of SNFs granted routine cost limit (RCL) exceptions and the resulting additional payments, almost $100 million in fiscal year 1995, has contributed to the growth in Medicare SNF costs; (6) contrary to expectation, GAO did not find that SNFs with exceptions had a higher proportion of patients requiring complex care than SNFs without exceptions; (7) patients identified as requiring complex care by the medical records GAO reviewed, and who reside in SNFs granted exceptions, were generally provided appropriate care; (8) HCFA's review process for RCL exception requests does not ensure that SNFs actually provide atypical services to their Medicare patients; (9) HCFA's exception screening benchmarks basically take into account only whether requesting SNFs treat a higher than average proportion of Medicare patients; and (10) the patient-specific information obtained from requesting SNFs is generally not used to assess whether the Medicare beneficiaries need or receive atypical services. |
NIH conducts and sponsors biomedical research through its institutes and centers (IC), each of which is charged with a specific mission. ICs’ missions generally focus on a given disease; a particular organ; or a stage in development, such as childhood or old age. ICs accomplish their missions chiefly through intramural and extramural research. Intramural research entails government scientists working in the ICs’ own laboratories and clinics, whereas extramural research is conducted at outside research institutions, primarily universities, by scientists who have been awarded extramural research grants from an IC through NIH’s competitive process.$30 billion in fiscal year 2012 was used to support extramural research. Of this $25.2 billion in extramural research grant funding, NIH provided about $16.1 billion to universities. Extramural research grants reimburse universities for the direct costs of each research project covered by the grants and a portion of the indirect costs of maintaining their facilities for research use and covering the administrative expenses of the university. Direct costs can be specifically identified with or directly assigned to individual research projects and are relatively easy to define and measure. They include, for example, the researcher’s salary, subawards, equipment, and travel. Indirect costs represent a university’s general support expenses and cannot be specifically identified with individual research projects or institutional activities. They include, for example, building utilities, administrative staff salaries, and library operations. OMB Circular No. A-21 establishes the principles for determining the types of direct and indirect costs that are allowed to be claimed and the methods for allocating such costs to federally funded research at educational institutions, including the establishment and use of indirect cost rates. Indirect costs are divided into two main components, facilities costs and administrative costs. Facilities costs include operations and maintenance expenses, such as for utilities; allowances for depreciation and use of buildings and equipment; interest on debt associated with building and equipment; and library expenses, such as for the use of the library and library materials purchased for research use. general administration expenses, such as the costs associated with executive functions like financial management; departmental administration expenses, including clerical staff and supplies for academic departments; sponsored projects’ administration expenses, which are the costs associated with the office responsible for administering projects and awards funded by external sources; and student administration and services expenses, such as the administration of the student health clinic. Because indirect costs cannot be specifically attributed to a particular research grant, they are charged via an indirect cost rate that serves as the mechanism for determining the proportion of indirect costs that may be charged to federally funded research awards. OMB Circular No. A-21 outlines the process for establishing an indirect cost rate for universities performing federally funded research. Each university develops a proposed indirect cost rate that is based on university cost data from prior years, which is subsequently negotiated with the federal government to arrive at a final indirect cost rate, in compliance with the principles of OMB Circular A-21. To calculate a university’s indirect cost rate, a percentage of each indirect cost component is allocated to the university’s research function on the basis of benefits received from that component by the research function. For example, a university can measure the square footage of floor space used for research and use this measure to allocate the amount of costs it claims for operating and using the space as a component in its indirect cost rate proposal. Each indirect cost component allocated to research is applied to a modified set of direct costs referred to as “modified total direct costs” (MTDC) to obtain an individual rate for each component. MTDC includes the salaries and wages of those conducting the research, fringe benefits (e.g., pensions), materials and supplies, travel, and the first $25,000 of each subaward. MTDC excludes costs such as equipment costs, capital expenditures, tuition remission, equipment or space rental costs, and the portion of each subaward in excess of $25,000. (See fig. 1.) Universities use a standard format, also known as the long form, for submitting their indirect cost rate proposals to their cognizant rate-setting agency. However, universities whose total direct costs on federal awards do not exceed $10 million in a fiscal year may use a simplified method for determining the indirect cost rate applicable to all federal awards. Whereas universities above the $10 million threshold must use an MTDC base, universities using the simplified method may use either salaries and wages as their base, or MTDC. As already noted, this report focuses on those universities that used the standard format for proposal submission. In February 2013, OMB issued proposed guidance that includes revisions to cost principles of OMB Circular No. A-21. The proposed guidance reflects input from the federal and nonfederal financial community, including the Interagency Council on Financial Assistance Reform. The proposed guidance would, among other things, allow more items to be directly charged rather than included as a component of the indirect cost rate. As of September 2013, OMB had not issued final guidance. From fiscal year 2002 to fiscal year 2012, NIH reimbursements to universities for indirect costs associated with NIH-funded extramural research increased at a slightly faster rate than those for direct costs, and during some portions of this period indirect cost growth increased notably faster than direct cost growth. In fiscal year 2012, the 50 universities with the largest research programs received over two thirds of total indirect cost reimbursement. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. Reimbursements for indirect costs from fiscal year 2002 through fiscal year 2012 increased slightly faster than reimbursements for direct costs, but increased notably faster during some periods. Over this period, NIH reimbursements for indirect costs grew by about 28.1 percent, from $3.6 billion to $4.6 billion. Over the same period, NIH reimbursement for direct costs grew by about 27.0 percent, from $9 billion to $11.5 billion. However, because there were large differences between indirect and direct growth in some years, indirect cost reimbursements increased notably faster than direct cost reimbursements during some periods. For example, from fiscal year 2002 to 2003, the first year of this period, there was a large increase in direct costs that compensated for greater growth in indirect costs during other years. As a result, from fiscal year 2003 to 2012 indirect costs increased 16.9 percent, from about $3.9 billion to $4.6 billion, while direct costs increased 11.7 percent, from about $10.3 billion to $11.5 billion. Furthermore, in 6 of the 10 years, reimbursements for indirect costs increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. After fiscal year 2005, annual changes in reimbursements were generally small but consistent, with reimbursements for indirect costs increasing relative to direct costs in 5 of 7 years. (See fig. 2 for more details on the annual change in costs.) NIH officials noted that, historically, NIH’s reimbursements for indirect costs have remained a stable percentage of NIH’s total funding for all NIH awards overall. Our analysis specifically for university research, which accounted for almost two-thirds of NIH’s funding for extramural research in fiscal year 2012, indicates that in 2003 about 27.7 percent of NIH reimbursement for university research was for indirect costs, and in 2012 this percentage increased slightly to 28.6 percent. This occurred while NIH’s budget for extramural research conducted at universities—which needs to cover both the direct and the indirect costs of research—slowed in the last few years. For example, during the most recent 5 years (fiscal year 2008 to fiscal year 2012), NIH’s total funding for extramural research conducted at universities increased about 5 percent, whereas it had increased about 21 percent in the 5 previous years (fiscal year 2002 to fiscal year 2007). In fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement to universities was provided to about 10 percent of the universities (50 of a total of about 500) receiving NIH funding for extramural research.(See app. I for the indirect cost reimbursements for these top 50 universities.) These top 50 universities had the largest research programs, as defined by the largest amount of reimbursement for direct costs and a relatively large number of research grants. Indirect cost rates for 5 universities out of the top 50 were not available from DCA. adjustment.the highest indirect cost rates among the 50 universities receiving the highest amounts of indirect cost reimbursement in fiscal year 2012. Among the 10 universities in the table, those with the highest indirect cost rates were Mount Sinai Medical School and New York University School of Medicine; Johns Hopkins University and Yale University had the largest research programs as measured by the number of NIH grants awarded. Stakeholders—university officials, DCA officials, and others—whom we interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some factors are related to the facilities costs, and others are related to administrative costs. NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with these potential increases. Some stakeholders underscored the importance to the research effort of providing funding for the costs of facilities. They explained that reimbursements for the facilities component of indirect costs—such as the amount of reimbursable square footage, operations and maintenance, building depreciation, and interest costs—help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. Some university officials we interviewed noted that these research facilities are necessary for conducting innovative biomedical research, such as research devoted to the role of genetic mutation for breast cancer that uses advanced lab space and equipment. They also noted that costs for these facilities have increased over time as biomedical research has become increasingly sophisticated. For example, a university’s officials stated that from fiscal year 2002 to fiscal year 2009, the cost of its facilities to support research—including those used to support advancement in data and computing—has grown from about $88 million to about $145 million. DCA officials stated that the uncapped facilities component of the indirect cost rate provides universities few, if any, incentives for controlling these potentially increasing costs. For example, DCA officials noted that there is no limit on reimbursement for interest costs under the facilities component. DCA officials stated that while reimbursements for interest costs may allow universities to support needed renovations or construction of new facilities, the fact that these reimbursements are not capped may also encourage universities to borrow money to build new facilities, which could lead to the building of more new space than is necessary for research needs. Officials also noted that these interest costs are out of DCA’s control and may vary. For example, at the time of our work, interest rates—which are used to determine interest costs— were very low, but they could increase over time, which could increase costs for ongoing building projects or buildings that have already been completed, regardless of future building decisions by universities. Because of this factor, the indirect cost rate could be expected to increase, resulting in a potential increase in the amount of indirect cost reimbursements provided by NIH. In addition, some stakeholders noted that, at the time of our work, 65 of about 500 universities receiving reimbursement for indirect costs in fiscal year 2012 were eligible for a rate increase of 1.3 percent to account for the higher cost of utilities. DCA officials added that OMB’s proposed revisions to Circular No. A-21 would allow all universities to receive some reimbursement for utility costs based on a revised formula. As a result, NIH reimbursements for indirect costs could be expected to increase as more universities would be eligible to include this cost in their indirect cost rates. Some stakeholders noted that while the cap on the reimbursement rate for administrative costs—26 percent—helps to control reimbursements for indirect costs, it does not account for the recent increases in administrative costs reportedly incurred by universities. For example, university officials explained that their administrative costs have increased in order to comply with recent changes in regulatory reporting requirements, such as those related to reporting conflicts of interest. Some university officials explained that they have hired additional full-time staff to review and manage various reporting requirements as well as invested in additional information technology (IT) to support new software related to regulatory requirements. Additionally, some stakeholders noted that administrative costs also have increased due to trends in the way biomedical research is conducted, such as an increase in collaboration between universities in research studies and an increased use of IT for biomedical research. For example, some university officials explained that many biomedical research projects now use advanced technology—such as high-sequencing technology or imaging—that requires greater investment in computing resources by the university. Additionally, one university’s officials noted that the advancements in IT provide support for interconnectivity, complex data security and data privacy requirements, and requirements for long-term storage and maintenance of electronic data. According to university officials at another university, in some instances they may charge some advanced computing equipment as a direct cost because it is specifically related to research; however, in most instances these computing resources are included in the administrative component of the indirect cost rate. According to DCA officials, if costs that are part of the capped administrative component increase significantly, indirect cost reimbursements overall could increase if universities begin to categorize some of the costs as part of the uncapped facilities component. Specifically, DCA officials explained that currently there is a provision in Circular No. A-21 that advises certain limits on changing the categorization of certain costs—such as those costs incurred by a university that are associated with increased use of information technology—from the administrative to the facilities component. However, they noted that the proposed revisions to Circular No. A-21 did not include such a provision. DCA officials stated that they may be limited in their ability to control increases in reimbursements associated with these categorization changes if this provision is removed and if university administrative costs continue to increase. NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with potential future increases of these costs. As we previously reported, NIH has a program to periodically identify, analyze, and manage significant risks to its objectives, strategy and mission. NIH officials noted that they assess risks related to all extramural research funding as part of this program, and that this assessment does not specifically focus on indirect costs for universities. According to NIH officials, NIH has not conducted such planning because overall indirect costs have remained around 27 percent of NIH’s total budget for all extramural research, and, in their opinion, future cost increases are unlikely to change this figure significantly in spite of factors that may contribute to increased indirect costs. Therefore, NIH officials stated that they do not anticipate the need to consider adjusting reimbursements for indirect costs for most grants below the amount determined by a university’s negotiated indirect cost rate, which would require a change in law or regulation. However, NIH officials told us that should indirect costs rise significantly, they may need to reduce the number of research projects, which have already been reduced in part because of budget limitations and increases in the direct costs of research. NIH noted that the reduced budget in fiscal year 2013 resulted in 700 fewer individual research grants. Even at current levels, indirect costs constitute a significant portion of NIH’s budget at about 20 percent. Therefore, over time, increases in indirect costs could cause further reductions in the number of research projects that NIH could support. NIH has indicated that NIH funding for both the indirect and the direct costs of university research provides critical support for biomedical research, covering the indirect costs of operating a research institution and the direct costs of specific research projects. NIH faces uncertainty related to the potential impact of increasing indirect costs on its funding of future research. Among research grants to universities specifically, NIH’s indirect costs are increasing at a faster rate than direct costs. While changes in recent years have generally been small, annual changes in reimbursement for indirect costs have consistently increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. Further, this has occurred while the growth in NIH’s budget for extramural research has slowed in recent years, putting pressure on NIH to find ways to continue to maximize its support of innovative biomedical research. Several factors are expected to contribute to future growth in indirect costs for NIH. These factors include that NIH’s current system of reimbursing indirect costs—through indirect cost rates for each university calculated according to OMB guidance—provides few, if any, incentives for universities to control facilities costs. At the same time, the cost of university facilities to support biomedical research is increasing over time, as cutting-edge research requires more advanced labs and equipment. NIH has not made plans for options that might address these trends—in part because it views increases in indirect costs as having been modest. However, indirect costs already represent one-fifth of NIH’s overall budget and about one-quarter of NIH’s budget for extramural research. NIH has experienced small but consistent increases in indirect costs, and factors suggest that indirect costs could increase more quickly over time in the future. If so, such increases could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. To help address the uncertainty NIH faces related to the potential impact of increasing indirect costs on its funding of future research, we recommend that the Director of NIH assess the impact of growth in indirect costs on its research mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research, including the direct costs of research projects. We provided a draft of this report to HHS, and HHS provided written comments (reprinted in app. II). HHS also provided technical comments, which we incorporated as appropriate. HHS indicated that it agreed with our recommendation and that NIH had already taken steps to implement it, but HHS disagreed with a number of our conclusions. Specifically, HHS stated that NIH assesses the impact of indirect costs through its annual budget projections, through planning and congressional justifications, and as part of its risk management program. The draft report acknowledged NIH’s efforts in assessing risk facing its extramural research program. However, NIH has not indicated how these actions would address our recommendation by assessing the potential ongoing impact of indirect costs for universities on its funding of future research. Moreover, NIH has not developed a plan for how to deal with potential continuing increases in indirect costs for universities. Instead, HHS indicated that, in past years, increases in indirect costs have been proportionally consistent with increases in direct costs, and therefore, there is not an immediate risk to NIH’s research portfolio. While the draft report acknowledged that indirect costs have remained a stable percentage of NIH’s overall research costs, it also noted that, for universities—which received almost two-thirds of NIH’s funding for extramural research—indirect costs increased notably faster than direct costs during some recent periods. Further, as indicated in the draft report, there are multiple indications that, for universities, indirect costs are likely to increase at a faster rate in the future, so past stability may not be sustained in future years. We remain convinced that increases in indirect costs could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. In addition, in its comments, HHS included an analysis of indirect costs over the past decade for its overall extramural research portfolio. This analysis was different from our analysis because it focused generally on extramural research rather than specifically on university research. As noted in the draft report, our research questions were focused specifically on universities. Moreover, as institutions of higher education, universities generally have a broader focus on education than research institutions. Further, as noted in the draft report, universities are subject to OMB Circular No. A-21 and their administrative costs are capped, unlike other research institutions. Because of the unique issues that universities face, our analysis of indirect costs excluded nonuniversity research institutions to avoid the possibility of data from these other NIH grantees masking trends for universities, which are the recipients of the largest portion of NIH’s grant funding. Finally, HHS stated that we did not provide an opportunity for the department to provide input on our review of NIH’s assessment of the potential impact of indirect costs on NIH’s research mission. We disagree with this characterization. NIH provided input on this issue to us during three separate meetings. For all three meetings, we provided discussion questions in advance. During one of the meetings, we and NIH officials discussed the key facts that were to be included in the draft report, including this issue. In addition, we offered NIH officials the opportunity to provide additional information in writing, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of the Department of Health and Human Services, the Director of the National Institutes of Health, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix III. Weill Medical College of Cornell University Indiana University—Purdue University at Indianapolis n/a = not available: this institution does not negotiate its indirect cost rate with DCA. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne Price made key contributions to this report. | NIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates. From fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. Stakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative. The combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge. GAO recommends that NIH assess the impact of growth in indirect costs on its mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research. HHS agreed with GAO's recommendation but disagreed with a number of GAO's conclusions, stating that risk to NIH's mission is low because indirect costs remain a stable percentage of NIH's budget. Due to indications that indirect costs for universities may increase in the future, GAO believes that continually assessing and planning for the impact of growth over the long term is important. |
In fulfilling its resource protection functions, Interior has faced a number of management challenges in the past and will continue to face challenges in the future. In particular, based on our recent work, we would like to highlight three challenges in this area (1) protecting lives, property and resources from wildland fires; (2) adapting to climate change; and (3) protecting and securing federal lands from illegal activities. As we reported in our March 2009 testimony, Interior, working with the Department of Agriculture’s Forest Service, has taken steps to help manage perhaps the agency’s most daunting challenge—protecting lives, private property, and federal resources from the threats of wildland fire. However, our nation’s wildland fire problem worsened dramatically over the past decade. The average annual acreage burned by wildland fires in the 2000s is more than double that burned in the 1990s, and appropriations for the federal government’s wildland management activities have tripled, averaging approximately $3 billion annually in recent years, up from about $1 billion in fiscal year 1999. While Agriculture’s Forest Service receives about 70 percent of the appropriations, four Interior agencies—the Bureau of Indian Affairs (BIA), the Bureau of Land Management (BLM), the U.S. Fish and Wildlife Service (FWS), and the National Park Service (NPS)— are key partners in the federal response to wildland fire. Therefore, most of our work and recommendations on wildland fire management address agencies in both departments. In our March 2009 testimony we noted four primary areas we believed the agencies needed to address to better respond to the nation’s wildland fire problems. While the agencies have continued to make improvements in these areas, as discussed below, work remains to be done in each. As a result, we continue to believe that wildland fire management is a major management challenge for Interior. The agencies have not yet developed a cohesive strategy that identifies options and associated funding to reduce potentially hazardous vegetation and address wildland fire problems. For more than a decade, we have recommended that the agencies develop a cohesive wildland fire strategy that identifies potential long-term options for reducing fuels and responding to fires that occur, and the funding requirements associated with the various options. In 2009 Congress echoed our call for a cohesive strategy in the Federal Land Assistance, Management, and Enhancement Act of 2009, which requires the agencies to produce a cohesive strategy consistent with our recommendations. In response, Interior and the Forest Service have prepared Phase I of the cohesive strategy, which, according to a senior agency official, provides a general description of the agencies’ approach to the wildland fire problem and establishes a framework for collecting and analyzing the information needed to assess the wildland fire problem and make decisions about how to address it. The document has not yet been made final or formally submitted to Congress as required by the act, though the strategy was required to be submitted within 1 year of the act’s 2009 passage. Once the document has been made final, the agencies expect to begin drafting Phase II of the strategy, which, according to this official, will involve the actual collection and analysis of data and assessment of different options. The agencies have not yet established clear goals and a strategy to help contain wildland fire costs. Although the agencies have continued to take steps intended to help contain wildland fire costs, they have not yet clearly defined their cost-containment goals or developed a strategy for achieving those goals. Without such fundamental steps, we believe the agencies will have difficulty determining whether they are taking the most important steps first, as well as the extent to which the steps they are taking will help contain costs. While several agency documents discuss the agencies’ cost containment goals and objectives at a high level, we believe these documents lack the clarity and specificity needed by officials in the field to help manage and contain wildland fire costs. We therefore continue to believe that the agencies will be challenged in managing their cost- containment efforts and improving their ability to contain wildland fire costs. The agencies have continued to improve their processes for allocating fuel reduction funds and selecting fuel reduction projects, but further action is needed. Fuel reduction projects—using prescribed fire, mechanical thinning, herbicides, grazing, or combinations of these methods—are intended to remove or modify wildland fuel to reduce the potential for severe wildland fires, lessen the damage caused by fires, limit the spread of flammable invasive species, and restore and maintain healthy ecosystems. In 2007 we identified several shortcomings in the agencies’ processes for allocating fuel reduction funds and selecting fuel reduction projects. While the agencies have continued to take steps to improve these processes, we believe they will continue to face challenges in more effectively using their limited fuel reduction dollars without the improved processes we have previously recommended. The agencies have not yet taken needed steps to improve the use of an interagency budgeting and planning tool. Since 2008 we have been concerned about Interior’s and the Forest Service’s development of a planning tool known as fire program analysis (FPA). FPA is designed to allow the agencies to analyze potential combinations of firefighting assets, and potential strategies for reducing fuels and fighting fires, to identify the most cost-effective among them. By identifying cost-effective combinations of assets and strategies within the agencies, FPA was also designed to help the agencies develop their wildland fire budget requests and allocate resources across the country. However, FPA’s development continues to be characterized by delays and revisions, and the agencies are several years behind their initially projected timeline for using it to help develop their budget requests. Although the agencies continue to take steps to improve FPA as we recommended, it is not clear how effective these steps will be in correcting the problems we have identified and therefore we believe that the agencies will continue to face challenges in this area. As we stated in our March 2009 testimony, federal land and water resources are vulnerable to a wide range of effects from climate change, some of which are already occurring. According to experts, these effects include (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. Furthermore, in August 2007, we reported that climate change impacts compete for the attention of decisionmakers with more immediate priorities. We found at that time that BLM, FWS, and NPS did not make climate change a priority, and that their strategic plans did not specifically address climate change. Our recent work related to flooding and erosion in Alaska provides an example of how the effects of a warmer climate have been clearly evident in Alaska. In June 2009, we reported that while the flooding and erosion threats to Alaska Native villages have not been completely assessed, since 2003, federal, state, and village officials have identified 31 villages that face imminent threats. We suggested that Congress consider the need for a federal lead to ensure that federal resources are being prioritized and allocated efficiently and effectively. In October 2009, we found that several federal agencies, including Interior, had begun to consider measures that would strengthen the resilience of natural resources in the face of climate change. In September 2009, Interior issued an order designed to address the impacts of climate change on the nation’s water, land, and other natural and cultural resources. Among other things, the order requires each bureau and office to consider and analyze potential climate change impacts when undertaking long- range planning exercises, setting priorities for scientific research and investigations, developing multi-year management plans, and making major decisions regarding potential use of resources. While we believe that this is a step in the right direction, in a fiscally constrained environment the department will continue to face challenges in setting priorities and making resource allocation decisions to address the impacts of climate change. Our recent work has also identified a challenge for Interior in the area of protecting and securing federal lands from the effects of illegal activities. BLM, FWS, and NPS are responsible for managing federal lands, enforcing federal laws governing the lands and their resources, and ensuring visitor safety. Illegal activities occurring on these lands have raised concerns that the agencies are becoming less able to protect our natural and cultural resources and ensure public safety. In December 2010, we reported that although land management agencies consider varied information on the occurrence and effects of illegal activities on federal lands, the agencies do not systematically assess the risks posed by such activities when determining their needs for resources and where to distribute them. Without systematic approaches to assess the risks they face, the agencies may have limited assurance that they are allocating scarce resources in a manner that effectively addresses the risk of illegal activities on our nation’s federal lands. In order to help the agencies better manage law enforcement resources, we recommended that the agencies adopt a risk management approach to systematically assess and address threats and vulnerabilities presented by illegal activities on federal lands. Interior concurred with our recommendation, and we continue to track its implementation. In addition, federal lands on the U.S. borders with Canada and Mexico are vulnerable to illegal cross-border activity. In November 2010, we reported that illegal cross-border activity remains a significant threat to federal lands. Furthermore, there has been little interagency coordination to share intelligence assessments of border security threats to federal lands and develop budget requests, strategies, and joint operations to address these threats. In October 2010, we also found that coordination challenges between land management agencies and Border Patrol caused land management and environmental laws to be implemented in such a way that, at times, delayed or restricted Border Patrol’s access to and monitoring of federal lands along the Southwest border. To more easily balance public safety and access to federal borderlands and to help ensure that Interior, the Department of Homeland Security, and the Department of Agriculture coordinate efforts to provide an effective interagency law enforcement response on these lands, we made recommendations aimed at improving interagency coordination. Interior agreed with our recommendations, and we continue to track their implementation. We have reported on management weaknesses in Indian and insular area programs for a number of years. BIA continues to face challenges in processing land in trust applications, and Interior’s Office of Insular Affairs (OIA) continues to face challenges in providing assistance to seven of the insular areas—four U.S. territories and three sovereign island nations—with long-standing financial, program management, and economic challenges. BIA is the primary federal agency charged with implementing federal Indian policy and administering the federal trust responsibility for about 2 million American Indians and Alaska Natives. BIA provides basic services to 565 federally recognized Indian tribes throughout the United States, including 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. In 1980 Interior 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 2006 that while BIA generally followed its regulations for processing land in trust applications from tribes and individual Indians, it had no deadlines for making decisions on them. While BIA has generally responded to our recommendations to improve the processing of land in trust applications, this issue continues to be a challenge, in part, because of a February 24, 2009, Supreme Court decision. The court held that the Indian Reorganization Act only authorizes the Secretary of the Interior to take land into trust for a tribe or its members if that tribe was under federal jurisdiction when the law was enacted in 1934. The court did not define what constituted being under federal jurisdiction but did find that a tribe, which was not federally recognized until 1983, was not under federal jurisdiction in 1934. It is not clear how many tribes or pending land in trust applications will be affected by this decision, but the decision raises a question about the Secretary’s authority to take land in trust for the 50 tribes that have been newly recognized since 1960 and their members. The Secretary’s decisions to take land in trust for two of these tribes—the Match-e-be-nash-she-wish Band of Potawatomi Indians of Michigan and the Cowlitz Indian tribe of Washington—have been challenged in court. The Secretary of the Interior has varying responsibilities to the insular areas of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), 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. OIA, which carries out the department’s responsibilities for insular affairs, provides financial and technical assistance to the insular areas in developing more efficient and effective governments and it helps manage relations between the federal government and the insular area governments by promoting appropriate federal policies. For example, OIA is responsible for helping to implement federal policies related to CNMI immigration and minimum wage increases in American Samoa and the CNMI. The insular area governments have had long-standing financial and program management deficiencies, in addition to facing economic challenges. Our recent work related to the insular areas has focused on concerns relative to OIA’s oversight of grants to insular areas, application of U.S. immigration law to the CNMI, and minimum wage increases in American Samoa and the CNMI. In March 2010, we reported that opportunities exist for OIA to improve its grant oversight and reduce the potential for mismanagement. OIA provided approximately $400 million annually to financial assistance to insular area governments—roughly $70 million of which is awarded annually as grants to insular areas for capital improvement projects, operations and maintenance improvement projects, technical assistance, and other purposes, to increase the self-sufficiency of the insular areas. We estimated that 39 percent of the 1,771 grant projects in OIA’s grant management database at the time of our review demonstrated at least one internal control weakness that may increase the projects’ susceptibility to mismanagement. While we noted that OIA had taken a number of steps to improve project implementation and management since 2005, we recommended that Interior improve OIA’s ability to effectively manage grants by taking several actions, including clarifying its authorities to ensure insular areas use funds more efficiently, creating a workforce plan to reflect the staffing levels necessary to adopt a proactive monitoring and oversight approach, and developing criteria for project redirection request approvals. Interior agreed with our recommendations and has since developed the workforce plan. Over the last few years we have also issued a number of reports on the application of U.S. immigration law to the CNMI. U.S. law established federal control of CNMI immigration beginning in 2009, with provisions affecting employers’ access to foreign workers, investors, and visitors during a transition period ending in 2014. Interior is specifically assigned several responsibilities in implementing the law. During the transition period, the U.S. Secretary of Homeland Security, in consultation with the U.S. Secretaries of the Interior, Labor, and State and the U.S. Attorney General, has the responsibility to establish, administer, and enforce a transition program to regulate immigration in the CNMI, and decisions regarding delays or extensions of the transition period also are in consultation with Interior and other agencies. Furthermore, the legislation requires Interior to provide technical assistance to the CNMI to promote economic growth; to assist employers in recruiting, training, and hiring U.S. citizens and lawful permanent residents in the CNMI; and to develop CNMI job skills as needed. To date, the U.S. Department of Homeland Security has not issued final regulations for foreign workers, nor has it made a permanent decision regarding access for visitors from Russia and China. It issued regulations for foreign investors in December 2010. In August 2008, we recommended that because of the importance of key implementation decisions by different federal agencies, the Secretary of Homeland Security should lead other relevant federal agencies, including the Departments of the Interior, Labor, and State, in identifying the interagency process that will be used to collaborate with one another— and consult with the CNMI government, as required—to jointly implement the legislation. Interior agreed with our findings, and we continue to track the law’s implementation. In 2007 the United States enacted legislation that incrementally applies the federal minimum wage to American Samoa and the CNMI. The legislation changed decades of federal law that had allowed both areas to apply minimum wage rates significantly lower than the minimum wage for the U.S. 50 states. Under current law, the minimum wage for American Samoa’s lowest paid workers will reach the federal minimum wage of $7.25 in 2018; and in the CNMI this is set to occur in 2016. Public and private sector officials and workers in both areas have expressed concern about the impact of the minimum wage increases on the local economies. Although the law does not assign Interior specific responsibilities, OIA is generally responsible for promoting and managing government relations in support of appropriate federal policies. In April 2010, we found that the first minimum wage increase had raised the wages of about three-quarters of private sector workers in American Samoa and about a third of private sector workers in the CNMI. Employment in American Samoa and the CNMI has declined for multiple reasons. Studies funded by Interior have projected major additional contraction of both economies. These economic realities pose a challenge to OIA as it tries to improve the standard of living for island residents and promote the economic development and self-sufficiency of the insular areas. As the steward of more than 500 million acres, federal land sales, acquisitions, and exchanges are important land management tools for Interior. Interior has faced a number of management challenges in this area in the past and our recent work has identified management weaknesses in Interior’s oversight of land exchanges. As a result, we believe that managing land acquisition and exchanges continues to be a major management challenge for Interior. In our March 2009 testimony, we stated that the Federal Land Transaction Facilitation Act of 2000 (FLTFA) which, in part, was intended to facilitate land consolidation, has had limited success. We reported that the agencies face several challenges to completing future land acquisitions under the act. Most notably, the act requires that the agencies use most of the funds to purchase land in the state in which the funds were raised; this restriction has had the effect of making little revenue available outside of Nevada. In November 2009, we reported that since FLTFA was enacted in 2000 through August 2009, BLM had raised $113.4 million in revenue under the act and that about 78 percent of this revenue came from land transactions in Nevada. We also found that the four land management agencies (BLM, FWS, NPS, and the Department of Agriculture’s Forest Service) had purchased few parcels with FLTFA revenue. As of November 2009, BLM reported spending a total of $43.8 million to acquire 28 parcels, including $24.6 million for 12 parcels using funds allocated through the interagency process. While we suggested in our November 2009 report that if Congress reauthorized the act that it should consider including additional lands for sale and greater flexibility for acquisitions; the July 2010 reauthorization that extended the act for 1 year did not amend the FLTFA provisions governing lands available for sale and acquisition. The reauthorization occurred a few days after FLTFA expired. According to BLM officials, at the time FLTFA expired, the unobligated program funds were transferred to the Land and Water Conservation Fund and as of November 2010 had not been restored to the program. Officials said that BLM has little incentive to conduct further land sales under FLTFA because of the cost and amount of work involved in preparing the sales and, given the limited 1-year extension, the uncertainty that BLM and other agencies will be able to use any revenues generated to acquire lands. Our recent work has also identified challenges for Interior in managing land exchanges. In June 2009, we reported on management weaknesses in BLM’s oversight of land exchanges under the Federal Land Policy and Management Act of 1976 (FLPMA). Among other things, we reported that BLM had issued new guidance on managing ledgers and continued to use ledgers to track land value imbalances over time in multiphase exchanges. However, we found that BLM was not adhering to its own guidance for maintaining the ledgers and therefore could not be confident in how much is owed to the federal government. Specifically, BLM could not be assured that the $2.6 million land value imbalance due to the United States, recorded in its ledgers as of June 30, 2008, was accurate. We recommended that Interior take several steps to better manage the land exchange program and protect federal funds. Although BLM has issued additional and clarifying guidance, it has not yet developed a national land tenure strategy, tracked land exchange costs, or required or tracked specific training for staff working on land exchanges. In addition, in December 2010, we issued a legal opinion concluding that BLM carried out certain land transactions in the state of Washington that were not authorized by FLPMA’s land exchange provisions and were inconsistent with FLPMA’s land sale provisions. Specifically, we concluded that the multiphase assembled land exchange consisted of a series of transactions where an agent of BLM sold public lands and used the proceeds to purchase nonfederal lands for BLM. The proceeds of these sales were required to be deposited into appropriate funds in the U.S. Treasury without deduction for any charge or claim. Instead, after selling public lands, BLM used some of the proceeds to purchase lands. This violated the Miscellaneous Receipts Statute. Furthermore, by using these proceeds, BLM improperly augmented its land acquisition appropriations. As we testified in March 2009, Interior continues to face 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 these facilities can impair 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 November 2010, the department estimated that the deferred maintenance backlog for fiscal year 2010 was between $13.5 billion and $19.9 billion (see table 1). Interior has made progress addressing our prior recommendations to improve information on the maintenance needs of NPS facilities and BIA schools and irrigation projects. The high end of the deferred maintenance has been relatively constant since 2007, when the estimate was $19.8 billion. Furthermore, the deferred maintenance estimates for the irrigation, dams, and other water structures category have decreased for the past 2 consecutive years, 2009 and 2010. Interior was able to address some needed repairs and improve the condition of some facilities through funds it received under the American Recovery and Reinvestment Act of 2009. Interior’s management of oil and gas resources has been a focus of a large body of our work and an area where we have found numerous weaknesses and challenges that need to be addressed. In response to our recommendations, Interior has taken steps to address material weaknesses and modify its practices for managing oil and gas resources, but as of December 2010, many recommendations remain unimplemented. We designated Interior’s management of federal oil and gas resources as a governmentwide high risk issue in February 2011. Interior faces ongoing challenges executing its responsibilities to manage oil and gas production from federal lands and waters in four broad areas: (1) oil and gas revenue collection, (2) management of human capital, (3) the recently undertaken reorganization of the bureaus dealing with oil and gas issues, and (4) balancing timely and efficient oil and gas development with environmental stewardship responsibilities. Interior’s oversight of oil and gas operations is critically important. The explosion onboard the Deepwater Horizon and oil spill in the Gulf of Mexico in April 2010 emphasized the importance of Interior’s management of permitting and inspection processes to ensure operational and environmental safety. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling reported in January 2011 that this disaster was the product of several individual missteps and oversights by BP, Halliburton, and Transocean, which government regulators lacked the authority, the necessary resources, or the technical expertise to prevent. Federal oil and gas resources provide an important source of energy for the United States, create jobs in the oil and gas industry, and generate billions of dollars annually in revenues that are shared between federal, state, and tribal governments. Revenue generated from federal oil and gas production is one of the largest nontax sources of federal government funds, accounting for about $9 billion in fiscal year 2009. In September 2008, we reported that in the deep water of the U.S. Gulf of Mexico, Interior collected lower levels of revenues for oil and gas production than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study—these resource owners included many other countries as well as some states. We recommended that Interior undertake a comprehensive reassessment of its revenue collection policies and processes. Interior has commissioned such a study in response to our report, which it expects to complete in 2011. The results of the study may reveal the potential for greater revenues to the federal government. We also reported in March 2010 that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands was accurately measured. For example, we found that neither BLM nor Interior’s Minerals Management Service (MMS) had consistently met their statutory requirements or agency goals for oil and gas production verification inspections. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development on federal lands and waters. As a result of this work, we identified 19 recommendations for specific improvements to oversight of production verification activities, with which Interior generally agreed. Additionally, we reported in October 2010 that Interior’s data likely underestimated the amount of natural gas produced on federal leases that is released directly to the atmosphere (vented) or is burned (flared). This vented and flared gas contributes to greenhouse gases and represents lost royalties. We recommended that Interior improve its data and address limitations in its regulations and guidance to reduce this lost gas. Interior generally agreed and is taking initial steps to implement these recommendations. Furthermore, we reported in July 2009 on numerous problems with Interior’s efforts to collect data on oil and gas produced on federal lands, including missing data, errors in company-reported data on oil and gas production, and sales data that did not reflect prevailing market prices for oil and gas. As a result of Interior’s lack of consistent and reliable data on the production and sale of oil and gas from federal lands, Interior could not provide reasonable assurance that it was assessing and collecting the appropriate amount of royalties on this production. We made a number of recommendations to Interior to improve controls on the accuracy and reliability of royalty data. Interior generally agreed with our recommendations and is working to implement many of them, but these efforts are not complete, and it is uncertain at this time if the efforts will fully address our concerns. We have reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet its oversight and management responsibilities for oil and gas operations on federal lands and waters. For example, in March 2010, we found that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. We made a number of recommendations to address these issues. While Interior’s reorganization of MMS includes plans to hire additional staff with expertise in oil and gas inspections and engineering, these plans have not been fully implemented and it remains unclear whether Interior will be fully successful in hiring, training, and retaining these staff. Moreover, the human capital issues we identified with BLM’s management of onshore oil and gas continue, and these issues have not yet been addressed in Interior’s reorganization plans. Historically, BLM managed onshore federal oil and gas activities while MMS managed offshore activities and collected royalties for all leases. In May 2010, the Secretary of the Interior announced plans to reorganize MMS—its bureau responsible for overseeing offshore oil and gas activities and collecting royalties—into three separate bureaus. The Secretary stated that dividing MMS’s responsibilities among three separate bureaus will help ensure that each of the three newly established bureaus have a distinct and independent mission. Interior recently began implementing this restructuring effort; transferring offshore oversight responsibilities to the newly created Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and revenue collection to a new Office of Natural Resources Revenue. Interior plans to continue restructuring BOEMRE to establish two separate bureaus—the Bureau of Ocean and Energy Management, which will focus on leasing and permitting, and the Bureau of Safety and Environmental Enforcement, which will focus on inspection and enforcement functions. While this reorganization may eventually lead to more effective operations, we have reported that organizational transformations are not simple endeavors and require the concentrated efforts of both leaders and employees to realize intended synergies and accomplish new organizational goals. One key practice that we have identified for effective organizational transformation is to balance continued delivery of services with transformational activities. We are concerned about Interior’s capacity to find the proper balance— particularly in today’s fiscally constrained environment—given its history of management problems and challenges in the human capital area. Specifically, we are concerned about Interior’s ability to undertake this reorganization while providing reasonable assurance that billions of dollars of revenues owed to the public are being properly assessed and collected and that oversight of oil and gas exploration and production on federal lands and waters maintains an appropriate balance between efficiency and timeliness on one hand, and protection of the environment and operational safety on the other. We have reported that Interior has experienced several challenges with meeting its obligations to make federal oil and gas resources available for leasing and development while simultaneously meeting its responsibilities for managing public lands for other uses, including wildlife habitat, recreation, and wilderness, among other uses. In July 2010, in our examination of federal oil and gas lease sale decisions in the Mountain West, we found that the extent to which BLM tracked and made available to the public information related to protests filed during the leasing process varied by state and was generally limited in scope. We also found that stakeholders—including environmental and hunting interests, and state and local governments protesting BLM lease offerings—wanted additional time to participate in the leasing process and more information from BLM about its leasing decisions. Moreover, we found that BLM had been unable to manage an increased workload associated with public protests and had missed deadlines for issuing leases. In May 2010, the Secretary of the Interior announced several agencywide leasing reforms that are to take place at BLM, some of which may address these concerns, such as providing additional public review and comment opportunity during the leasing process. In March 2010, we found that Interior faced challenges in ensuring consistent implementation of environmental requirements, both within and across BOEMRE’s regional offices, leaving it vulnerable with regard to litigation and allegations of scientific misconduct. We recommended that Interior develop comprehensive environmental guidance materials for BOEMRE staff. Interior concurred with this recommendation and is currently developing such guidance. Finally, in September 2009, we reported that BLM’s use of categorical exclusions under Section 390 of the Energy Policy Act of 2005 was frequently out of compliance with the law and BLM’s internal guidance. As a result, we recommended that BLM take steps to improve the implementation of Section 390 categorical exclusions through clarification of its guidance, standardizing decision documents, and increasing oversight. For many years we have identified better management of revenue collection efforts as a major management challenge. As we stated in our March 2009 testimony, additional revenues could be generated by amending the General Mining Act of 1872 so that the federal government could collect federal royalties on minerals extracted from U.S. mineral rights. In addition, financial assurances and bonds from hardrock mining and oil and gas operations could be enhanced to help ensure the reclamation of federal land disturbed by these operations. Our recent work has found that while BLM requires, among other things, that oil and gas operators reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform the required reclamation, and the minimum bond amounts required have not been increased in almost 50 years. The General Mining Act of 1872 helped open the West by allowing individuals to obtain exclusive rights to mine billions of dollars worth of hardrock minerals from federal lands without having to pay a federal royalty. In July 2008, we reported that the 12 western states, including Alaska, assess multiple types of royalties on mining operations. States may use similar names for the royalties they assess, but these can vary widely in their forms and rates. Unlike the federal government, these states charge royalties that allow them to share in the proceeds from hardrock minerals extracted from state-owned lands, as well as levy taxes that function like royalties, on private, state, and federal lands. Under BLM regulations, hardrock mining operators who extract gold, silver, copper, and other 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. 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. In March 2008, we found that the financial assurances required by BLM were not adequate to fully cover estimated reclamation costs. According to BLM, mine operators had provided financial assurances valued at approximately $982 million to guarantee reclamation costs for 1,463 hardrock operations on BLM land. BLM also estimated that 52 mining operations had financial assurances that amounted to about $28 million less than needed to fully cover estimated reclamation costs. We found, however, that because of a BLM miscalculation, the financial assurances for these 52 operations were in fact about $61 million less than needed to fully cover estimated reclamation costs. In addition, we have also reported on the importance of financial assurances in the reclamation of mountaintop mining operations. Similarly for oil and gas development, we reported in January 2010 that while BLM requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform reclamation. If the bond is not sufficient to cover well plugging and surface reclamation and there are no responsible or liable parties, the well is considered “orphaned,” and BLM uses federal dollars to fund reclamation. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 orphaned wells, and BLM has identified another 144 wells yet to be reclaimed. According to our analysis of BLM data, as of December 2008, oil and gas operators had provided 3,879 bonds, valued at $162 million, to ensure compliance with lease terms and conditions for 88,357 wells. The minimum bond amount for individual leases was set in 1960, and minimum amounts for statewide or nationwide bonds was established in 1951; none of these bond amounts has been updated or adjusted for inflation. We also found that 12 western states generally required higher bond amounts than the minimum amounts established by BLM regulations for individual and statewide oil and gas leases. With an information technology budget of nearly $1 billion in fiscal year 2010, Interior relies on computerized information systems to carry out its financial and mission-related operations. Effective information security controls are required to ensure that financial and sensitive information is adequately protected from inadvertent or deliberate misuse, fraudulent use, and improper disclosure, modification, or destruction. Ineffective controls can also impair the accuracy, completeness, and timeliness of information used by management. The need for effective information security is further underscored by the evolving and growing cyber threats to federal systems and the dramatic increase in the number of security incidents reported by federal agencies. Interior has been challenged to effectively protect its computer systems and networks. Our recent work, as well as our analysis of agency and Office of Inspector General reports, show that the department has not consistently implemented effective controls to prevent, limit, and detect unauthorized access to its systems or manage the configuration of network devices to prevent unauthorized access and ensure system integrity. For example, we have reported on the need for federal agencies, including Interior, to improve implementation of information security controls such as those for configuring desktop computers and wireless communication devices. We recommended that Interior, among other things, complete implementation of the agency’s baseline security configuration for desktop computers using Window XP or Vista operating systems, and ensure its components document deviations to the baseline configuration and deploy a National Institute of Standards and Technology (NIST)-validated tool to monitor compliance with the configuration. The department agreed with our recommendations and indicated that it has initiated actions to implement them. Mr. Chairman, this concludes our prepared statement. We 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 Anu K. Mittal or Frank Rusco at (202) 512-3841 or [email protected] and [email protected], respectively. 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 Jeffery D. Malcolm, Assistant Director, and Janice Ceperich. Also contributing to this testimony were Ashley Alley, Elizabeth Beardsley, Andrea Wamstad Brown, Larry Crosland, Jonathan Dent, Heather E. Dowey, Glenn Fischer, Emil Friberg, Steve Gaty, David Gootnick, Alyssa Hundrup, Richard P. Johnson, Marissa Jones, Carol Kolarik, Jon Ludwigson, Robert Marek, Jeanette Soares, Kiki Theodoropolous, Barbara Timmerman, Charles Vrabel, Gregory C. Wilshusen, Jayne Wilson, and Arvin Wu. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Department of the Interior: Major Management Challenges. GAO-09-425T. Washington, D.C.: March 3, 2009. Wildland Fire Management: Federal Agencies Have Taken Important Steps Forward, but Additional, Strategic Action Is Needed to Capitalize on Those Steps. GAO-09-877. Washington, D.C.: September 9, 2009. 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 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. 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. Federal Lands: Adopting a Formal, Risk-Based Approach Could Help Land Management Agencies Better Manage Their Law Enforcement Resources. GAO-11-144. Washington, D.C.: December 17, 2010. Border Security: Additional Actions Needed to Better Ensure a Coordinated Federal Response to Illegal Activity on Federal Lands. GAO-11-177. Washington, D.C.: November 18, 2010. Energy-Water Nexus: A Better and Coordinated Understanding of Water Resources Could Help Mitigate the Impacts of Potential Oil Shale Development. GAO-11-35. Washington, D.C.: October 29, 2010. Southwest Border: More Timely Border Patrol Access and Training Could Improve Security Operations and Natural Resource Protection on Federal Lands. GAO-11-38. Washington, D.C.: October 19, 2010. Helium Program: Key Developments Since the Early 1990s and Future Considerations. GAO-10-700T. Washington, D.C.: May 13, 2010. Surface Coal Mining: Financial Assurances for, and Long-Term Oversight of, Mines with Valley Fills in Four Appalachian States. GAO-10-206. Washington, D.C.: January 14, 2010. Surface Coal Mining: Characteristics of Mining in Mountainous Areas of Kentucky and West Virginia. GAO-10-21. Washington, D.C.: December 9, 2009. Energy-Water Nexus: Improvements to Federal Water Use Data Would Increase Understanding of Trends in Power Plant Water Use. GAO-10-23. Washington, D.C.: October 16, 2009. Climate Change Adaptation: Strategic Federal Planning Could Help Government Officials Make More Informed Decisions. GAO-10-113. Washington, D.C.: October 7, 2009. Air Pollution: Air Quality, Visibility, and the Potential Impacts of Coal- Fired Power Plants on Great Basin National Park, Nevada. GAO-09-788R. Washington, D.C.: July 27, 2009. Federal Lands: Enhanced Planning Could Assist Agencies in Managing Increased Use of Off-Highway Vehicles. GAO-09-509. Washington, D.C.: June 30, 2009. Alaska Native Villages: Limited Progress Has Been Made on Relocating Villages Threatened by Flooding and Erosion. GAO-09-551. Washington, D.C.: June 3, 2009. Endangered Species Act: The U.S. Fish and Wildlife Service Has Incomplete Information about Effects on Listed Species from Section 7 Consultations. GAO-09-550. Washington, D.C.: May 21, 2009. Federal Land Management: Additional Documentation of Agency Experiences with Good Neighbor Authority Could Enhance Its Future Use. GAO-09-277. Washington, D.C.: February 25, 2009. Endangered Species Act: Many GAO Recommendations Have Been Implemented, but Some Issues Remain Unresolved. GAO-09-225R. Washington, D.C.: December 19, 2008. 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. Bureau of Land Management: Effective Long-Term Options Needed to Manage Unadoptable Wild Horses. GAO-09-77. Washington, D.C.: October 9, 2008. Wildlife Refuges: Changes in Funding, Staffing, and Other Factors Create Concerns about Future Sustainability. GAO-08-797. Washington, D.C.: September 22, 2008. U.S. Fish and Wildlife Service: Endangered Species Act Decision Making. GAO-08-688T. Washington, D.C.: May 21, 2008. Yellowstone Bison: Interagency Plan and Agencies’ Management Need Improvement to Better Address Bison-Cattle Brucellosis Controversy. GAO-08-291. Washington, D.C.: March 7, 2008. Natural Resource Management: Opportunities Exist to Enhance Federal Participation in Collaborative Efforts to Reduce Conflicts and Improve Natural Resource Conditions. GAO-08-262. Washington, D.C.: February 12, 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. U.S. Fish and Wildlife Service: Opportunities Remain to Improve Oversight and Management of Oil and Gas Activities on National Wildlife Refuges. GAO-07-829R. Washington, DC: June 29, 2007. National Parks Air Tour Management Act: More Flexibility and Better Enforcement Needed. GAO-06-263. Washington, D.C.: January 27, 2006. Native American Graves Protection and Repatriation Act: After Almost 20 Years, Key Federal Agencies Still Have Not Fully Complied with the Act. GAO-10-768. Washington, D.C.: July 28, 2010. Alaska Native Villages: Limited Progress Has Been Made on Relocating Villages Threatened by Flooding and Erosion. GAO-09-551. Washington, D.C.: June 3, 2009. 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. American Samoa: Performing a Risk Assessment Would Better Inform U.S. Agencies of the Risks Related to Acceptance of Certificates of Identity. GAO-10-638. Washington, D.C.: June 11, 2010. Commonwealth of the Northern Mariana Islands: DHS Should Conclude Negotiations and Finalize Regulations to Implement Federal Immigration Law. GAO-10-553. Washington, D.C.: May 7, 2010. American Samoa and Commonwealth of the Northern Mariana Islands: Wages, Employment, Employer Actions, Earnings, and Worker Views Since Minimum Wage Increases Began. GAO-10-333. Washington, D.C.: April 8, 2010. U.S. Insular Areas: Opportunities Exist to Improve Interior’s Grant Oversight and Reduce the Potential for Mismanagement. GAO-10-347. Washington, D.C.: March 16, 2010. CNMI Immigration and Border Control Databases. GAO-10-345R. Washington, D.C.: February 16, 2010. Commonwealth of the Northern Mariana Islands: Coordinated Federal Decisions and Additional Data Are Needed to Manage Potential Economic Impact of Applying U.S. Immigration Law. GAO-09-426T. Washington, D.C.: May 19, 2009. High-Level Leadership Needed to Help Guam Address Challenges Caused by DOD-Related Growth. GAO-09-500R. Washington, D.C.: April 9, 2009. Commonwealth of the Northern Mariana Islands: Managing Potential Economic Impact of Applying U.S. Immigration Law Requires Coordinated Federal Decisions and Additional Data. GAO-08-791. Washington, D.C.: August 4, 2008. Compact of Free Association: Palau’s Use of and Accountability for U.S. Assistance and Prospects for Economic Self-Sufficiency. GAO-08-732. Washington, D.C.: June 10, 2008. Commonwealth of the Northern Mariana Islands: Pending Legislation Would Apply U.S. Immigration Law to the CNMI with a Transition Period. GAO-08-466. Washington, D.C.: March 28, 2008. Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income. GAO-07-513. Washington, D.C.: June 15, 2007. 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. Bureau of Land Management and General Services Administration— Selected Land Transactions. B-318274. Washington, D.C.: December 23, 2010. Federal Land Management: Challenges to Implementing the Federal Land Transaction Facilitation Act. GAO-10-259T. Washington, D.C.: November 17, 2009. Federal Land Management: BLM and the Forest Service Have Improved Oversight of the Land Exchange Process, but Additional Actions Are Needed. GAO-09-611. Washington, D.C.: June 12, 2009. Federal Land Management: Federal Land Transaction Facilitation Act Restrictions and Management Weaknesses Limit Future Sales and Acquisitions. GAO-08-196. Washington, D.C.: February 5, 2008. Interior’s Land Appraisal Services: Actions Needed to Improve Compliance with Appraisal Standards, Increase Efficiency, and Broaden Oversight. GAO-06-1050. Washington, D.C.: September 28, 2006. We have not issued any new reports on the Department of the Interior’s deferred maintenance management challenge since our last testimony on the department’s management challenges in March 2009. Federal Oil and Gas Leases: Opportunities Exist to Capture Vented and Flared Natural Gas, Which Would Increase Royalty Payments and Reduce Greenhouse Gases. GAO-11-34. Washington, D.C.: October 29, 2010. Onshore Oil and Gas: BLM’s Management of Public Protests to Its Lease Sales Needs Improvement. GAO-10-670. Washington, D.C.: July 30, 2010. Oil and Gas Management: Past Work Offers Insights to Consider in Restructuring Interior’s Oversight. GAO-10-888T. Washington, D.C.: July 22, 2010. Oil and Gas Management: Key Elements to Consider for Providing Assurance of Effective Independent Oversight. GAO-10-852T. Washington, D.C.: June 17, 2010. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation. GAO-10-413. Washington, D.C.: March 31, 2010. Oil and Gas Management: Interior’s Oil and Gas Production Verification Efforts Do Not Provide Reasonable Assurance of Accurate Measurement of Production Volumes. GAO-10-313. Washington, D.C.: March 15, 2010. Offshore Oil and Gas Development: Additional Guidance Would Help Strengthen the Minerals Management Service’s Assessment of Environmental Impacts in the North Aleutian Basin. GAO-10-276. Washington, D.C.: March 8, 2010. Oil and Gas Bonds: Bonding Requirements and BLM Expenditures to Reclaim Orphaned Wells. GAO-10-245. Washington, D.C.: January 27, 2010. Energy Policy Act of 2005: Greater Clarity Needed to Address Concerns with Categorical Exclusions for Oil and Gas Development under Section 390 of the Act. GAO-09-872. Washington, D.C.: September 16, 2009. Mineral Revenues: MMS Could Do More to Improve the Accuracy of Key Data Used to Collect and Verify Oil and Gas Royalties. GAO-09-549. Washington, D.C.: July 15, 2009. Oil and Gas Leasing: Interior Could Do More to Encourage Diligent Development. GAO-09-74. Washington, D.C.: October 3, 2008. Mineral Revenues: Data Management Problems and Reliance on Self- Reported Data for Compliance Efforts Put MMS Royalty Collections at Risk. GAO-08-893R. Washington, D.C.: September 12, 2008. Oil and Gas Royalties: The Federal System for Collecting Oil and Gas Revenues Needs Comprehensive Reassessment. GAO-08-691. Washington, D.C.: September 3, 2008. Oil and Gas Royalties: Litigation over Royalty Relief Could Cost the Federal Government Billions of Dollars. GAO-08-792R. Washington, D.C.: June 5, 2008. Oil and Gas Royalties: A Comparison of the Share of Revenue Received from Oil and Gas Production by the Federal Government and Other Resource Owners. GAO-07-676R. Washington, D.C.: May 1, 2007. Oil and Gas Royalties: Royalty Relief Will Cost the Government Billions of Dollars but Uncertainty Over Future Energy Prices and Production Levels Make Precise Estimates Impossible at this Time. GAO-07-590R. Washington, D.C.: April 12, 2007. 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 Bonds: Bonding Requirements and BLM Expenditures to Reclaim Orphaned Wells. GAO-10-245. Washington, D.C.: January 27, 2010. Surface Coal Mining: Financial Assurances for, and Long-Term Oversight of, Mines with Valley Fills in Four Appalachian States. GAO-10-206. Washington, D.C.: January 14, 2010. Hardrock Mining: Information on State Royalties and Trends in Mineral Imports and Exports. GAO-08-849R. Washington, D.C.: July 21, 2008. Hardrock Mining: Information on Abandoned Mines and Value and Coverage of Financial Assurances on BLM Land. GAO-08-574T. Washington, D.C.: March 12, 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. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010. Information Security: Agencies Need to Implement Federal Desktop Core Configuration Requirements. GAO-10-202. Washington, D.C.: March 12, 2010. Information Security: Agencies Continue to Report Progress, but Need to Mitigate Persistent Weaknesses. GAO-09-546. Washington, D.C.: July 17, 2009. 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 Department of the Interior (Interior) is responsible for managing much of the nation's vast natural resources. Its agencies implement an array of programs intended to protect these resources for future generations while also allowing certain uses of them, such as recreation and oil and gas development. In some cases, Interior is authorized to collect royalties and fees for these uses. Over the years, GAO has reported on management challenges at Interior, which are largely characterized by the struggle to balance the demand for greater use of its resources with the need to conserve and protect them. Furthermore, given the government's long-term fiscal challenges, Interior faces difficult choices in balancing its responsibilities. This testimony highlights some of the major management challenges facing Interior today. It is based on prior GAO reports. As GAO's previous work has shown, Interior faces major management challenges in the following seven areas: (1) Strengthening resource protection: Interior has not yet developed a cohesive strategy to address wildland fire issues as GAO has recommended in the past. In addition, Interior faces challenges in adapting to climate change and protecting and securing federal lands from illegal activities. (2) Strengthening the accountability of Indian and insular area programs: Having a land base is important to Indian tribal governments. Concerns remain about the effect of a February 2009 Supreme Court decision on the process for taking land in trust for tribes and their members. In addition, seven insular areas--four U.S. territories and three sovereign island nations--continue to face financial, program management, and economic challenges. (3) Improving federal land acquisition and exchanges: As the steward of more than 500 million acres of federal land, land sales, acquisitions, and exchanges are important land management functions for the department. The Federal Land Transaction Facilitation Act of 2000 has had limited success and Interior needs to better manage land exchanges and protect federal funds. (4) Reducing Interior's deferred maintenance backlog: While Interior has made progress improving information on maintenance needs, the dollar estimate of the deferred maintenance backlog for fiscal year 2010 was between $13.5 billion and $19.9 billion. (5) Management of federal oil and gas resources: GAO designated Interior's management of federal oil and gas resources as a governmentwide high-risk area in February 2011. Interior faces ongoing challenges in four broad areas: (1) oil and gas revenue collection, (2) management of human capital, (3) reorganization of the bureaus dealing with oil and gas issues, and (4) balancing timely and efficient oil and gas development with environmental stewardship responsibilities. (6) Generating revenue and enhancing financial assurances and bonds: Additional revenues could be generated by amending the General Mining Act of 1872 so that the federal government could collect federal royalties on minerals extracted from U.S. mineral rights. In addition, financial assurances and bonds from hardrock mining and oil and gas operations could be enhanced to help ensure the reclamation of federal land disturbed by these operations. (7) Improving information security: Interior has been challenged to effectively protect its computer systems and networks. The department has not consistently implemented effective controls to prevent, limit, and detect unauthorized access to its systems or manage the configuration of network devices to prevent unauthorized access and ensure system integrity. GAO has made a number of recommendations intended to improve Interior's programs by enhancing the information it uses to manage its programs and strengthening internal controls. Interior has agreed with most of the recommendations and taken some steps to implement them. However, Interior has been slow to implement other recommendations, such as developing a cohesive wildland fire strategy and improving oversight of oil and gas activities. |
DOD’s portfolio of major acquisition programs has grown at a pace that far exceeds available resources. From 1992 to 2007, the estimated acquisition costs needed to complete the major acquisition programs in DOD’s portfolio increased almost 120 percent, while the funding provided for these programs only increased 57 percent, creating a fiscal bow wave that may be unsustainable (see fig. 1). The total acquisition cost of DOD’s 2007 portfolio of major programs under development or in production has grown by nearly $300 billion over initial estimates. While DOD is committing substantially more investment dollars to develop and procure new weapon systems, our analysis shows that the 2007 portfolio is experiencing greater cost growth and schedule delays than the fiscal years 2000 and 2005 portfolios (see table 1). For example, total acquisition costs for programs in DOD’s fiscal year 2007 portfolio have increased 26 percent from first estimates—compared to a 6-percent increase for programs in its fiscal year 2000 portfolio. We found a similar trend for total RDT&E costs and unit costs. Continued cost growth results in less funding being available for other DOD priorities and programs, while continued failure to deliver weapon systems on time delays providing critical capabilities to the warfighter. Put simply, cost growth reduces DOD’s buying power. As program costs increase, DOD must request more funding to cover the overruns, make trade-offs with existing programs, delay the start of new programs, or take funds from other accounts. Delays in providing capabilities to the warfighter result in the need to operate costly legacy systems longer than expected, find alternatives to fill capability gaps, or go without the capability. The warfighter’s urgent need for the new weapon system is often cited when the case is first made for developing and producing the system. However, DOD has already missed fielding dates for many programs and many others are behind schedule. On average, the current portfolio of programs has experienced a 21-month delay in delivering initial operational capability to the warfighter, and 14 percent are more than 4 years late. Poor program execution contributes to and flows from shortfalls in DOD’s requirements and resource allocation processes. Over the past several years our work has highlighted a number of underlying systemic causes for cost growth and schedule delays both at the strategic and at the program level. At the strategic level, DOD’s processes for identifying warfighter needs, allocating resources, and developing and procuring weapon systems—which together define DOD’s overall weapon system investment strategy—are fragmented and broken. At the program level, the military services propose and DOD approves programs without adequate knowledge about requirements and the resources needed to successfully execute the program within cost, schedule, and performance targets. In addition, DOD officials are rarely held accountable for poor decisions or poor program outcomes. DOD largely continues to define war fighting needs and make investment decisions on a service-by-service basis, and assess these requirements and their funding implications under separate decision-making processes. While DOD’s requirements process provides a framework for reviewing and validating needs, it does not adequately prioritize those needs and is not agile enough to meet changing warfighter demands. A senior Army acquisition official recently testified before Congress that because the process can take more than a year, it is not suitable for meeting urgent needs related to ongoing operations; and a recent study by the Center for Strategic and International Studies indicates that the process is unwieldy and officials are now trying to find ways to work around it. Ultimately, the process produces more demand for new programs than available resources can support. This imbalance promotes an unhealthy competition for funds that encourages programs to pursue overly ambitious capabilities, develop unrealistically low cost estimates and optimistic schedules, and to suppress bad news. Similarly, DOD’s funding process does not produce an accurate picture of the department’s future resource needs for individual programs—in large part because it allows programs to go forward with unreliable cost estimates and lengthy development cycles—not a sound basis for allocating resources and ensuring program stability. Invariably, DOD and the Congress end up continually shifting funds to and from programs—undermining well-performing programs to pay for poorly performing ones. At the program level, the key cause of poor outcomes is the consistent lack of disciplined analysis that would provide an understanding of what it would take to field a weapon system before system development. Our body of work in best practices has found that an executable business case is one that provides demonstrated evidence that (1) the identified needs are real and necessary and that they can best be met with the chosen concept and (2) the chosen concept can be developed and produced within existing resources—including technologies, funding, time, and management capacity. Although DOD has taken steps to revise its acquisition policies and guidance to reflect the benefits of a knowledge- based approach, we have found no evidence of widespread adoption of such an approach in the department. Our most recent assessment of major weapon systems found that the vast majority of programs began development with unexecutable business cases, and did not attain, or plan to achieve, adequate levels of knowledge before reaching design review and production start—the two key junctures in the process following development start (see figure 2). Knowledge gaps are largely the result of a lack of disciplined systems engineering analysis prior to beginning system development. Systems engineering translates customer needs into specific product requirements for which requisite technological, software, engineering, and production capabilities can be identified through requirements analysis, design, and testing. Early systems engineering provides knowledge that enables a developer to identify and resolve gaps before product development begins. Because the government often does not perform the proper up-front analysis to determine whether its needs can be met, significant contract cost increases can occur as the scope of the requirements change or become better understood by the government and contractor. Not only does DOD not typically conduct disciplined systems engineering prior to beginning system development, it has allowed new requirements to be added well into the acquisition cycle. The acquisition environment encourages launching ambitious product developments that embody more technical unknowns and less knowledge about the performance and production risks they entail. A new weapon system is not likely to be approved unless it promises the best capability and appears affordable within forecasted available funding levels. We have recently reported on the negative impact that poor systems engineering practices have had on several programs such as the Global Hawk Unmanned Aircraft System, F-22A, Expeditionary Fighting Vehicle, Joint Air-to-Surface Standoff Missile and others. With high levels of uncertainty about technologies, design, and requirements, program cost estimates and related funding needs are often understated, effectively setting programs up for failure. We recently assessed the service and independent cost estimates for 20 major weapon system programs and found that the independent estimate was higher in nearly every case, but the difference between the estimates was typically not significant. We also found that both estimates were too low in most cases, and the knowledge needed to develop realistic cost estimates was often lacking. For example, program Cost Analysis Requirements Description documents—used to build the program cost estimate—are not typically based on demonstrated knowledge and therefore provide a shaky foundation for estimating costs. Cost estimates have proven to be off by billions of dollars in some of the programs we reviewed. For example, the initial Cost Analysis Improvement Group estimate for the Expeditionary Fighting Vehicle program was about $1.4 billion compared to a service estimate of about $1.1 billion, but development costs for the system are now expected to be close to $3.6 billion. Estimates this far off the mark do not provide the necessary foundation for sufficient funding commitments and realistic long-term planning. Constraining development cycles would make it easier to more accurately estimate costs, and as a result, predict the future funding needs and effectively allocate resources. We have consistently emphasized the need for DOD’s weapon programs to establish shorter development cycles. DOD’s conventional acquisition process often requires as many as 10 or 15 years to get from program start to production. Such lengthy cycle times promote program funding instability—especially when considering DOD’s tendency to change requirements and funding as well as frequent changes in leadership. Constraining cycle times to 5 or 6 years would force programs to conduct more detailed systems engineering analyses, lend itself to fully funding programs to completion, and thereby increase the likelihood that their requirements can be met within established time frames and available resources. An assessment of DOD’s acquisition system commissioned by the Deputy Secretary of Defense in 2006 similarly found that programs should be time-constrained to reduce pressure on investment accounts and increase funding stability for all programs. When DOD consistently allows unsound, unexecutable programs to pass through the requirements, funding, and acquisition processes, accountability suffers. Program managers cannot be held accountable when the programs they are handed already have a low probability of success. In addition, program managers are not empowered to make go or no-go decisions, have little control over funding, cannot veto new requirements, and have little authority over staffing. At the same time, program managers frequently change during a program’s development. Our analysis indicates that the average tenure for managers on 39 major acquisition programs started since March 2001 was about 17 months—less than half the length of the average system development cycle time of 37 months. Such frequent turnover makes it difficult to hold program managers accountable for the business cases that they are entrusted to manage and deliver. The government’s control over and accountability for decisions is complicated by DOD’s growing reliance on technical, business, and procurement expertise supplied by contractors. This reliance can reach a point where the foundation on which decisions are based may be largely crafted by individuals who are not employed by the government, who are not bound by the same rules governing their conduct, and who are not required to disclose whether they have financial or other personal interests that conflict with the responsibilities they have performing contract tasks for DOD. Further, in systems development, DOD typically uses cost-reimbursement contracts, in which DOD generally pays the allowable costs incurred for the contractor’s best efforts, to the extent provided by the contract. This may contribute to an acquisition environment that is not conducive for incentivizing contractors to follow best practices and keep cost and schedule in check. Recognizing the need for more discipline and accountability in the acquisition process, Congress recently enacted legislation that, if followed, could result in a better chance to spend resources wisely. Likewise, DOD has recently begun to develop several initiatives, based in part on congressional direction and GAO recommendations that, if implemented properly, could also provide a foundation for establishing a well balanced investment strategy and sound, knowledge-based business cases for individual acquisition programs. Over the past 3 years, Congress has enacted legislation that requires DOD to take certain actions which, if followed, could instill more discipline into the front-end of the acquisition process when key knowledge is gained and ultimately improve acquisition outcomes. For example, 2006 and 2008 legislation require decision-makers to certify that specific levels of knowledge have been demonstrated at key decision points early in the acquisition process before programs can enter the technology development phase or the system development phase. The 2006 legislation also requires programs to use their original baseline estimates—and not only their most recent estimates—when reporting unit cost threshold breaches. It also requires an additional assessment of the program if certain thresholds are reached. Other key legislation requires DOD to report on the department’s strategies for balancing the allocation of funds and other resources among major defense acquisition programs, and to identify strategies for enhancing the role of program managers in carrying out acquisition programs. (For more detailed description of recent legislation, see appendix I). DOD has initiated actions aimed at improving investment decisions and weapon system acquisition outcomes, based in part on congressional direction and GAO recommendations. Each of the initiatives is designed to enable more informed decisions by key department leaders well ahead of a program’s start, decisions that provide a closer match between each program’s requirements and the department’s resources. For example: DOD is experimenting with a new concept decision review, different acquisition approaches according to expected fielding times, and panels to review weapon system configuration changes that could adversely affect program cost and schedule. DOD is also testing portfolio management approaches in selected capability areas to facilitate more strategic choices about how to allocate resources across programs and also testing the use of capital budgeting as a potential means to stabilize program funding. In September 2007, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics issued a policy memorandum to ensure weapons acquisition programs were able to demonstrate key knowledge elements that could inform future development and budget decisions. This policy directed pending and future programs to include acquisition strategies and funding that provide for contractors to develop technically mature prototypes prior to initiating system development, with the hope of reducing technical risk, validating designs and cost estimates, evaluating manufacturing processes, and refining requirements. DOD also plans to implement new practices that reflect past GAO recommendations intended to provide program managers more incentives, support, and stability. The department acknowledges that any actions taken to improve accountability must be based on a foundation whereby program managers can launch and manage programs toward greater performance, rather than focusing on maintaining support and funding for individual programs. DOD acquisition leaders have told us that any improvements to program managers’ performance hinge on the success of these departmental initiatives. In addition, DOD has taken actions to strengthen the link between award and incentive fees with desired program outcomes, which has the potential to increase the accountability of DOD programs for fees paid and of contractors for results achieved. If adopted and implemented properly these actions could provide a foundation for establishing sound, knowledge-based business cases for individual acquisition programs, and the means for executing those programs within established cost, schedule, and performance goals. DOD understands what it needs to do at the strategic and at the program level to improve acquisition outcomes. The strategic vision of the current Under Secretary of Defense for Acquisition, Technology and Logistics acknowledges the need to create a high-performing, boundary-less organization—one that seeks out new ideas and new ways of doing business and is prepared to question requirements and traditional processes. Past efforts have had similar goals, yet we continue to find all too often that DOD’s investment decisions are service- and program- centric and that the military services overpromise capabilities and underestimate costs to capture the funding needed to start and sustain development programs. This acquisition environment has been characterized in many different ways. For example, some have described it as a “conspiracy of hope,” in which industry is encouraged to propose unrealistic cost estimates, optimistic performance, and understated technical risks during the proposal process and DOD is encouraged to accept these proposals as the foundation for new programs. Either way, it is clear that DOD’s implied definition of success is to attract funds for new programs and to keep funds for ongoing programs, no matter what the impact. DOD and the military services cannot continue to view success through this prism. Adding pressure to this environment are changes that have occurred within the defense supplier base. In 2006, a DOD- commissioned study found that the number of fully competent prime contractors competing for programs had been reduced from more than 20 in 1985 to only 6. This limits DOD’s ability to maximize competition to reduce costs and encourage innovation. More legislation can be enacted and policies can be written, but until DOD begins making better choices that reflect joint capability needs and matches requirements with resources, the acquisition environment will continue to produce poor outcomes. It should not be necessary to take extraordinary steps to ensure needed capabilities are delivered to the warfighter on time and within costs. Executable programs should be the natural outgrowth of a disciplined, knowledge-based process. While DOD’s current policy supports a knowledge-based, evolutionary approach to acquiring new weapons, in practice decisions made on individual programs often sacrifice knowledge and realism in favor of revolutionary solutions. Meaningful and lasting reform will not be achieved until DOD changes the acquisition environment and the incentives that drive the behavior of DOD decision-makers, the military services, program managers, and the defense industry. Finally, no real reform can be achieved without a true partnership among all these players and the Congress. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For further information about this statement, please contact Katherine V. Schinasi at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals who made key contributions to this statement include Michael J. Sullivan, Director; Ronald E. Schwenn, Assistant Director; Megan Hill; Travis J. Masters; Karen Sloan; and Alyssa B. Weir. 10 U.S.C. § 2366a (as amended) - Milestone B Certification Before a major defense program can receive approval to start system development, the Milestone Decision Authority (MDA) must certify that, for example-- the program is affordable when considering DOD’s ability to accomplish the program’s mission using alternative systems and the per unit and total acquisition costs in the context of the Future Year Defense Plan; reasonable cost and schedule estimates have been developed for system development and appropriate market research has been conducted prior to technology development to reduce duplication of existing technology and products; and the technology in the program has been demonstrated in a relevant environment. MDA may waive one or more requirements if the MDA determines that without a waiver, DOD would be unable to meet critical national security objectives. 10 U.S.C. § 2433 (as amended) - Unit Cost Reports Amended reporting and certification requirements for major defense programs that exceed baseline costs, by: creating two types of growth thresholds--“significant cost growth” and “critical cost growth”; basing new thresholds on the percentage increases in both the original and current baseline estimate incorporating these thresholds into existing unit cost reporting requirements; and requiring that in the event of a breach of the critical cost growth threshold, the Secretary of Defense, in coordination with the Joint Requirements Oversight Council, to (1) assess the reasons for the cost growth, the projected cost to either complete the program with current or reasonably modified requirements, and the rough order of magnitude costs for a reasonable alternative system or capability and (2) certify that the program is essential to national security; no less costly, equally capable alternatives exist; new cost estimates are reasonable; and an adequate management structure is in place to control costs. Program Manager Empowerment and Accountability Required the Secretary of Defense to develop a strategy for enhancing the role of DOD program managers in developing and carrying out defense acquisition programs that addressed matters such as: improved career paths and opportunities; incentives for recruitment and retention of highly qualified individuals; improved resources and support; enhanced monetary and non-monetary awards for successful accomplishment of program objectives; Required that DOD guidance for major defense programs be revised to address program manager qualifications, resources, responsibilities, tenure and accountability. Guidance for taking programs from development to production was to address matters such as: the need for performance agreements between program managers and MDAs that set forth expected parameters for cost, schedule and performance and include commitments by both parties to ensure parameters are met and the extent to which a program manager should continue in the position without interruption until the delivery of the first production units. Investment Strategy for Major Defense Acquisition Programs Required the Secretary of Defense to submit to the congressional defense committees a report on DOD’s strategies for balancing the allocation of funds and other resources among major defense acquisition programs. The report was to address topics such as DOD’s ability to: establish priorities among needed capabilities and assess resources needed to achieve such balance costs, schedule and requirements of major defense programs to ensure the most efficient use of resources. The report also was to address the role of a Tri-Chair Committee comprised of the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Vice Chairman of the Joint Chiefs of Staff; and the director of Program Analysis and Evaluation, among others; in the resource allocation process. 10 U.S.C. § 2366b Milestone A Certification Before a major defense program can receive approval to begin technology development, the MDA must, after consulting with the Joint Requirements Oversight Council (JROC) on matters related to program requirements and military needs, certify that, for example: the system fulfills an approved initial capabilities document; the system is necessary and appropriate if it duplicates a capability already provided by an existing system; and the cost estimate for the system has been submitted and the level of resources required to develop and procure the system is consistent with the priority level assigned by the JROC. If a milestone A certified major defense program exceeds the cost estimate for the system submitted at the time of certification by at least 25 percent prior to milestone B approval, the MDA and JROC shall determine whether the level of resources required to develop and procure the system remains consistent with the priority level assigned. The Secretary of Defense was also asked to review guidance and take steps to ensure that DOD does not initiate a technology development program for a major weapon system without milestone A approval. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-08-467SP. Washington, D.C.: March 31, 2008. Best Practices: Increased Focus on Requirements and Oversight Needed to Improve DOD’s Acquisition Environment and Weapon System Quality. GAO-08-294. Washington, D.C.: Feb. 1, 2008. Cost Assessment Guide: Best Practices for Estimating and Managing Program Costs. GAO-07-1134SP, Washington, D.C.: July 2007. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO- 07-406SP. Washington, D.C.: March 30, 2007. Best Practices: An Integrated Portfolio Management Approach to Weapon System Investments Could Improve DOD’s Acquisition Outcomes. GAO-07-388, Washington, D.C.: March 30, 2007. Best Practices: Stronger Practices Needed to Improve DOD Technology Transition Processes. GAO-06-883. Washington, D.C.: September 14, 2006. Best Practices: Better Support of Weapon System Program Managers Needed to Improve Outcomes. GAO-06-110. Washington, D.C.: November 1, 2005. Defense Acquisitions: Major Weapon Systems Continue to Experience Cost and Schedule Problems under DOD’s Revised Policy. GAO-06-368. Washington, D.C.: April 13, 2006. DOD Acquisition Outcomes: A Case for Change. GAO-06-257T. Washington, D.C.: November 15, 2005. Defense Acquisitions: Stronger Management Practices Are Needed to Improve DOD’s Software-Intensive Weapon Acquisitions. GAO-04-393. Washington, D.C.: March 1, 2004. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems’ Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Defense Acquisitions: Factors Affecting Outcomes of Advanced Concept Technology Demonstration. GAO-03-52. Washington, D.C.: December 2, 2002. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001. Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000. Defense Acquisition: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. Best Practices: DOD Training Can Do More to Help Weapon System Programs Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16, 1999. Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999. Defense Acquisitions: Best Commercial Practices Can Improve Program Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999. Defense Acquisitions: Improved Program Outcomes Are Possible. GAO/T- NSIAD-98-123. Washington, D.C.: March 17, 1998. Best Practices: Successful Application to Weapon Acquisition Requires Changes in DOD’s Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998. Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 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. | Since 1990, GAO has designated the Department of Defense's (DOD) management of major weapon system acquisitions a high risk area. DOD has taken some action to improve acquisition outcomes, but its weapon programs continue to take longer, cost more, and deliver fewer capabilities than originally planned. These persistent problems--coupled with current operational demands--have impelled DOD to work outside of its traditional acquisition process to acquire equipment that meet urgent warfighter needs. Poor outcomes in DOD's weapon system programs reverberate across the entire federal government. Over the next 5 years, DOD plans to invest about $900 billion to develop and procure weapon systems--the highest level of investment in two decades. Every dollar wasted on acquiring weapon systems is less money available for other priorities. This testimony describes DOD's current weapon system investment portfolio, the problems that contribute to cost and schedule increases, and the potential impacts of recent legislative initiatives and DOD actions aimed at improving outcomes. It also provides some observations about what is needed for DOD to achieve lasting reform. The testimony is drawn from GAO's body of work on DOD's acquisition, requirements, and funding processes, as well as its most recent annual assessment of selected DOD weapon programs. DOD's portfolio of weapon system programs has grown at a pace that far exceeds available resources. From 1992 to 2007, the estimated acquisition costs remaining for major weapons programs increased almost 120 percent, while the annual funding provided for these programs only increased 57 percent. Current programs are experiencing, on average, a 21-month delay in delivering initial capabilities to the warfighter--often forcing DOD to spend additional funds on maintaining legacy systems. Systemic problems both at the strategic and at the program level underlie cost growth and schedule delays. At the strategic level, DOD's processes for identifying warfighter needs, allocating resources, and developing and procuring weapon systems--which together define DOD's overall weapon system investment strategy--are fragmented and broken. At the program level, weapon system programs are initiated without sufficient knowledge about system requirements, technology, and design maturity. Lacking such knowledge, managers rely on assumptions that are consistently too optimistic, exposing programs to significant and unnecessary risks and ultimately cost growth and schedule delays. At the same time, frequent turnover of program managers and an increased reliance on contractors increases the government's risk of losing accountability. Recognizing the need for more discipline and accountability in the acquisition process, Congress recently enacted legislation part of which requires decision-makers to certify that programs meet specific criteria at key decision points early in the acquisition process. Likewise, DOD has recently begun to develop several initiatives that are based in part on congressional direction and GAO recommendations. If adopted and implemented properly, these measures could provide a foundation for establishing a well balanced investment strategy, sound business cases for major weapon system acquisition programs, and a better chance to spend resources wisely. While legislation and policy revisions can help guide change, DOD must begin making better choices that reflect joint capability needs and match requirements with resources or the department will continue to experience poor acquisition outcomes. DOD investment decisions continue to be dictated by the services who propose programs that overpromise capabilities and underestimate costs to capture the funding needed to start and sustain development programs. The transitory nature of leadership further undermines successful reform. To better ensure warfighter capabilities are delivered when needed and as promised, incentives must encourage a disciplined, knowledge-based approach, and a true partnership with shared goals must be developed among the department, the military services, the Congress, and the defense industry. |
Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the progress being made in downsizing the federal workforce and agencies’ use of buyouts. As agreed with your office, our statement includes information on the results to date of federal downsizing efforts, whether agencies’ use of buyouts reflected the administration’s workforce restructuring goals as articulated by the National Performance Review (NPR), the demographic results of the buyouts, the extent to which we estimate that the statutorily mandated workforce reduction goals could be met through attrition, and the cost and savings implications of buyouts versus reductions-in-force (RIF). We obtained information on the results of federal downsizing activities by analyzing workforce data contained in the Office of Personnel Management’s (OPM) Central Personnel Data File (CPDF) for fiscal year 1992 through November of fiscal year 1996, and by reviewing workforce trends presented in the President’s fiscal year 1997 federal budget. Our analysis of whether agencies’ use of buyouts reflected NPR’s workforce restructuring goals was based on our review of applicable Office of Management and Budget (OMB) guidance to agencies and CPDF workforce data. Our examination of the demographic results of the buyouts was based on CPDF data as well. Our estimate of the extent to which mandated workforce reduction goals can be achieved by attrition was based on workforce trends data contained in the President’s fiscal year 1997 federal budget. The costs and savings of buyouts and RIFs were analyzed using past studies by us, the Congressional Budget Office, and other federal agencies; contacts with agency officials; and demographic data from the CPDF. A more detailed analysis of the circumstances under which buyouts or RIFs offer greater potential savings is contained in the report we prepared for this Subcommittee that was released today. The Federal Workforce Restructuring Act of 1994 (P.L. 103-226) placed annual ceilings on executive branch full-time equivalent (FTE) positions from fiscal years 1994 through 1999. If implemented as intended, these ceilings will result in downsizing the federal workforce from 2.08 million FTE positions during fiscal year 1994 to 1.88 million FTE positions during fiscal year 1999. To help accomplish this downsizing, the act allowed non-Department of Defense (DOD) executive branch agencies to pay buyouts to employees who agreed to resign, retire, or take voluntary early retirement by March 31, 1995, unless extended by the head of the agency, but no later than March 31, 1997. DOD, though subject to the act’s governmentwide FTE ceilings, has the authority, under earlier legislation, to offer buyouts through September 30, 1999. For both DOD and non-DOD agencies, the buyout payment was the lesser of $25,000 or an employee’s severance pay entitlement. According to OPM data, as of September 30, 1995, more than 112,500 buyouts had been paid governmentwide. DOD was responsible for about 71 percent of these buyouts. The federal workforce is being reduced at a faster pace than was called for by the Workforce Restructuring Act. As shown in table 1, the act mandated a ceiling of 2,043,300 FTE positions for fiscal year 1995. This would have resulted in a reduction of 95,500 FTE positions (4.5 percent) from the actual fiscal year 1993 level. In reality, the actual fiscal year 1995 FTE level was 1,970,200, a reduction of 168,600 FTE positions (7.9 percent) from the fiscal year 1993 level. By the end of fiscal year 1997, the administration’s budget calls for the federal workforce to be nearly 53,000 FTE positions below the ceiling called for by the act for that period. Although the workforce reductions occurred governmentwide, they were not evenly distributed among agencies. Indeed, most of the downsizing took place at DOD. As shown in table 2, DOD absorbed nearly three-quarters of the FTE reductions in fiscal year 1994 and over half of the governmentwide reductions in fiscal year 1995. In fiscal year 1997, DOD is expected to absorb all of the FTE reductions made that year while the non-DOD workforce is expected to increase by a net total of 0.2 percent, according to the President’s fiscal year 1997 budget. Although federal employment levels have declined steadily in recent years, the workforce has been reduced with comparatively few RIFs, in part because of the buyouts. Had it not been for the buyout authority, it is likely that more agencies would have RIFed a larger number of employees to meet federal downsizing goals. From September 30, 1994, through March 1995, the on-board executive branch civilian workforce dropped from 2,164,727 employees to 2,032,440 employees, a reduction of 6 percent. CPDF data show that of the 132,287 reductions in on-board personnel that took place during this time period, 48 percent involved buyouts and 6 percent came from RIFs. The remaining 46 percent involved separations without buyouts or the basis for separation was not identified in the CPDF. The administration, through NPR, recommended that agencies direct their workforce reductions at specific “management control” positions that the administration said added little value to serving taxpayers. Such positions included those held by (1) managers and supervisors and (2) employees in headquarters, personnel, budget, procurement, and accounting occupations. By fiscal year 1999, the administration called on agencies to increase managers’ and supervisors’ span of control over other employees from a ratio of 1:7 to 1:15, and to cut management control positions by half. In our draft report on agencies’ use of buyouts that we are preparing for this Subcommittee, we present preliminary data showing that, as a proportion of the workforce as a whole, the management control positions designated for reduction by NPR were barely reduced since the end of fiscal year 1992 (the year before buyouts began at DOD); in some agencies they have increased. As shown in table 3, although the percentage of supervisors at DOD agencies dipped from 12.7 percent of the workforce to 11.9 percent, (1 supervisor for every 6.9 employees to 1 supervisor for every 7.4 employees), all but one of the other designated management control positions increased somewhat. Acquisition positions showed no change. Non-DOD agencies came only slightly closer to meeting the NPR goals. The percentage of supervisors in the non-DOD workforce went from 12.5 percent to 11.6 percent (1 supervisor for every 7 employees to 1 supervisor for every 7.6 employees). Personnel and headquarters staff also decreased as a proportion of the non-DOD workforce, while the remaining categories showed no proportional reduction or slight increases. some employees delayed their separations so that they could receive a buyout. Although it was not an explicit goal of the buyout legislation, the buyouts appeared to have helped agencies downsize without adversely affecting workforce diversity. Indeed, of the nearly 83,000 employees who were paid buyouts from fiscal year 1993 through March 31, 1995, 52 percent were white males. Consequently, the percentage of women in the workforce increased from 43.4 percent at the end of fiscal year 1992 to 44.6 percent by March 31, 1995. Likewise, during that same time period, the percentage of minorities went from 27.9 percent to 28.9 percent of the workforce. As noted earlier, total governmentwide FTE levels to date are well below the annual ceilings mandated by the Workforce Restructuring Act. Our estimates indicate that the act’s final fiscal year 1999 target for FTE ceilings could probably be met in total through an attrition rate as low as 1.5 percent and still allow for some limited hiring. As shown in figure 1, the administration’s 1997 budget calls for reducing the federal workforce from 1.97 million FTE positions at the end of fiscal year 1995 to an estimated 1.91 million FTE positions by the end of fiscal year 1997. At that rate of reduction—about 1.5 percent per year—executive branch civilian agencies could meet the fiscal year 1999 FTE ceiling called for by the act while still hiring nearly 28,000 new full-time employees. Although federal attrition varies from year to year because of such factors as the state of the economy, the availability of separation incentives, and employees’ personal considerations, federal attrition has typically run considerably higher than 1.5 percent. For example, in fiscal years 1982 through 1992 (the year before buyouts began at DOD), CPDF data shows that the average annual quit rate was about 8 percent. Federal employment levels (FY 1996 - 1997 are budgetary estimates). GAO estimates. Federal Workforce Restructuring Act ceiling. Experience has shown that some agencies may need to pare down their workforces more than others as budgets are reduced, programs are dropped, and/or missions are changed. In such circumstances, some agencies may not be able to meet workforce reduction goals through attrition, and other downsizing strategies, such as buyouts or RIFs, may be necessary. do so 3 years earlier. If it were to reduce at this pace, NASA has said that it would anticipate that RIFs would be necessary. Although this downsizing proposal may or may not be implemented, it illustrates the potential magnitude of workforce reductions being considered at some individual agencies. If an agency is unable to meet its workforce reduction goals through attrition alone, which downsizing strategy—buyouts or RIFs—generates greater savings? Our study of the costs and savings of buyouts versus RIFs concludes that, over a 5-year period, buyouts would generally result in more savings to taxpayers than RIFs. This is because buyouts usually result in the separation of employees with higher salaries and benefits than those who are separated through RIFs. Because of the rights of higher graded employees to “bump” or “retreat” to lower-graded positions during a RIF, employees separated through RIFs are frequently not those who were in the positions originally targeted for elimination. We found that buyouts could generate up to 50 percent more in net savings than RIFs over the 5-year period following separation. However, these results would change if bumping and retreating did not occur in a RIF and the separated employees were eligible for retirement. In these cases, RIFs could generate up to 12 percent more in savings over the 5-year period than buyouts. Finally, if the employees were separated without bumping and retreating and were not retirement-eligible, the cost of severance pay for the RIFed employees would result in buyouts generating up to 10 percent more in net savings than RIFs over the 5-year period. These net savings projections are based on the assumption that positions vacated by separating employees would not be refilled by government or contractor personnel. Projected savings would be reduced if this occurred. their workforces by reducing management control positions. These positions have not been reduced as a proportion of the workforce as called for by NPR. With regard to future workforce reductions, our analysis showed that in terms of absolute numbers—and given historical quit rates—the remaining annual FTE employment ceilings called for by the Workforce Restructuring Act probably could be achieved governmentwide through attrition. Nevertheless, some agencies may be required to downsize more than others. In such situations, buyouts or RIFs may be necessary. In comparing the costs and savings of buyouts and RIFs, our analysis showed that buyouts offered greater savings than RIFs, except when RIFed employees do not bump and retreat and are eligible to retire. This concludes my prepared statement. I would be pleased to answer any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the government's progress in downsizing its workforce and use of employee buyouts. GAO noted that: (1) executive branch full-time equivalent (FTE) positions could decrease to 1.88 million during fiscal year (FY) 1999 under mandated ceilings; (2) as of September 30, 1995, the Department of Defense (DOD) paid 71 percent of the more than 112,500 governmentwide buyouts; (3) the actual FY 1995 FTE level was 73,100 positions below the FY 1995 ceiling; (4) the FY 1997 budget calls for nearly 53,000 fewer FTE positions; (5) employee buyouts have helped limit reductions-in-force (RIF) to 6 percent of personnel cuts; (6) agencies have used buyouts more to meet required downsizing goals than to meet the administration's restructuring goals; (7) management control positions of DOD agencies have decreased to under 12 percent, but other designated positions have increased; (8) 70 percent of buyouts between FY 1993 and FY 1995 were paid to employees who took regular or early retirement; (9) retirements decreased 20 percent from FY 1991 through FY 1992, but increased 35 percent after buyout authorization; (10) the FY 1999 workforce goal could probably be met through normal attrition, but budget cuts may force some agencies to rely on other strategies to reduce their workforces below their goals; and (11) in general, buyouts generate up to 50 percent more in net savings over 5 years than RIF because higher-graded employees retreat to lower-graded positions during RIF. |
The Workforce Investment Act of 1998 authorized Youth Opportunity Grants (YO), a $1 billion, 5-year program aimed at increasing the educational attainment and long-term employment of youth residing in high poverty areas. The program was designed to assist at-risk, hard-to- serve youth and the communities in which they live by concentrating resources into a targeted geographic area. YO expanded on earlier demonstration programs that were based on a similar design, the most recent of which were known as Kulick grants. The Department of Labor (the Department) announced the 36 YO grantees—24 urban, 6 rural, and 6 Native American—in February 2000 and set a goal for the grantees to have their programs operational by September of that year. Although the Department originally planned to continue to add grantees, funding for the program was eliminated in the budget for fiscal year 2004. Figure 1 shows the 36 grantees by location. The Department of Labor’s stated goals for the YO program were to increase educational attainment and promote long-term employment of youth in the target areas, as well as to improve the youth service delivery systems in these communities. Specifically, grantees were expected to effect increases in the rates of high school completion, college enrollment, and employment, both for youth participating in the program and, by extension, the overall target area. Grantees were also expected to facilitate the delivery of services by partnering with other institutions in the community, especially local schools and colleges, the juvenile justice system, and private employers. The program was designed to allow grantees to enhance the local infrastructure of youth services by filling in critical service gaps, coordinating existing services, and, in the case of some rural and tribal areas, developing an infrastructure where services were limited. Many of the YO program components were based on practices that experts have identified as effective for working with at-risk youth, and the design of the program supported flexibility and invention at the local level. Based on a youth development framework that emphasizes a comprehensive approach to meeting a young person’s needs, the program required YO grantees to offer a full range of education, employment, and leadership development services as well as provide other supports to the youth. Advocates and experts have also stressed that youth need a place to gather where they feel comfortable and a sense of belonging. In this vein, YO grantees were required to have at least one youth center in the target community that would provide a focal point for services and activities as well as a safe place for the youth to go. In addition, grantees were expected to maintain a core staff of trained youth workers and to provide follow up services to participants for at least 2 years after they completed participation in program activities, which is in keeping with the identified effective practice of providing youth access to a caring, trusted adult for an extended period of time. Additionally, experts have suggested youth benefit from the opportunity to continue a relationship with a program for as long as they need. Similarly, the program had flexible enrollment rules that allowed participants to remain enrolled even through periods of inactivity. However, the program design allowed grantees latitude in deciding many of the particulars of the program. For example, grantees could choose how and by whom services would be delivered, the number and location of the YO centers, and the institutions with which they partnered. Figure 2 displays the key components of Youth Opportunity Grant program. Like some prior demonstration programs that the Department of Labor has administered, eligibility for YO was not based on income, but rather on geographic residence. Youth between the ages of 14 and 21 living in the target area were eligible for the program, regardless of income. In most cases, the target areas were federally designated empowerment zones or enterprise communities, which are, by definition, areas with high rates of poverty. The Department of Labor provided extensive, ongoing technical assistance to grantees. The Department assigned grantees coaches with considerable experience working in youth programs who helped grantees with a range of issues, such as developing services and building partnerships. The Department also collaborated with a private foundation to establish a training institute that provided courses in youth development to more than 2,000 youth workers. In addition, the Department sponsored opportunities for grantees to share best practices and strategies in regular directors’ meetings and conference calls and through peer-to-peer training sessions. The Department laid the foundation for collecting performance data on the program by setting up a management information system (MIS). The Department collected performance data on the YO program in a centralized, electronic system. Grantees submitted information to fulfill requirements of the Workforce Investment Act, which mandated that grantees report on seven performance measures related to employment, retention, earnings, attainment of skills, and attainment of credentials. In addition to these, grantees reported on interim measures developed by the Department to gauge the progress of participants as they moved through the program. These measures were designed to document youth participation in activities and other intermediate milestones. The Department had funded several prior programs premised on a geographic and community concept similar to that of the YO, although on a much smaller scale, but little information is available on the impact of these demonstration programs. Although evaluations were conducted of these earlier programs, the impact studies were either incomplete or not released. The first of these demonstrations, Youth Opportunities Unlimited, was evaluated and the results published, but the study did not include a systematic analysis of impact based on comparison groups. The funding for the second demonstration, Youth Fair Chance, was cut 2 years into the program, and although the evaluation study was published, it was based on only 2 of the planned 5 years of the program. As a result, the authors of this study advised that the findings should be interpreted cautiously. The most recent of the demonstration programs was known as the Kulick grants. The Department has prepared an evaluation of the Kulick grants, but has not yet released the results publicly. For the Youth Opportunity Grants, the Department set up an extensive effort in 2000 to collect and analyze information to assess the program’s impact. The Department contracted for a $24 million evaluation study that included plans to estimate the impact of the program by comparing key characteristics in the YO communities and comparable areas that did not receive YO grants. It was to begin in 2000, and the final report was originally scheduled to be completed in July 2005. The study was designed to differentiate between those observed changes in participants and the communities that resulted from the program and those that would have occurred even without the program’s intervention. Grantees adapted key elements of the program’s design to their particular circumstances and used a variety of approaches in providing services and conducting outreach. Grantees set up centers that varied widely in terms of number and other characteristics where youth could receive services and participate in activities. The centers housed a core staff who provided case management and helped plan individualized services for youth. Staff numbers and duties differed between grantees. Most grantees used the management information system (MIS) provided by the Department of Labor to submit program data to the Department, but some used their own systems. Most grantees used a combination of approaches to provide youth services, including collaborating with other organizations and, when they deemed it necessary, developing services of their own. To reach hard- to-serve target population, grantees used a variety of recruiting techniques, ranging from the conventional to the innovative. The centers set up under the terms of the grant varied widely in number and character. Because the target communities varied in size, some grantees had 1 center while other, more geographically dispersed grantees had as many as 40. The centers were intended to serve as the hub of the local programs, and the types of activities offered in them differed considerably. One center we visited in rural Louisiana had a variety of recreational facilities, such as a basketball court and recreation room, in addition to a classroom, computer lab, and staff offices. Youth participating in this program told us nothing like these facilities had existed for them before the YO program. On the other hand, a center we visited in Houston resembled a traditional career center, with computer kiosks set up near staff offices where the youth could undertake job searches and skills assessments. Houston officials said they had formerly offered some recreational activities on site, but found them to be duplicative of other services available in the neighborhood. Some grantees provided still other facilities at their centers. For example, Baltimore had an on-site health clinic and music recording studio. Some grantees also had centers located within schools. The District of Columbia had staff sited in a local high school, where they offered training and support for youth. This in-school center was located in a large classroom, with a staff office off to one side and furnished with a computer lab with equipment purchased by the grantee. Figure 3 depicts photos of two youth opportunity grant centers we visited. The centers housed staff who varied substantially in number and makeup. Houston divided staff duties between as many as 115 people working in 4 centers. In this program, “personal service representatives” provided case management and identified youths’ goals and training needs, and “employment counselors” assisted youth with job searches and conducted follow-up services to youth who had been placed in employment. Other grantees, however, had sites with only one person performing all of the major staff duties. At the California Indian Manpower Consortium (CIMC) Manchester Point Arena site, one youth worker handled recruitment, case management, and job placement. Because of the remoteness of the site, this youth worker also frequently drove a van, weekly transporting youth to services as far as 4 hours away. Most grantees used the management information system (MIS) provided by the Department of Labor to record program data, but some used their own systems and then submitted the data to the Department. Those who did not use the Department MIS used a variety of systems. For example, Milwaukee developed its own system with the aim of using it in conjunction with other youth programs offered by its local Workforce Investment Board. Similarly, Hartford developed customized software that enabled it to share information with other provider agencies and the schools in the community. Grantees used a combination of approaches to establish a network of educational, occupational, and other services for youth, but varied the extent to which they relied on other providers. Grantees availed themselves of existing services, either through formal arrangements or by referring participants to other organizations in the community. Kansas City arranged for youth to attend classes at other local agencies to help prepare for the GED exam. Similarly, Baltimore referred young women who needed interview clothing to a local charity organization. Most grantees also collaborated with other institutions to provide some services. San Antonio partnered with a local community college to establish academies in which youth could spend half a day on their home campuses and half a day at the community college, allowing them to earn a certificate or associate degree in areas such as aviation or biotechnology. Houston purchased credit retrieval software for local high schools that students could use to complete their academic requirements for graduation. In addition, grantees originated programs to fill perceived gaps in services. Memphis established its own charter school with an emphasis on the arts in order to provide alternative education opportunities for the youth, one of the emphasized youth activities in the program. To provide leadership development opportunities, one of the CIMC sites sponsored a cemetery care project. In this project, participants worked with the tribal elders to make a map of the local cemetery with the names of the deceased because cemeteries on this reservation did not have headstones. Table 1 shows youth activities and examples of how grantees implemented the activities. Grantees also used an array of strategies to help youth find long-term educational or occupational opportunities and to follow up with participants after they exited the program. Some grantees had staff specifically devoted to finding appropriate employment opportunities and connecting youth with these opportunities. For example, Milwaukee created the position of job developer, who identified potential employers and spoke to them directly about the youth in the program. Grantees also used a number of methods for helping youth enroll in post-secondary institutions, such as conducting college tours, assisting with financial aid forms, and placing support staff on college campuses. The statutory provision authorizing the YO program required grantees to provide follow- up services for 2 years after the youth completed participation in program activities. Grantees recorded on a quarterly basis the employment and education status of the youth who had completed participation in the program, for example, if they were in school or working at the time of contact. Some grantees contacted youth more frequently. Staff in Baltimore told us they varied the frequency depending on the degree to which they regarded the young person to be at some risk. One might be contacted monthly, while another would be checked on nearly every day. Grantees recruited youth, including traditionally difficult to serve populations, by creating connections with other youth-serving agencies. Milwaukee operated a juvenile justice project to help youth coming out of the corrections system to reintegrate into the community. Personnel at a local correctional facility worked with program staff to identify those due for release who were expecting to live within the geographic target area of the program. Program staff traveled to the facility to conduct an orientation session and then worked with the youth, corrections officials, and parents to develop a reintegration plan. The services offered to them were similar to those offered to all of the YO participants. Grantees also used a variety of innovative methods to recruit participants. Since many of the youth were disconnected from both school and work, as one grantee told us, they could be not only hard to serve, but hard to find. Some grantees went beyond conventional outreach activities of mailers and radio advertisements and conducted community walking campaigns using staff to saturate shopping malls and other areas where youth congregate. Others used youth to lead recruitment. In some cases, a grantee used employment as an inducement to link youth to other activities the program offered. For example, Louisiana’s work program allowed participants to work more hours in subsidized employment the further they advanced toward their educational goals. We were told many of the youth lived in unstable economic conditions, and these needs had to be addressed before the youth would focus on other areas, such as education. In other cases, grantees used cash or non-monetary rewards to encourage participation. In Houston, youth could attend special events, such as a basketball game, if they participated in the program a minimum number of hours. Grantees were able to address a variety of challenges in setting up the program and delivering services to youth using local discretion, flexible enrollment rules, and other aspects of the program’s design, but they and others said a longer start-up period would have been beneficial. Most grantees found it difficult to establish centers and retain participants in their programs. They felt that these challenges were compounded by expectations for a quick start-up, and subsequently they and Department officials felt more planning time would have been beneficial. Grantees also had difficulty establishing an information-reporting system, but once in place, found it was helpful for program management purposes. Conditions in the communities such as violence and lack of jobs presented a challenge to most grantees, but they took advantage of the local discretion built into the program to develop strategies to address them. Grantees also cited as an obstacle the vast service needs of many of the youth the program was intended to serve, but case management, individualized services, and flexible enrollment rules were useful in dealing with them. The majority of grantees reported that finding or renovating centers was a challenge. Many grantees did not have suitable sites in their communities for use as centers, and some put considerable effort into renovating existing structures. In the extreme, the grantee in Alaska renovated 40 centers in remote communities not accessible by road and shipped equipment and material by air. In a few cases, grantees did not have a permanent building until after the first year of the program. In Boston, the program was housed in temporary facilities for a period of time because a permanent center could not be completed for the program’s opening. Another challenge identified by most grantees was retaining participants, which grantees linked in part to expectations from the Department to start to enroll youth quickly. The Department set a goal to recruit 3,000 participants nationwide within the first few months of the program, or a little less than 100 youth per grantee. Some grantees said they felt rushed to meet recruitment goals and told us they recruited many youth who were not committed to the program. In addition, several directors mentioned that they felt they were asked to serve participants before their programming was fully developed, a situation that as one expert commented, was akin to asking grantees to “fly the plane before they were finished building it.” We were told that, in these situations, some youth became disenchanted with the program and left because of the limited offerings the center presented early on. Grantees, agency officials, and experts said a longer planning period would have been beneficial. Grantees had an 7 month window between the announcement of the grant recipients and the Department’s target date for having the programs operational. For example, two grantees with whom we spoke said about three additional months would have been necessary for them to meet the goals set out by the Department. Agency officials also told us that grantees were pushed to start-up too quickly and could have benefited from more time to plan. Agency officials said it would have been appropriate to give grantees more time to meet the Department’s initial goals. Most grantees reported that establishing an information reporting system was challenging, and grantees told us it would have been useful for the Department to have had a workable system in place at the outset of the program. The management information system (MIS) initially provided by the Department was fraught with problems. Department officials told us it took about 18 months to iron out the kinks. In addition, the Office of Inspector General identified inconsistencies in the way grantees were recording data early on. Although the Department eventually developed an improved system, grantees said it would have been better had the MIS been in place from the beginning. Not having a system in place created additional burden for the grantees. For example, Louisiana developed its own system to collect information until an updated system was available and then manually transferred 11 months of data into the new MIS. Once in place, grantees additionally used the information system for their own program management purposes such as to improve performance and reinforce accountability. The Hartford grantee was able to integrate its system with the school district, allowing case managers to track attendance and grades to allow better monitoring of participant achievements. The Hartford system also enabled program management to see which case managers were most successful at engaging youth in the activities required for the completion of their goals. Regarding accountability, Portland used its information system to monitor the performance of its contractors on a weekly basis. Some of the major challenges also identified by grantees were problems external to the program, yet affected their ability to deliver services. Twenty-eight of the grantees reported on the survey that a lack of jobs in the community was a challenge. In some areas, jobs were on the decline because of shifts in the local economy or relocation of major employers. For example, the grantee in San Francisco related that due to the dot-com bust, youth in the program were competing with a skilled workforce willing to fill entry level positions that would otherwise be available to youth. In other areas, especially rural ones, there were few employers, let alone large ones. In addition, 29 of 36 grantees reported on the survey that risk factors such as violence, drugs, and gangs were challenges in implementing the program. In some cases, these factors made it difficult for participants to receive services. In one urban community, we were told there were safety concerns with youth participating in evening activities sponsored by the YO because they would have to return home after dark. Local discretion built into the program design helped grantees respond to external challenges. Within the structure of the program, grantees were allowed some amount of latitude to develop responses to circumstances in their communities, such as a scarcity of jobs. For example, the California Indian Manpower Consortium created opportunities for youth to have work experiences, such as subsidizing summer jobs with local business including a campground and senior center or working with the tribe to place youth in clerical positions. Similarly, grantees were able to develop services to address specific risk factors in their communities. Imperial County offered a curriculum series to help address interpersonal violence among adolescents, an issue they had identified as particularly problematic in their area. The series was designed to reduce impulsive and aggressive behavior through empathy training, interpersonal problem solving, behavior skill training, and anger management. In Milwaukee, the grantee addressed safety concerns by renting vans to transport the youth to nighttime events. Grantees identified as a major challenge the obstacles faced by their clients, such as homelessness, lack of family support, mental health problems, and low levels of academic attainment. Staff in Baltimore told us homelessness was a frequent issue faced by youth in their area and finding a place to sleep can preoccupy the youth and disrupt the learning process. YO staff and others said that participants may lack support in other areas of their lives, such as from their families. For example, one grantee told us of a participant who was awarded a full scholarship to college, but the parents would not sign the paperwork to receive the money. Some youth also faced mental health issues, which prevented them from moving forward in their lives. All of these factors, we were told, could mean a slow start for youth who enrolled in the program. The director of an alternative high school in Milwaukee told us that because of the disorder in their lives, many of these youth may take a year just to become comfortable in the program before they can even begin making any forward progress. Grantees found aspects of the program design such as case management, individualized services, and flexible enrollment rules useful in addressing the service challenges of participants. For example, grantees used assessments to help determine the academic needs of clients and provide each client with the appropriate individualized services. Philadelphia designed a program in which each participant had a personalized remediation plan based on the results of an evaluation test and interview with an education coach. This plan was intended to build on clients’ strengths and accounted for their particular learning styles. After the initial assessment, participants were reevaluated at regular intervals to monitor their academic progress and goal attainment. The curriculum was designed so that youth could increase at least one grade level after 90 hours of instruction. In addition, both youth and community members told us that YO staff were key in helping youth stay motivated and guiding them through difficult situations. Grantees also found the enrollment rules useful in working toward program goals. The program’s enrollment policy allowed most participants to continue to receive services even if they experienced periods of inactivity. Staff in Houston told us that the policy was a benefit to the youth because, unlike other employment programs, YO did not end their relationship with youth who had not been participating for a while. Grantees and others reported that the participants and their communities made advancements in education and employment; however, a formal assessment of the program’s impact is still under study. Data reported by the grantees showed that a number of youth advanced their education while they were participating in the program, such as completing high school. Grantees also reported data showing a portion of the participants entered unsubsidized employment after enrolling in the program. Similarly, grantees and others believe their communities made advancements toward the Department’s stated education and employment goals of the program. In addition, the majority of grantees reported that they made improvements in the youth service delivery systems in their communities. The Department funded an evaluation to assess the impact of the program, which was designed to shed light on the extent to which observed changes can be attributed to the program. However, the study has not yet been completed. Data reported by the grantees showed that a number of youth advanced their education while they were participating in the program. Two of the Department’s primary goals of program were to increase the rates of high school completion and college enrollment for the youth. Data that grantees entered into the management information system (MIS) showed that of the approximately 91,000 youth who signed up for in the program nationwide, about 18,700 either completed high school or attained a GED after enrolling in the program. In addition, about 11,700 youth entered college, 37 percent of whom were reported to be out of school when they initially enrolled in the program. Youth with whom we spoke credited the program with giving them a second chance to increase their education and to better their employment opportunities. One Louisiana youth’s comments typified what we heard elsewhere from participants during our site visits, “YO is the best thing that has happened to me. YO has given me a job and put a little money in my pocket.” He added, “YO has also been instrumental in keeping me out of jail. Above all, YO has helped me realize that education is important.” Figure 4 summarizes enrollment, participation, education, and employment data for youth in the program, as of June 2005. Grantees reported data showing that a portion of the youth entered unsubsidized employment after completing YO activities. Data from the MIS show that about 17,300 youth were placed in employment that was not subsidized by the program, 62 percent of whom were out of school when they initially enrolled in the program. Grantees and others told us the job readiness training that some youth received as part of the program was particularly important in helping them get jobs. Employers we spoke with told us they knew the youth that were sent to them by YO would be well trained and ready to work. A local human resources manager for a national chain of home improvement stores told us that he thought YO participants were better prepared for employment than other residents of the area, adding that they show up with better job skills and “soft” skills. Grantees and others expressed the view that their communities had made advancements in concert with the Department’s education and employment goals for the program. Almost all of the grantees reported that high school completion, college enrollment, and youth employment rates improved in their communities as a result of the program. Several grantees also asserted that affecting the youth led to changes in the community. In addition, community members with whom we spoke said the program helped their communities make progress toward greater education and employment. For example, a tribal leader in California told us that YO motivated the youth in his tribe to stay in school. Similarly, one expert pointed to some of the rural grantees who had many youth enroll in college, which she said was especially important because of a lack of jobs in these areas. The majority of grantees reported making improvements in the youth service delivery systems in their communities. Some of the described changes were to the service infrastructure in these communities. For example, San Diego pointed out that it had created a multiservice youth center in a neighborhood where none had existed before. Grantees cited other improvements related to the mode of service delivery. Tucson reported that prior to YO, it had funded three stand-alone youth programs, but now it has a one-stop system with multiple entry points for delivering youth services. Other grantees noted that their efforts to foster better communication and collaboration among service providers had benefited the youth. As the Portland grantee commented, by partnering with their local employment department and community college system, they were able to leverage staff to provide intensive job search and college preparation services to youth. In other cases, local leaders credited the YO as a catalyst for change in their community. For example, a school superintendent in California told us that YO staff had helped to forge an agreement between the school district and five Indian tribes in the area to develop an education curriculum that would be more sensitive to the tribes’ cultures. While the Department of Labor funded an evaluation designed to assess the impact of the program, it has not yet been completed. This was planned as a 5-year, $24 million evaluation, which began in 2000. As part of the evaluation, the Department conducted baseline and follow-up surveys of the target areas, and gathered extensive descriptions of the 36 programs and communities. The evaluation also included plans for an impact study that was designed to compare YO participants and communities with other, similar youth and communities that did not participate in YO. This type of comparative analysis would be necessary to determine if the events reported by grantees and others would have occurred in the absence of the program. However, the evaluation is not finished. Moreover, agency officials are unsure if the impact study that was to be part of the evaluation will be completed. Due to departmental allocations being lower than expected, the Department spent $1.9 million less than the full amount of the original contract on the evaluation. Agency officials told us that the impact study was likely to be scaled back because of the lower allocation. The evaluation was originally scheduled to be completed in July 2005. However, agency officials told us they do not expect the study to be finished until June 2006. The Youth Opportunity Grant program was designed to help at-risk youth and their communities by concentrating resources geographically and by incorporating components that experts have suggested are effective in assisting this population. To continue to improve the ability to serve these youth, researchers and practitioners must be able to learn from the most promising and innovative approaches in serving these youth, including those used in the Youth Opportunity Grant program. The Department of Labor has begun an evaluation of the program that includes many pieces of a potentially useful study. Although informative, these pieces will not by themselves answer the question of impact, in other words, whether the described events would have occurred in the absence of the program. In order to understand what effect, if any, the program had on these observed events, it is necessary to have a systematic comparison with other, similar communities that did not receive grants. The Department planned, but has not yet completed, such an analysis as part of the evaluation. The Department has an opportunity to contribute to the research on programs for serving at-risk youth, if the evaluation study is completed and the results made public. However, the Department has not taken full advantage of past opportunities to release information on other programs based on a similar model, such as the Kulick grants. Given the $1 billion investment in this program—including almost $24 million for an evaluation effort—and the need for rigorous data on these types of programs, the study should be completed and the results should be made available. Unless the Department completes the evaluation of the Youth Opportunity Grant program and releases the results, researchers and practitioners will not be able to fully realize the potential to learn from the program. To continue to improve efforts to serve at-risk youth and in order that researchers can evaluate the quality of information and determine possible impact of the program, we recommend that the Secretary of Labor take the actions necessary to complete the impact analysis of the Youth Opportunity Grant program and release the data and all related research reports from the program’s evaluation. We provided a draft of this report to the Department of Labor for its review and comment. In its response, the Department agreed with our conclusions and recommendation and indicated that it intends to complete the impact analysis and publish all related reports from the Youth Opportunity Grant program evaluation. A copy of the Department’s response is in appendix II. The Department also provided us with technical comments, which we incorporated into the report where appropriate. We will send copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (415) 904-2272 if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To accomplish our research objectives, we surveyed Youth Opportunity Grant Program directors on the implementation of the Youth Opportunity Grants. To augment information from our survey, we conducted five site visits of programs. We chose sites for our visits to represent proportionately the three grantee types (urban, rural, and Native American) as well as their geographic distribution. The grantees we visited were the District of Columbia, Houston, Milwaukee, rural Louisiana, and the California Indian Manpower Consortium. During our visits we met with program administrators, staff, and participants to learn their perspectives on program implementation, challenges, outcomes, impact, and lessons learned. Also, we interviewed local workforce board members, school officials, community based service providers, private employers, and local government officials to discuss their perspectives on the impact and other aspects of the program. In addition, we toured Youth Opportunity Centers, in-school facilities, and observed program activities. We briefly visited an additional two grantees— Baltimore and Philadelphia—in the course of pretesting the survey, and while at their sites, toured centers and spoke with program administrators, staff, and participants. We gathered additional information by reviewing agency documents including site assessments and grant applications. We also interviewed agency officials and other relevant experts, including researchers, representatives of advocacy organizations, YO coaches, and former Department of Labor officials. We performed our work from September 2004 to November 2005 in accordance with generally accepted government auditing standards. We also investigated several possible sources of external data to quantitatively measure outcomes and impact, but determined none of them were feasible for our purposes. The data sets we reviewed were: Current Population Survey, Common Core of Data, National Longitudinal Survey of Youth, High School and Beyond, and American Community Survey. To learn about the implementation of the Youth Opportunity Grants, we conducted a Web-based survey of all Youth Opportunity Grant Program Directors. We asked directors about the usefulness of program components, challenges they faced implementing the program and strategies used to deal with them, and their opinion on the program’s impact on participants and communities. Additionally, we asked directors about the size and structure of their programs, the manner in which they delivered services, and the types of organizations with which their programs partnered. The survey also included a series of questions about how programs maintained information to help us determine the reliability of data in the Department of Labor’s management information system. We pretested the survey with several program directors and modified the survey to take their comments into account. All 36 program directors completed the survey, for a response rate of 100 percent. We administered the survey between March 17 and May 31, 2005. To view selected results of the survey, go to GAO-06-56SP. We used electronic data collected on the program by the Department of Labor in a management information system (MIS) to describe the number of youth in the program who achieved the Department’s goals for the program, such as high school completion, college enrollment, and long- term education and employment placements. We have determined the MIS data are sufficiently reliable for the purposes of this study through discussions with officials at the Department of Labor, in-depth interviews with MIS staff during site visits, and responses to a comprehensive array of survey items in which each grantee described their procedures for editing and auditing the data they entered into the MIS. We analyzed the MIS data using guidance provided to us by the Department. David Lehrer, Assistant Director, and Anne Welch, Analyst-in-Charge, managed this assignment and made significant contributions to all aspects of the work. Dan Concepcion and Eleanor Johnson also made significant contributions to this report. In addition, Kevin Jackson assisted in all aspects of the survey of Program Directors and in reviewing external data sources. Jerry Sandau and Cathy Hurley assisted in the analysis of the MIS data and assessment of the MIS data reliability. Jessica Botsford provided legal support, and Susan Bernstein 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 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: Youth Provisions Promote New Service Strategies, but Additional Guidance Would Enhance Program Development. GAO-02-413. Washington, D.C.: April 5, 2002. | The Youth Opportunity Grant program (YO) represented an innovative approach to improving education and employment opportunities for at-risk youth by targeting resources in high poverty areas and incorporating strategies that experts have identified as effective for serving this population. The Department of Labor (the Department) awarded 36 grants in 2000, and the program continued for 5 years. The Department had used a similar approach on a smaller scale in previous programs, but little information is available on the impact of these other programs. In order to understand what can be learned from the Youth Opportunity Grant program, GAO examined the grantees' implementation of the program, challenges they faced, and what is known about the program's outcomes and impact. To view selected results from GAO's Web-based survey of the Program Directors, go to GAO-06-56SP (http://www.gao.gov/cgi-bin/getrpt?GAO-06-56SP). Grantees used a variety of approaches to build the infrastructure of the YO program, provide services to at-risk youth, and conduct outreach efforts. While grantees set up centers and trained core staff to deliver services, they differed somewhat in their approaches, depending on circumstances within their communities. In addition, grantees employed a combination of strategies to provide youth services, including collaborating with other providers and inventing unique programming. To recruit this hard-to-serve target population, grantees used a range of techniques, from partnering with juvenile justice agencies, to combing malls for eligible youth. Fast program start up, conditions in their communities, and the characteristics and needs of the youth challenged the grantees;however they used features of the program design to address some of these difficulties. Many grantees struggled to set up the program, especially within the Department's time frame. In addition, grantees felt encumbered by the drugs, violence, and a lack of jobs in their communities as well as the obstacles facing their clients, such as low academic achievement and lack of family support. Grantees used the discretion and other components built into the program design to address many of these challenges. For example, in response to safety concerns, an urban grantee elected to provide transportation for youth attending evening events. However, grantees and others said more planning time would have been beneficial. Grantees and others reported that the youth and their communities made progress toward the YO program goals, but the program's impact is still under study. Grantees reported that they had enrolled about 91,000 youth nationwide, many of whom completed high school, entered college, or found employment after enrolling in the program. In addition, grantees and others said that the grants had benefited their communities. However, without an impact analysis, it is not known whether these events would have occurred in the absence of the program. The Department contracted for a $24 million evaluation of the program that included plans for an impact analysis; however, agency officials are unsure if the analysis will be completed. |
Helium is an inert element that occurs naturally in gaseous form and has a variety of uses because of its unique physical and chemical characteristics.point of any element, and, as the second lightest element, gaseous For example, helium has the lowest melting and boiling helium is much lighter than air. Certain natural gas fields contain a relatively large amount of naturally occurring helium, which can be recovered as a secondary product. The helium is separated from the natural gas and stored in a concentrated form that is referred to as crude helium because it has yet to go through the final refining process. The federal helium program is currently managed by Interior’s BLM. As of September 30, 2013, there were about 10.84 billion cubic feet of crude helium in storage—roughly 9 billion cubic feet owned by the government, and the rest is owned by private companies. After private companies— refiners or nonrefiners—purchase helium from BLM and pay for it, the official ownership of the helium is transferred from BLM to the company on the first day of the month after payment is received, and it becomes part of the privately owned inventory in storage. BLM stores and then delivers the privately owned helium through the pipeline to refiners in accordance with the storage contracts between BLM and the private companies. As of July 1, 2014, BLM held storage contracts with 10 companies: 4 refiners, 4 nonrefiners, and 2 companies that do not store helium in the reserve but are connected to the pipeline in order to transport helium from private natural gas fields to the 4 refiners also connected to the pipeline. According to a U.S. Geological Survey report, in 2013, helium produced from the reserve represented about 40 percent of the total estimated production of helium in the United States and about 30 percent of the total estimated production worldwide. The Helium Stewardship Act of 2013 significantly changed the federal helium program. For example, the act: Establishes four phases for the sale and auction of crude helium from, and eventual closure of, the reserve—Phase A: allocation transition; Phase B: auction implementation; Phase C: continued access for federal users; and Phase D: disposal of assets. Phase D is to be completed no later than September 30, 2021. 50 U.S.C. §§ 167d(a)-(d). Establishes a minimum quantity of crude helium that BLM is required to offer for sale or auction each fiscal year in Phases A, B, and C. Specifically, the amount of crude helium to be offered must be the lesser of (1) the quantity of crude helium offered for sale by the Secretary of the Interior during fiscal year 2012 or (2) the maximum total production capacity of the federal helium system, which includes the pipeline. 50 U.S.C. § 167d(f). We refer to this as the act’s minimum quantity requirement. Requires BLM to annually establish, as applicable, separate sale and minimum auction prices for Phase A and Phase B using, if applicable, and in the following order of priority: (1) the sale price of crude helium in BLM auctions; (2) price recommendations and disaggregated data from a qualified, independent third party who has no conflict of interest and conducted a confidential survey of qualifying domestic helium transactions; (3) the volume-weighted average price of all crude helium and pure helium purchased, sold, or processed by persons in all qualifying domestic helium transactions; or (4) the volume- weighted average cost of converting gaseous crude helium into pure helium. 50 U.S.C. § 167d(b)(7). We refer to this as the act’s price- setting provision. Requires BLM to require all persons that have storage contracts with BLM for privately owned helium in the reserve to disclose, on a strictly confidential basis, (1) the volumes and associated prices of all crude and pure helium purchased, sold, or processed by persons in qualifying domestic helium transactions; (2) the volumes and associated costs of converting crude helium into pure helium; and (3) refinery capacity and future capacity estimates. 50 U.S.C. § 167d(b)(8)(A). We refer to this as the act’s disclosure requirement. Establishes a condition for Phase A sales and Phase B sales and auctions to refiners. Specifically, as a condition of sale or auction to a refiner under Phase A sales and Phase B, the refiner must make excess refining capacity of helium available at commercially reasonable rates to persons who acquire helium from BLM after the act’s enactment. 50 U.S.C. § 167d(b)(8)(B). According to the act’s legislative history, this condition was intended to maximize participation in helium sales. The act does not define excess refining capacity or commercially reasonable rates. We refer to this condition as the act’s tolling provision. Since the Helium Stewardship Act of 2013 was enacted in October 2013, BLM has taken a number of actions to begin implementing the act, including (1) estimating volumes of helium that can be produced from the reserve each fiscal year, (2) preparing for and conducting Phase A helium sales, and (3) initiating planning for Phase B sales and auctions. Before BLM could determine how much helium it would sell or auction in each phase, the agency first estimated the volumes of crude helium that can be produced from storage in the reserve. As helium is produced, and the amounts remaining in storage continue to decrease, the helium becomes increasingly difficult to extract. Because of this dynamic, BLM used a geologic model to identify the most efficient way to produce the remaining helium from storage. Table 1 shows the results of BLM’s modeling efforts with the estimated amounts expected to be produced from the reserve by fiscal year, reflecting the reduced volumes that BLM expects will be produced over time. In comparison, BLM offered 2,100 million cubic feet of crude helium for sale in each of fiscal years 2012 and 2013, the same amount it had offered for sale annually since fiscal year 2004. BLM has taken a number of actions to implement multiple provisions of the act regarding Phase A (see fig. 1). The act requires BLM to offer crude helium for sale in Phase A in such quantities and under such terms as BLM determines necessary to carry out Phase A with minimum market disruption, in addition to meeting the act’s minimum quantity requirement. Under Phase A, BLM prepared for and conducted sales by determining sales volumes, setting the sale price, and implementing the act’s disclosure requirement, among other things. BLM offered for sale a total of 610 million cubic feet of helium in two different Phase A sales—one in January 2014 and one in May 2014. BLM officials said that they did not hold the first Phase A sale until January 2014 because they needed time to interpret the new act and develop the fiscal year 2014 sale price. In the first quarter of fiscal year 2014, BLM continued delivering helium to the refiners from their private storage balances. According to BLM officials, they considered limiting the total Phase A sales to the 400 million cubic feet sold in January 2014 so they could deliver more privately stored helium. However, these officials said that after receiving comments requesting that BLM sell additional helium, and after considering the act’s minimum quantity requirement, they decided to offer for sale an additional 210 million cubic feet of helium in May 2014. In the two Phase A sales, four nonrefiners purchased a total of 61 million cubic feet of crude helium, and refiners purchased the remainder. By offering 610 million cubic feet for sale in fiscal year 2014, BLM did not offer for sale the full volume of crude helium that BLM’s model estimated would be produced in fiscal year 2014. This estimated volume, approximately 1.5 billion cubic feet, is less than the volume of crude helium offered for sale in fiscal year 2012 (2.1 billion cubic feet). Under the act’s minimum quantity requirement, BLM must offer for sale or auction in fiscal year 2014 the lesser of the “maximum total production capacity of the federal helium system” or the amount of helium offered for sale in fiscal year 2012. BLM officials told us they interpreted the “maximum total production capacity of the federal helium system” not as the full volume estimated by the model to be produced from the reserve this fiscal year, but rather as an amount equal to the production capacity of the reserve after (1) meeting federal users’ needs, (2) delivering a percentage of privately owned helium stored in the reserve to refiners for processing, and (3) holding back a contingency amount for possible production problems (see fig. 2). These officials said this interpretation helps ensure that the agency can deliver the volumes of privately owned helium that remain in storage before the end of fiscal year 2021. Some refiners, however, submitted comments to BLM stating that they disagree with the agency’s interpretation of the act’s minimum quantity requirement. They said that the “maximum total production capacity of the federal helium system” is the amount equal to the full volume of helium that is estimated to be produced from the reserve for the year, minus an amount for federal users. BLM set the price for the two Phase A helium sales at $95 per thousand cubic feet—an $11 increase over the fiscal year 2013 price—in December 2013. The fiscal year 2014 price increase resulted from a November 2012 recommendation from Interior’s Office of Inspector General that BLM implement a new helium pricing process by the end of 2013 to ensure a fair return on the sale of helium. In response, BLM worked with Interior’s Office of Minerals Evaluation to contract for a study on helium prices. The study was completed on October 15, 2013. The price increase was based largely on the results of this study. BLM officials told us that they used the study in setting the price for the Phase A sales because they believed it satisfied both the Office of Inspector General’s recommendation and the recently enacted price-setting provision. BLM required companies making offers in the Phase A sales to fulfill the act’s disclosure requirement, in addition to requiring the refiners to report their excess refining capacity. BLM communicated these requirements in its announcements for the Phase A sales. By implementing the act’s disclosure requirement in this manner, however, BLM did not receive information from all 10 storage contract holders since 2 companies did not participate in the sales. BLM officials told us they had not realized that the act required them to obtain this information from the 2 storage contract holders that did not participate in the sales. BLM and other Interior officials said that they plan to explore what storage contract holders that do not participate in sales or auctions are statutorily required to disclose. Phase A sales submitted the requested volume and pricing information, and BLM publicly disclosed that the refiners reported, in aggregate, a total of 50 million cubic feet of excess refining capacity available for the last 8 months of fiscal year 2014 (February 2014 through September 2014), an amount less than the 61 million cubic feet purchased by nonrefiners. Under the Paperwork Reduction Act, the Director of the Office of Management and Budget must review and approve agencies’ proposed collections of information from 10 or more entities. BLM has not submitted an information collection proposal to the Office of Management and Budget for the act’s disclosure requirement but is exploring who is required to disclose information. Phase B under such terms and conditions as the agency determines are necessary to maximize total recovery of helium from the federal helium reserve over the long term; to manage crude helium sales according to the agency’s ability to extract and produce helium from the reserve; to carry out Phase B with minimum market disruption; and maximize the total financial return to the taxpayer, among other things. BLM is in the process of planning for the required (1) Phase B auction of a portion of the helium that will be produced in fiscal year 2015, (2) Phase B sale of a portion of the helium that will be produced in fiscal year 2015, and (3) Phase B advanced one-time sale of a portion of the helium that will be produced in fiscal year 2016. BLM published its proposed implementation plan for the auction and sales in the Federal Register on May 16, 2014, for a 30-day comment period, and BLM is planning to hold the auction and sales in late July 2014 to comply with the August 1, 2014, statutory deadline. BLM officials said they planned to publish the final implementation plan in the Federal Register in mid- July 2014. Until the final plan is published, BLM’s proposed implementation is tentative. Similar to Phase A, for the Phase B fiscal year 2015 auction and sale, as well as the fiscal year 2016 one-time sale, BLM is making decisions about helium volumes available for sale and auction, setting the sale price, and implementing the act’s disclosure requirement. As was the case with the volumes of helium made available for sale in Phase A, BLM plans to offer a total amount of helium for sale or auction each year in Phase B that would be less than the annual total helium production amounts shown in table 1. BLM officials told us they are continuing this approach based on the agency’s interpretation of the act’s multiple requirements for Phase B, including the minimum quantity requirement. Specifically, for fiscal year 2015, BLM officials told us they will offer for sale or auction 928 million cubic feet of the 1.3 billion cubic feet that is estimated to be produced from the reserve, and to use the remaining production capacity to accommodate federal users’ needs and deliver a percentage of the privately owned helium stored in the reserve (see table 2). For the fiscal year 2016 one-time sale, BLM proposed to offer 250 million cubic feet of helium. In its proposed implementation plan, BLM stated its intent to auction 10 percent of the 928 million cubic feet that BLM will make available for fiscal year 2015 to qualified bidders, including refiners and nonrefiners. In Phase B, BLM is generally required to auction an increasing amount of the helium made available for each fiscal year, beginning with helium available for fiscal year 2015. Specifically, for fiscal year 2015, BLM is required to auction 10 percent of the total volume of crude helium made available for that fiscal year, but the agency is authorized to adjust that quantity in certain circumstances.to adjust the auction amount for fiscal year 2015 to minimize potential market disruption. BLM officials told us they decided not BLM’s proposed plan includes making Phase B sale volumes available only to refiners, which is a departure from BLM’s prior practice, including for Phase A. In the past, sale volumes were divided into two portions, one offered to refiners and one offered first to nonrefiners. With the introduction of auctions in Phase B, BLM has proposed to divide the total helium made available each year into two different portions—a sale volume available only to refiners and an auction volume available to all qualified bidders, including, but not limited to, nonrefiners. Some nonrefiners have raised a concern about this approach since they would no longer be permitted to purchase any of the helium that will be offered for sale. As a result, they stated, fewer nonrefiners are likely to end up purchasing federal helium because they may be outbid in the auction by the refiners. The act does not contain language specifying which parties are eligible to participate in the Phase B sales but, according to BLM officials, the act intended to have the auctions replace the portion of the sales that were previously available to nonrefiners. BLM’s proposed implementation plan also includes a calculation of the minimum auction price for fiscal year 2015 and a formula for calculating the sales price for fiscal year 2015 and the fiscal year 2016 one-time sale. BLM officials told us they did not have time to contract for a market survey of relevant domestic transactions by an independent third party to inform these prices, one of the options provided for in the act’s price- setting provision. As a result, BLM is basing its minimum auction price on the fiscal year 2014 sales price, adjusted for inflation. BLM’s price for the fiscal year 2015 sale and the fiscal year 2016 one-time sale is based on the adjusted fiscal year 2014 sales price as well, but it also takes the average auction price into account. BLM officials told us they do not intend to use this approach in the future to set prices but, rather, they plan to contract for an independent market survey to inform the prices for the sale and auction of the remaining fiscal year 2016 helium. In its May 2014 Federal Register notice, BLM did not directly address how it will implement the act’s disclosure requirement for the fiscal year 2015 sale and auction and fiscal year 2016 one-time sale. However, BLM officials told us they intend to follow procedures similar to those used for the Phase A sales, that is, having only sale and auction participants respond to the act’s disclosure requirement. BLM faces challenges in implementing the act’s tolling provision and incentivizing tolling. The tolling provision was intended, according to a relevant Senate committee report, to maximize participation in helium sales in Phases A and B. Without a way to have helium refined, there would be less or no interest in purchasing helium by nonrefiners. As of May 1, 2014, refiners had agreed to toll about one-quarter of the crude helium purchased by nonrefiners in the January 2014 Phase A sale. The Helium Stewardship Act of 2013 provides that refiners, as a condition of sale or auction, make excess refining capacity available at commercially reasonable rates to certain entities. In implementing this provision, however, BLM faces challenges in knowing whether refiners (1) have excess refining capacity available and (2) if so, are offering tolling services to nonrefiners at commercially reasonable rates. In implementing the act’s tolling provision, BLM faces the challenge of verifying whether the refiners have excess refining capacity available. Although BLM asked refiners to report excess refining capacity in January 2014 as part of the Phase A sales, BLM did not define the term “excess refining capacity” because, according to BLM officials, they were still in the process of interpreting the act. Moreover, BLM did not request information regarding how refiners determined their excess refining capacity or supporting documentation. By not defining excess refining capacity, or asking how the refiners calculated it, BLM does not know how the refiners calculated the amounts they reported and whether the four refiners calculated those amounts in the same way. In advance of the January 2014 Phase A sale, refiners reported a total of 50 million cubic feet of excess refining capacity for the last 8 months of fiscal year 2014. BLM officials and some nonrefiners told us they questioned why refiners would have so little excess refining capacity available when BLM had announced it would produce and deliver a few hundred million cubic feet less federal helium during fiscal year 2014 than it had produced and delivered—and that refiners had processed—during fiscal year 2013. However, refiners reported multiple reasons why they had limited excess capacity, including that plants connected to the pipeline also process crude helium from privately owned natural gas deposits. In our interviews with refiners, they described different methods for calculating the excess refining capacity that they reported to BLM. For example, some refiners used formulas that accounted for multiple variables, including seasonality, interruptions, supply, total refining capacity, and existing contracts, while others used simpler formulas. Moreover, it is unclear whether BLM expected refiners to include refining plants or units that are currently nonoperational but that could become operational later in the year in their calculations of total refining capacity. In preparation for Phase B and the fiscal year 2015 auction and sale, BLM officials said they are taking steps to improve their ability to determine whether refiners have accurately reported excess refining capacity. BLM posted a data collection form on its website on June 2, 2014, for refiners to use when reporting excess refining capacity; the form includes a definition of excess refining capacity. The form provides guidance on how BLM expects refiners to report excess refining capacity, but some nonrefiners commented to BLM that this definition leaves room for different interpretations. For example, BLM asks refiners to report “planned demand” for the applicable fiscal year in order to determine excess capacity. BLM, however, does not make clear whether such demand should already be under contract or just anticipated at the time its form is submitted. BLM also is requiring refiners to certify the accuracy of their reports of excess refining capacity on this form and to update it within 2 weeks if the reported data vary by 10 percent at any time. If a refiner fails to report excess refining capacity or to update BLM when the data change, BLM is proposing to bar that refiner from participation in helium auctions and/or sales. However, BLM has not specified for how long or from which auctions or sales such a refiner would be barred. We plan to conduct additional work after the July 2014 auction and sales on BLM’s efforts to obtain excess refining capacity data from refiners using its data collection form. Therefore, we are not making any recommendations at this time. BLM is also challenged in determining whether refiners that reported having excess refining capacity are offering tolling services at “commercially reasonable rates,” as required by the act. BLM did not define commercially reasonable rates for Phase A or identify criteria it would use to evaluate offered rates. As a result, BLM officials told us they did not make determinations of whether the rates offered by refiners in Phase A were commercially reasonable. Moreover, BLM officials told us they do not intend to define commercially reasonable rates or identify criteria for evaluating such rates for the upcoming July 2014 Phase B auction and sales. Until BLM identifies criteria or a definition of what constitutes a commercially reasonable rate, it is unclear how BLM would implement the tolling provision, if necessary. BLM officials told us they are not planning on defining commercially reasonable rates because it is more appropriate for the companies or a court to make that determination. BLM officials said they do not have complete information about the full spectrum of refiners’ costs that are included in their tolling rates. Also, these officials said that refiners and nonrefiners are interpreting what is a commercially reasonable rate differently and that the officials are hesitant to be drawn into that dispute. BLM officials told us they would have a hard time finding that a rate was not reasonable if the parties involved agreed to it. These officials said they received multiple comments from refiners, nonrefiners, and helium end users that support BLM’s “hands-off” approach to determining what is a commercially reasonable rate. However, some of the nonrefiners we interviewed said that they would like BLM to be more involved in setting a commercially reasonable rate. We plan to conduct additional work after the July 2014 auction and sales on BLM’s implementation of the tolling provision. Therefore, we are not making any recommendations at this time. BLM officials told us that they are considering a variety of ways of delivering helium in Phase B that would incentivize refiners to toll. However, the agency’s ability to create incentives is restricted by the terms of existing storage contracts that predate the act and remain in effect until September 30, 2015. Under the existing contracts—which the act does not affect or diminish—BLM’s delivery of helium through the pipeline is based on the refining capacities of the four refiners in 2000. For example, if BLM delivered 100 million cubic feet of helium into the pipeline over the course of a month, that amount would be divided among the refiners per the allocations determined by their 2000 refining capacities (see table 3). Therefore, for nonrefiners to actually receive helium they have purchased from BLM, one or more of the refiners’ allocations would need to be reduced so it could be delivered.helium that could be delivered to a refiner for its own use, potentially meaning lost revenue for that refiner. Some of the refiners we spoke with said this reduction in the volume of helium they would receive is a significant reason why they have been reluctant or unable to toll. This directly reduces the amount of In planning for the fiscal year 2015 auction and sale, BLM officials told us they considered various ways to address this delivery issue within the confines of the existing storage contracts. In its May 16, 2014, Federal Register notice, BLM proposed reducing the total volume of helium that is subject to the delivery allocations. This approach could allow BLM to deliver any helium that nonrefiners purchased at auction separately from helium that is subject to the allocations. Under this approach, tolling could represent an opportunity for refiners to receive helium they otherwise would not be receiving. BLM and other Interior officials told us they believe the existing storage contracts provide the flexibility to BLM to make such adjustments. At least one refiner, however, has notified BLM that it finds that BLM’s interpretation violates the act and the terms of the current storage contract. Although potentially significant for fiscal year 2015, the challenges posed by the existing storage contracts may be reduced under certain market conditions. Specifically, BLM officials noted that the disincentive may be moot if refiners are not interested in receiving their full allocation of helium each month. For example, although the refiners have used their full allocations since fiscal year 2010, according to BLM officials, some refiners recently notified BLM that they are reducing their requested monthly delivery amounts from the pipeline because additional helium supplies have become available from other, private sources in other locations in the world. According to these officials, these conditions could make tolling more likely because, if refiners were accepting less helium from the federal system for their own use, they could have excess refining capacity available in their plants on the pipeline. At least one nonrefiner told us, however, that the availability of the additional supplies from other sources means they are not interested in having their federal helium tolled. Furthermore, this challenge could be alleviated when new storage contracts are signed. BLM officials told us they plan to begin developing the terms of new storage contracts, and these contracts will go into effect in fiscal year 2016. These officials said they can modify the delivery allocations in the new contracts so that delivery of nonrefiners’ helium does not result in a reduction of a refiner’s delivered volume and instead would represent an opportunity for the refiner to accept delivery of helium it otherwise would not have received. However, even with an incentive from BLM, refiners’ and nonrefiners’ conflicting interests will make it challenging for tolling to occur. BLM officials said that, even if refiners report having excess refining capacity, and that capacity is offered at commercially reasonable rates, the parties may still have difficulty finding mutually agreeable terms for delivering the refined helium. These officials said a major reason why more tolling has not occurred is that refiners and nonrefiners disagree over delivery terms. For example, some nonrefiners told us they are looking for some assurance of when and how much refined helium the refiners will deliver to them in certain months. Such an agreement might specify an overall volume to be tolled spread out over a number of months. These nonrefiners said they need some predictability so they can meet contractual obligations with their customers. However, some refiners said they cannot offer predictable volumes to nonrefiners, both because of existing obligations to their own customers and because their supplies are subject to interruptions that occur in the federal helium system, such as unexpected plant shutdowns. Some of these refiners told us they would offer to toll for nonrefiners as capacity comes available, but some of the nonrefiners we interviewed said that they are typically unable to use helium offered on short notice, in part because they need to secure commitments to provide refined helium in advance in order to satisfy their existing contracts. Chairman Lamborn, Ranking Member Holt, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions 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. Other individuals who made key contributions to this testimony include Jeff Malcolm (Assistant Director), Cheryl Arvidson, Carol Bray, Juli Digate, Leslie Kaas Pollock, and Jeanette Soares. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government and the private sector use helium, a key nonrenewable resource, for a variety of purposes, including research and manufacturing. As of September 30, 2013, BLM was storing about 9 billion cubic feet of federally owned crude helium and almost 2 billion cubic feet of privately owned crude helium in an underground federal reserve. Helium produced from the reserve represents 40 percent of the total U.S. production. The Helium Stewardship Act of 2013 is intended to complete the privatization of the federal helium reserve in a competitive market fashion that ensures stability in the helium markets, while protecting the interests of American taxpayers. It establishes a phased process through fiscal year 2021 to dispose of the remaining helium. Phase A is a transition period of helium sales, and Phase B consists of auctions in addition to sales. This testimony describes (1) BLM's initial implementation of the act and (2) challenges, if any, BLM faces in implementing and incentivizing tolling—when a helium refiner processes or refines another party's crude helium at an agreed upon price. GAO examined helium sales documents and BLM's proposed plan for implementing the act; visited BLM's Amarillo Field Office near the reserve to review documents and observe the helium facilities; interviewed BLM and other Interior officials; and interviewed representatives from four refiners and four nonrefiners that participated in recent sales. GAO is not making any recommendations in this testimony. The Department of the Interior's (Interior) Bureau of Land Management (BLM) has taken a number of actions to begin implementing the Helium Stewardship Act of 2013, including (1) estimating volumes of helium that can be produced from the federal helium reserve each year, (2) preparing for and conducting helium sales under the act's Phase A transition period, and (3) initiating planning for the act's Phase B, which introduces a competitive auction process for crude helium along with continued sales. First, BLM estimated the amount of crude helium that can be produced from the reserve each year based on a geologic model. Second, under Phase A, BLM determined sale volumes, set the sale price and required participants to disclose certain information, among other things. Third, BLM has begun planning for the required Phase B auction and sale of helium for fiscal year 2015 and a one-time sale of a portion of the helium that will be made available in fiscal year 2016. BLM plans to hold this auction and these sales in July 2014 to comply with an August 1, 2014, statutory deadline. BLM officials told us the agency plans to offer for auction or sale most of the helium estimated to be produced in fiscal year 2015 and use the remainder to meet federal users' needs and to deliver privately owned helium to refiners for processing. However, refiners disagree with the agency's approach, stating the act requires BLM to offer for auction or sale the maximum amount that it can produce from the reserve each year. BLM officials said they are taking this approach to help ensure that the agency can deliver the privately owned helium that remains in storage before the end of fiscal year 2021. BLM faces challenges in implementing the act's tolling provision and identifying incentives. Under the provision, refiners, as a condition of sale or auction in Phases A and B, are to make excess refining capacity available at commercially reasonable rates to certain entities. In implementing this provision, however, BLM faces challenges in knowing whether refiners (1) have excess refining capacity available and (2) if so, are offering tolling services to nonrefiners at commercially reasonable rates. For example, although BLM asked refiners to report excess refining capacity as a condition of the Phase A sales, BLM did not define the term “excess refining capacity” because, according to BLM officials, they were still in the process of interpreting the act. According to refiners GAO interviewed, they used different methods to calculate the excess refining capacity they reported to BLM. In preparation for Phase B and the fiscal year 2015 auction and sale, BLM has proposed a definition of excess refining capacity, although some nonrefiners noted that it leaves room for interpretation. Regarding rates, BLM has not defined or identified criteria for determining what is a commercially reasonable rate. BLM officials said they prefer to take a “hands off” approach, allowing the companies involved and the marketplace to determine what is commercially reasonable, but it is unclear how BLM would implement the tolling provision without a definition or criteria for what is commercially reasonable. Moreover, BLM officials told GAO that they are considering various ways to incentivize tolling by refiners, but the agency's ability to create incentives is limited by the terms of existing contracts governing helium delivery that remain in effect through fiscal year 2015. GAO plans to conduct additional work after the July 2014 auction and sales on BLM's implementation of the act's tolling provision. Therefore, GAO is not making any recommendations at this time. |
By way of providing context for our examination of U.S. trade policy as it relates to TPA guidance and the Doha Declaration on TRIPS and Public Health, the following is an overview of ongoing U.S. government efforts to address the wider issue of access to medicine and public health both related and unrelated to IP, as well as how the WTO first became involved in public health issues, and the origin of IP and public health in TPA. The U.S. government has supported innovation, competition, and access to medicine. The Federal government, primarily through the National Institutes of Health (NIH), conducts and supports medical research, investing annually over $28 billion. About 55 percent of NIH’s budget supports basic research. While basic research may not have an immediate impact on drug innovation, such “untargeted” research often ultimately leads to developing new medicines and technologies. In principle, U.S. intellectual protection laws are designed to support innovation. Patents are considered to be especially valuable for innovations in pharmaceuticals. According to the pharmaceutical industry, IP protection is crucial to its ability to offer new, innovative medicines. Research and development of new drugs is very risky and time- consuming. The industry faces high fixed or “sunk” costs associated with lengthy discovery and clinical trials. Moreover, a large proportion of new drugs never make it to market due to their lack of efficacy or inadequate safety. Thus, drug companies seek a relatively high return on the medicines they do bring to market. U.S. patents give companies a 20-year period during which they have an exclusive right to make, sell, and use their invention. They use this period when they cannot be undercut by competitors to charge relatively higher prices, thus allowing them to recoup their investments and earn profits. However, the effective life of a patent is typically much shorter than this 20-year period, since the preclinical and clinical testing phases necessary for securing FDA marketing approvals can take more than a decade. Public policy has also played a role in fostering generic competition to hold down prices. Generic drugs--copies of brand-name drugs--can enter the market after the brand-name’s patent or other market exclusivities expire and FDA approval is granted. Under the Hatch-Waxman Act of 1984, generic manufacturers do not have to repeat expensive research and clinical trials to obtain approval. Instead, they only need to show the FDA that their drugs are bioequivalent to the branded medicines. Because they do not incur the same research and clinical trial expenditures, generic firms can enter the market more quickly once patents have expired and sell drugs at lower prices. Generic entry may also put pressure on innovator companies to develop more new drugs. Governments have also taken collective and individual steps to provide medicines—particularly since 2001. At the global level, funds for combating HIV/AIDS through the Global Fund to Combat AIDS, Tuberculosis and Malaria, established in 2003, and UNAIDS, established in 1994, have grown considerably since 2001. Among other things, the United States established the President’s Emergency Plan for AIDS Relief, or PEPFAR, a 5-year, $15 billion initiative run by the Office of the Global AIDS Coordinator at State, which has supported HIV prevention activities, antiretroviral treatment and training, and HIV-related care and training at more than 15,000 project sites primarily in 15 focus countries, mainly in sub-Saharan Africa. More affluent developing countries, such as Brazil and Thailand, have themselves been taking more aggressive steps to combat AIDS and improve access, including universal access schemes paid for with public funds. Some of these government efforts have been undertaken with private sector support. The research-based pharmaceutical industry has engaged in private-public partnerships to address neglected diseases found in poor countries, such as tuberculosis and malaria. Research-based pharmaceutical companies have also instituted pricing schemes whereby the same drug is sold at different prices, depending on the consumer’s or country’s ability to pay. Ensuring that the supply remains in the intended market, not resold elsewhere, is critical to this strategy’s success, but can be problematic. Governments have also supported industry efforts to donate medicines outright—about $4.4 billion worth of medicines and other medical help over the 2000-2005 period, according to estimates by the London School of Economics. Despite government and industry initiatives, available data suggest that many people currently lack access to existing medicines. According to the World Health Organization (WHO), one third of the global population does not have regular access to essential medicines. This matters: WHO estimates that over 10.5 million lives a year could be saved by 2015 by scaling up access to existing interventions for infectious diseases, maternal and child health, and noncommunicable diseases. Indeed, WHO says unaffordable prices of medicine and the need for new medicines for diseases that disproportionately affect lower income populations are among the primary challenges in expanding access to medicines globally. According to WHO, in developing countries today, medicines account for up to 70 percent of health care expenditure. This compares to less than 15 percent in most high income countries, and about 10 cents of every health care dollar spent in the United States in 2005. Because of this imbalance in health care expenditure worldwide, WHO’s various projects on access to medicines and IP rights continue. The Group of 8 Industrialized Nations, the Organization for Economic Cooperation and Development (OECD), and the United Nations Conference on Trade and Development (UNCTAD) are among the other organizations that have also undertaken efforts to address aspects of the issue. The April 1994 Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations led to the establishment of WTO on January 1, 1995. The Uruguay round was the product of long and complex negotiations that not only liberalized manufactured goods trade in such sectors as apparel, but also added IP and services rules and obligations to the trading system. The WTO TRIPS Agreement was part of the Uruguay Round’s results and established minimum levels of protection that each government has to give to IP of fellow WTO members. The United States had fought hard to secure worldwide adoption of minimum IP protection and enforcement standards through TRIPS as home to the world’s largest and most innovative pharmaceutical industry. TRIPS extended patent protection for inventions of both products and processes, while allowing certain exceptions, for at least 20 years. It also required WTO members, when requiring as a condition of marketing approval the submission of undisclosed test data or other data (such as data submitted to health authorities for regulatory approval of pharmaceutical safety), the origination of which involves considerable effort, to protect such data, against unfair commercial use. When all of the WTO agreements took effect, developed countries were given 1 year to ensure their laws and practices conformed with TRIPS, but developing countries were given transition periods of 5 or more years. Even so, many developing countries complained about having to comply with the new requirements. The issue of IP and access to medicine came to a head at WTO in 2001 when the HIV/AIDS pandemic in sub-Saharan Africa was reaching catastrophic levels. Separately, South Africa attempted to use its laws to lower prices for imported medicines, but faced opposition from U.S. and other drug companies that felt its actions compromised their rights. Brazil and the United States, meanwhile, were in dispute over a Brazilian law that could make exceptions to patents if products were not manufactured in Brazil. Nongovernmental organizations (NGO) became involved in discussing the implications of TRIPS to public health. Shortly after WTO adopted the Declaration on TRIPS and Public Health, Congress passed the Trade Act of 2002, which granted the President Trade Promotion Authority (TPA) for reciprocal trade agreements to liberalize U.S. trade with foreign nations. TPA contains guidance from Congress concerning U.S. goals in negotiated trade agreements. One of the three goals for IP specified in TPA, “to respect the Doha Declaration on TRIPS and Public Health,” was added in response to an amendment by Senator Edward Kennedy. In his remarks about the amendment, Senator Kennedy explained that the Declaration on TRIPS and Public Health struck a balance between the legitimate interests of intellectual property protection and the preservation of public health. Senator Kennedy went on to assert that “his amendment directs our trade negotiators to support the declaration without reservation.” Senators Grassley and Baucus also asserted their support for the amendment and emphasized the importance of IP issues with respect to public health and innovation of new medicines. Congress otherwise provided no guidance at the time on how to interpret and apply this TPA objective. Recently, in response to the expiration of the President’s Trade Promotion Authority (TPA) on June 30, 2007, before the Doha round of global trade talks had been successfully concluded, there have been some calls to renew it. To help address public health problems affecting many developing countries, WTO members adopted the Doha Declaration (reprinted in full below) to stress the importance of implementing the TRIPS agreement in a manner supportive of public health. As part of a carefully worded compromise among competing perspectives, this statement was placed in the context of shared challenges and goals, such as promoting both access to existing medicines and research into and development of new medicines. The United States interprets the declaration as a political statement recognizing public health crises and affirming the importance of IP protection that neither changes existing TRIPS obligations nor creates new obligations, and does not assign public health greater priority than IP protection. Significantly, the declaration clarifies certain flexibilities explicit in TRIPS that allow WTO members to address public health crises. USTR argues that these flexibilities should be applied judiciously and subject to certain conditions specified in the TRIPS agreement. Some developing countries, however, believe these flexibilities provide broad discretion to ensure access to medicines when IP regulations present barriers to addressing not only health issues, but also social welfare. Differences over a narrower versus broader interpretations continued long after the declaration. Notably, debate over how to help countries with little or no pharmaceuticals manufacturing capacity take full advantage of the flexibilities, including which members should be eligible and for what diseases, became controversial. Declaration on the TRIPS Agreement and Public Health 1. We recognize the gravity of the public health problems afflicting many developing and least-developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics. 2. We stress the need for the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) to be part of the wider national and international action to address these problems. 3. We recognize that intellectual property protection is important for the development of new medicines. We also recognize the concerns about its effects on prices. 4. We agree that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO Members’ right to protect public health and, in particular, to promote access to medicines for all. In this connection, we reaffirm the right of WTO Members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose. 5. Accordingly and in the light of paragraph 4 above, while maintaining our commitments in the TRIPS Agreement, we recognize that these flexibilities include: a. In applying the customary rules of interpretation of public international law, each provision of the TRIPS Agreement shall be read in the light of the object and purpose of the Agreement as expressed, in particular, in its objectives and principles. b. Each Member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted. c. Each Member has the right to determine what constitutes a national emergency or other circumstances of extreme urgency, it being understood that public health crises, including those relating to HIV/AIDS, tuberculosis, malaria and other epidemics, can represent a national emergency or other circumstances of extreme urgency. d. The effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of intellectual property rights is to leave each Member free to establish its own regime for such exhaustion without challenge, subject to the MFN and national treatment provisions of Articles 3 and 4. 6. We recognize that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement. We instruct the Council for TRIPS to find an expeditious solution to this problem and to report to the General Council before the end of 2002. 7. We reaffirm the commitment of developed-country Members to provide incentives to their enterprises and institutions to promote and encourage technology transfer to least- developed country Members pursuant to Article 66.2. We also agree that the least- developed country Members will not be obliged, with respect to pharmaceutical products, to implement or apply Sections 5 and 7 of Part II of the TRIPS Agreement or to enforce rights provided for under these Sections until 1 January 2016, without prejudice to the right of least-developed country members to seek other extensions of the transition periods as provided for in Article 66.1 of the TRIPS Agreement. We instruct the Council for TRIPS to take the necessary action to give effect to this pursuant to Article 66.1 of the TRIPS Agreement. In the wake of the HIV/AIDS crisis at the time, some WTO members were concerned about the extent to which the TRIPS agreement allowed them to address public health needs. The African members known as the African Group were among the members pushing for clarification. WTO members formally addressed this issue in the main Doha Ministerial Declaration and their intention to adopt a separate declaration, as shown below. Ministerial Declaration - Fourth Session November 2001 We stress the importance we attach to implementation and interpretation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) in a manner supportive of public health, by promoting both access to medicines and research and development into new medicines and, in this connection, are adopting a separate Declaration. The Doha Declaration is divided into seven paragraphs. Paragraphs one through four are general principles that WTO members agreed to that describe the relationship between IP rights and public health. Paragraph five lays out specific flexibilities provided in TRIPS that can be used by WTO members to address public health related problems. Below is a summary of these flexibilities: 5(a) that each provision in TRIPS should be read in light of the agreement’s objectives and principles; 5(b) the right to grant compulsory licenses. The WTO fact sheet on TRIPS and pharmaceuticals describes the term compulsory licensing as when a government allows someone else to produce the patented product or process without the consent of the patent owner—in this case in reference to pharmaceuticals, but it could also apply to patents in any field.5 (c) the right to determine what is a national emergency; and 5 (d) the right to establish an exhaustion regime without challenge. The WTO fact sheet on TRIPS and pharmaceuticals describes the term exhaustion as a legal principle consisting of the idea that once a company (patent holder) has sold a batch of its product, its patent distribution rights are exhausted with respect to that batch, and it no longer has any rights to control distribution of that batch. Exhaustion is the legal principal behind parallel imports. WTO members appear to agree that the TRIPS and Public Health declaration makes no change to TRIPS itself. However, two changes are foreshadowed. Specifically, paragraphs six and seven calls upon WTO members to take future action in specific areas. Paragraph six mandates WTO members to resolve a potential problem with regard to compulsory licensing by WTO members with insufficient or no pharmaceutical manufacturing capacities. Because TRIPS specifies that a country may only compulsory license primarily for supplying the domestic market, countries with little or no manufacturing capacity (and therefore no domestic company to which the government could grant a compulsory license) could face difficulties in effectively using compulsory licensing. They must import their medicines, but the supplier (the exporter) would be prevented under TRIPS from exporting them the patented medicines under a compulsory license if the product was patented in its territory. Paragraph seven instructs WTO members to take the steps necessary to extend the deadline from for least developed countries to implement their TRIPS obligations with respect to pharmaceutical products to 2016. The United States believes that the declaration does not change existing TRIPS obligations or create new rights, nor does it give public health greater priority than IP protection. Overall, leading up to Doha and since, the United States has consistently opposed creating broader exemptions to TRIPS to protect public health, but instead has called for permitting targeted exceptions to TRIPS to avoid eroding patent protections that it deems necessary for research and development of medicines to treat life- threatening diseases. Some developing countries had wanted to modify TRIPS provisions if they were considered insufficient to protect public health. According to a USTR official, paragraph four of the declaration–“The TRIPS agreement does not and should not prevent members from taking measures to protect public health.”—does not provide a broad exception in TRIPS for public health purposes and in addition, the provision should be considered in context with the rest of the declaration. Some developing countries had originally called for the declaration to have stronger language–”Nothing in the TRIPS agreement should prevent Members from taking measures to protect public health.”–in an attempt to make the declaration legally binding. With regard to paragraph five, which enumerates flexibilities in TRIPS that may be used to address public health, the United States supports the view that these flexibilities preserve the ability of members to formulate public health policies while also maintaining effective patent systems. But some developing countries see paragraph five as providing broader discretion to address public health. For example, a group of developing countries, including the African Group, Brazil, India, and Thailand, has maintained that there should be a common understanding that confirms the right of governments to ensure access to medicines at affordable prices and to make use of TRIPS provisions whenever the scope or exercise of IP regulations results in barriers to access to medicine. These members believe that TRIPS objectives and principles (referred to in the last phrase in paragraph five (a) of the declaration) support the view that TRIPS protections are and should be contingent on IP rights contributing to social goals, such as nutrition and social and economic welfare. (TRIPS objectives and principles are found in articles 7 and 8 respectively, shown below). TRIPS Article 7 – Objectives The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technology knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations. TRIPS Article 8 – Principles 1. Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement. 2. Appropriate measures, provided that they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology. The United States has maintained that, rather than impeding access to medicines, patent regimes meet the objectives of article 7 by contributing to the promotion of technological innovation and dissemination of technology. Furthermore, the United States has argued that the final clause in article 8–”provided that such measures are consistent with the provisions of Agreement”–precluded article 8 from providing such a broad exception to the obligations of TRIPS. The European Union (EU), Switzerland, and Japan were concerned that the countries were suggesting the ability to make significant exceptions to patent protection under TRIPS. The interpretation of paragraph five (b) on compulsory licensing has sparked the most controversy among WTO members. The WTO fact sheet on TRIPS and pharmaceuticals describes the declaration as affirming compulsory licensing as part of its overall attempt to strike a balance between promoting access to existing drugs and promoting research and development into new drugs. Significantly, the declaration clarifies that WTO members can determine the grounds for issuing a compulsory license. This is because TRIPS does not specifically list the reasons that might be used to justify compulsory licensing, but rather enumerates a number of conditions for doing so. During the debate over the declaration, the United States stressed that, while it considered compulsory licensing to sometimes be appropriate, it believed its widespread use for any purpose could have negative implications for the patent system and, more importantly, for the availability and development of new drugs. Moreover, the United States argued using compulsory licensing as a mechanism for directing industrial policy or protecting domestic industries against foreign competition would be contrary to the letter and purpose of TRIPS. In addition, USTR emphasizes that while the declaration is clear that members can determine the grounds for compulsory licensing, they still must meet certain conditions articulated in TRIPS article 31. These are aimed at protecting the legitimate interests of the patent holder when circumstances allow compulsory licensing and government use of a patent without the authorization of the patent holder. Summarized below are some relevant excerpts from selected article 31—”Other use without authorization of the patent holder”—provisions, including important exceptions in recognition of the fact that time can be of the essence in some situations, such as national emergencies. Basically, with some exceptions, whoever issues a compulsory license must first inform the patent holder and seek to obtain authorization (voluntary license) from the patent holder. In all cases, they must remunerate the patent holder. Summaries of article 31(b) (h) (k) provisions: Prior to use, user makes effort to obtain authorization from the patent holder on reasonable commercial terms and conditions within a reasonable period of time. Above authorization requirement may be waived in cases of national emergency or other circumstances of extreme urgency to correct anticompetitive practices as determined by judicial or administrative processes. notified as soon as reasonably practicable in case of national informed promptly in case of noncommercial use Patent holder shall receive adequate remuneration. Some developing countries, including the African Group, Brazil, India, and Thailand, expressed the view that the TRIPS agreement in no way stands in the way of public health protection, and therefore that it should provide the broadest flexibility for the use of compulsory licensing to obtain lower cost medicines. Differences over compulsory licensing have continued to reemerge, including later during the later debate over how to resolve the paragraph six problem. Finally, the United States and some WTO members have different interpretations of paragraph five (d), which says that TRIPS leaves each member free from challenge to establish its own exhaustion regime, based on TRIPS article 6 (shown below). TRIPS Article 6 – Exhaustion For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4, nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights. The United States stated during the debate leading up to the declaration that it did not interpret this to mean that TRIPS permits parallel imports, and expressed misgivings about their use. To be specific, USTR pointed out that permitting parallel imports inhibits the patent holder’s willingness to offer prices differentiated according to countries’ ability to pay. This is because, when prices are higher in one country than in others, there is a tendency for diversion to higher income countries. These are precisely the markets where patent owners want to maintain high prices in order to recoup costs and earn the profits that fund future research. This differential pricing has been a key feature of pharmaceutical industry efforts to promote improved access to medicine since the Doha Declaration. In contrast to the U.S. position, some developing countries, including the African Group, Brazil, India, and Thailand, called parallel importation a significant way of increasing access to medicines, particularly for developing countries, and a relevant tool when compulsory licenses may be ineffective. Differences over whether the use of compulsory licensing should be restricted or widespread continued during the subsequent debate leading up to the 2003 Council Decision on the Implementation of Paragraph Six. The United States believed that situations requiring a compulsory license for export (sometimes referred to as the “paragraph six solution”) would likely be somewhat limited but emphasized that the grave health problems faced by certain developing and least developed countries made a solution imperative. The United States called for restricting compulsory licensing for export to a narrower set of scenarios to ensure that only countries facing genuine crises and with no effective manufacturing capacity could use it. WTO members disagreed about the legal means to address paragraph six and its scope and coverage, including which members should participate in the solution and for what diseases. During deliberations in 2001 leading up to the Declaration, the United States maintained that situations requiring a paragraph six solution would likely remain somewhat limited in the near term, but recognized that the grave health problems faced by certain developing and least developed countries foreshadowed serious consequences should they occur. First, difficulties falling under paragraph six would only be expected to arise when pharmaceuticals were not provided by the patent holder through normal commercial arrangements or through discount, donation, or other aid programs. In addition, a paragraph six solution would only apply if a patent existed in the WTO member country or territory that was exporting the pharmaceutical. However, some developing countries at the time were not obligated to provide patents until January 2005, most notably India. The legal mechanism by which to address paragraph six could also affect the widespread use of compulsory licensing and the effective force of TRIPS obligations. WTO members had to decide whether to craft the paragraph six solution on the basis of TRIPS article 30 or on a waiver of article 31. The United States and the EU supported article 31. The United States argued that a targeted moratorium or waiver of obligations of TRIPS article 31(f) (see below) was the most expeditious, workable, transparent, sustainable, and legal solution. Essentially, the TRIPS requirement that compulsory licensing should be primarily for domestic use would be waived. “Other use without authorization of the patent holder” The African Group also supported the article 31 approach and had laid out several options for doing so. Above all, however, they said that they wanted an expeditious solution. According to WTO officials, there was a tacit agreement among the WTO members that the African Group “had the moral high ground” on this issue because the HIV/AIDS pandemic was so acute in Africa. Alternatively, countries such as Brazil, India, and Thailand argued that the best solution was to interpret TRIPS article 30 (see below) so as to recognize the right of WTO members to authorize third parties to make, sell, and export patented public-health-related products, without the consent of the patent holder to address the public health needs in another country. These acts would be considered “limited exceptions to the exclusive rights” conferred by patents. The countries argued that an authoritative interpretation of article 30 would also have the advantage of avoiding the potentially cumbersome requirement under a waiver of article 31(f) that the exporting country must also grant a compulsory license as well as change its own laws to allow compulsory licensing for exporting. Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties. USTR contended that such a broad reinterpretation of article 30 allowing members to amend their patent laws to permit compulsory licenses would unreasonably conflict with patent owners’ normal exploitation of patents and with their legitimate interests. Furthermore, unlike article 31, article 30 contains no procedural safeguards, such as requirements for notifying a patent owner of use, establishing terms and conditions, or remuneration to the patent holder. USTR stated that creating an exception through article 30 was hard to defend legally as being consistent with TRIPS. Moreover, it contended that there was too much danger that such an exception would be misused and thus subject to dispute settlement challenge. The question of which countries should be able to take advantage of a paragraph six solution also provoked controversy. Basically, the United States and other WTO members with large name-brand pharmaceutical industries, including the EU and Switzerland, wanted the paragraph six solution to focus on developing and least developed countries lacking pharmaceutical manufacturing capacity as importing beneficiaries. The United States wanted to establish specific procedures to clarify which developing country members could be considered to have insufficient or no manufacturing ability, and thought it inappropriate to extend the solution to developed countries or to countries that had manufacturing capacity but chose not to manufacture certain drugs based on policy, economic, or other reasons. WTO officials told us they tried to collect data on manufacturing capability, but could find none. Ultimately, the 2003 Council Decision required importing countries to explain how they had no or insufficient manufacturing capacity for the product in question. After facing strong resistance from other WTO members, the United States did not insist on a specific list of eligible countries. However, the United States maintained that not every member country should be able to use a paragraph six solution, and suggested that some members, such as OECD countries and certain developing countries opt out. WTO officials told us that the United States put pressure on many countries to opt out. In the end, 23 developed countries agreed to opt out, and the 10 countries soon to join the EU partially opted out, with agreement to opt out completely after they joined the EU. Finally, some other WTO members agreed that they would only use the system as importers in situations of national emergency or other circumstances of extreme urgency. The other controversial issue was the scope of diseases to be covered under paragraph six of the declaration. In November and December 2002, the United States said that it was willing to join the consensus on all of a paragraph six solution draft except for language on the scope of diseases. The United States, the EU, and Japan wanted coverage limited to the diseases mentioned in paragraph one of the declaration, namely “HIV/AIDS, TB, malaria and other epidemics” of potentially pandemic proportions. Others, including Brazil and Argentina, disagreed and wanted no restrictions on diseases. According to WTO officials, some WTO members discussed using either paragraph one or paragraph four–“access to medicine for all”–of the declaration to address the scope of diseases, and settled on the former after being reassured that the declaration did not restrict itself to specific diseases. According to WTO officials, in April 2003, the new TRIPS Council Chair, Singapore, conferred with the United States and the U.S. pharmaceutical industry, drafted a new paragraph six text, and led negotiations among a few members—namely, South Africa, Kenya, Brazil, India, and the United States. USTR officials noted that this group of countries represented the spectrum of views on this debate. The final text contained no specifics on diseases, but relied on paragraph one of the declaration. USTR officials emphasized that the United States ultimately conditioned its consensus with a paragraph six solution on a statement by the chairman of the General Council that signaled that diversion was a key issue. WTO members generally agreed diversion should be prevented to ensure that drugs provided under the paragraph six solution went where intended. The separate statement by the General Council chairman was designed to alleviate fears that the decision might be abused and undermine patent protection or not effectively prevent drugs from being diverted. The General Council chairman stated that, before adopting the decision, he wanted to place on the record “this Statement which represents several key shared understandings of Members regarding the Decision to be taken and the way in which it will be interpreted and implemented.” He went on to state that members recognize that the purpose of the decision would be defeated if products were diverted from the markets for which they were intended, and that all reasonable measures should be taken to prevent such diversion. In addition, the chairman listed the WTO members that had agreed to opt out of using the system as importers. Ultimately, the outcome of the nearly 2-year debate over a paragraph six solution was the adoption of the 2003 General Council Decision in light of the General Council chairman’s statement. The decision waived the prohibition in TRIPS article 31(f) against exporting under a compulsory license to countries that cannot manufacture the pharmaceuticals themselves. USTR officials told us they considered it a positive outcome in that it provided a solution to the problem identified in paragraph six of the Doha Declaration, while preserving TRIPS rules and obligations. Other WTO members initially supported the outcome, but expressed some concern later. For example, the African Group suggested at a March 2005 meeting of the WTO TRIPS Council that the burden of using the decision was the reason why, up to that point, the 2003 Council Decision had not been used by a country to waive TRIPS rules and import generic versions of patented drugs under a compulsory license. One WTO representative told us more recently that he considered the waiver too complicated, calling the packaging and labeling requirements costly and draconian because of the need to change production lines. Under the waiver, countries can produce generic copies of patented products under compulsory licenses to export to eligible importing countries, subject to certain requirements and safeguards. The terms of the waiver are summarized below: Notify TRIPS Council: names, expected quantities, of drug. Other than least developed countries, establish insufficient or no manufacturing capacities for the product in question. Take reasonable measures within their means, with possible assistance from developed country members, to prevent exportation elsewhere (diversion). If product is patented in its territory, must grant or intend to grant a compulsory license in compliance with TRIPS Article 31. Remuneration waived if product is provided by exporting country. Make a determination of a national emergency, other circumstances of extreme urgency, or a case of public noncommercial use. Export only amount necessary to meet needs of eligible importing member. Export entirety of product produced under compulsory license to the eligible importing member(s) that has notified the TRIPS Council. Label product to identify it as being produced under the system established by the decision. Package and color uniquely, provided such distinction is feasible and does not significantly affect price. Publicize on a designated Web site distinguishing features and quantities of medicine exporting. Notify TRIPS Council: name of licensee, products, country to be supplied, and duration of license. Adequately remunerate patent holder in the exporting member. Ensure the availability of effective legal means to prevent the importation of products produced under the system established by the decision and diverted to their markets. According to USTR, in July 2004, the United States and Canada agreed to suspend applications, as between themselves, of a provision of the North American Free Trade Agreement (NAFTA) that parallels Article 31 (f) of the TRIPS agreement in order to ensure that Canada could export drugs under the terms of the 2003 Council Decision without violating NAFTA. The first and only WTO member to date to notify the WTO TRIPS Council of its intent to use a paragraph six solution was Rwanda, in July 2007. Debate at the WTO over the 2003 Council Decision still continued for another 2 years. In response to a call by some WTO members, principally driven by the African Group, to express the 2003 Council Decision in an amendment to TRIPS as a more permanent solution, the 2003 Decision also called for WTO members to prepare an amendment to replace the decision. As a result, the General Council issued a decision on December 6, 2005, adopting a protocol amendment that is open for members to accept. It will become effective once the amendment is accepted by two thirds of the WTO membership. Thus far, eight WTO members have accepted the amendment, including the United States, Switzerland, El Salvador, the Republic of Korea, Norway, India, the Philippines, and Israel. The drafting of the amendment turned into another 2-year struggle. According to USTR, the United States wanted to ensure that agreements made under the 2003 Council Decision were not changed in the amendment. To do this, USTR proposed to include the chairman’s statement as a footnote to the amendment. WTO members discussed the possible legal weight of a footnote. According to USTR, some members felt attaching the chairman’s statement as a footnote might give it too much legal weight. In addition, some members wanted to make changes to the original 2003 Decision in the amendment. Eventually, the footnote was dropped and the members agreed to have the chairman’s statement read orally, similar to the scenario followed in adopting the 2003 Council Decision. Despite losing the footnote, the United States believed it had achieved the delicate balance of preserving the solution agreed to under the 2003 Council Decision while promoting access to medicine with safeguards against diversion. In negotiating FTAs, USTR said it balances respect for the Doha Declaration with its other two IP negotiating objectives in TPA by consistently promoting high standards of IP protection similar to U.S. law, while making allowances for the two specific flexibilities mentioned in the declaration. For example, USTR makes concessions to developing countries on compulsory licensing and parallel importing provisions specifically cited in the declaration. However, USTR has continued to pursue other pharmaceutical-related IP provisions that it does not see as relevant or contrary to the Doha Declaration in all of its FTAs, such as data exclusivity, patent term extensions, and patent linkage. Reactions to USTR’s approach have been mixed. The pharmaceutical industry supports the inclusion of these protections in FTAs because it believes they are central to maintaining incentives for investment in research and development of new drugs. Some experts and public health advocates have raised concerns that USTR’s approach hinders generic competition, reducing access to medicines and thus violating the principles of the declaration. Finally, certain Members of Congress have expressed concern over the pharmaceutical-related IP provisions in FTAs with developing countries, and this concern was recently addressed through a bipartisan compromise between Congress and the administration. USTR has three principal negotiating objectives related to IP rights when negotiating FTAs with other countries. The Trade Act of 2002, which granted the President Trade Promotion Authority (TPA), contains guidance from Congress on U.S. negotiating objectives for trade agreements, including three goals on IP rights:1. to further promote adequate and effective protection of IP rights, including through ensuring that the provisions of any multilateral or bilateral trade agreement governing IP rights that is entered into by the United States reflect a standard of protection similar to that found in United States law; 2. to secure fair, equitable, and nondiscriminatory market access opportunities for United States persons that rely upon IP protection; and 3. to respect the Doha Declaration on the TRIPS Agreement and Public Health, adopted by the World Trade Organization (WTO). USTR officials explained that USTR believes it can simultaneously pursue policies that advance the first two objectives of promoting IP rights and securing market access, while fulfilling the third objective to respect the Doha Declaration. Specifically, the officials noted that in order to pursue the first two objectives in FTAs, USTR officials have negotiated high levels of IP protection in FTAs that reflect standards of protection similar to U.S. law, and build on the minimum standards in TRIPS. USTR officials stated that they pursue the second objective of securing market access for persons who rely on IP protection by ensuring that products benefit from the increased protection and market access in the FTAs. For example, USTR officials noted that FTAs with more developed countries have regulatory provisions for pharmaceuticals and medical devices on market approval, price controls, and reimbursement policies. USTR sees no inherent conflict between active pursuit of TPA’s first two objectives of promoting IP protection similar to U.S. law and market access opportunities, and the third objective of respecting the Doha Declaration, but rather considers these objectives complementary. USTR officials stated that USTR’s view is that IP rights ultimately enhance public health by promoting innovation for new medicines and that therefore this approach is consistent with the Doha Declaration. In response to the objectives laid out in TPA, USTR officials noted that they have pursued a menu of pharmaceutical-related IP provisions in its FTAs, including restrictions on compulsory licensing and parallel imports, and requirements to provide data exclusivity, patent term extensions, and patent linkage. Some of these pharmaceutical-related IP provisions go beyond the minimum levels of protection outlined in TRIPS, provoking complaints from some that they violate the principles and spirit of the Doha Declaration. However, USTR considers them consistent with its interpretation of the declaration’s intent and meaning and with TPA guidance. The FTA pharmaceutical-related IP provisions, to the extent that they are similar across the FTAs, have been summarized below. However, it is important to note that variations across the provisions exist and have not been presented in these summaries. Moreover, not every FTA reviewed contained every provision summarized below. Compulsory Licensing: Generally, provisions on compulsory licensing limit the ability of a country to issue a compulsory license to a few specific scenarios: to remedy anticompetitive practices in cases of public noncommercial use, in cases of national emergency, or other circumstances of extreme urgency. Parallel Imports: Generally, provisions on parallel importation require the country to preserve the patent owner’s exclusive right to sell or import its product in the country in a variety of contexts. Data Exclusivity: Generally, data exclusivity provisions state that a generic company cannot obtain marketing approval based on the safety and efficacy data of the innovator company for a period of at least 5 years from the date marketing approval was granted to the innovator. Thus, this provision provides the innovator 5 years of effective marketing exclusivity, unless the generic firm produces its own safety and efficacy data with new drug trials. Patent Term Extensions: Generally, patent term extension provisions require the country to provide a patent term extension to the patent owner to compensate for unreasonable delays in granting the patent, or for unreasonable curtailment of the effective patent term as a result of the marketing approval process. Patent Linkage: Generally, provisions on patent linkage establish a relationship between the market approval process of generic drugs and the patent status of the originator product. Under this relationship, the governmental body responsible for granting market approval prevents third parties from making or selling copies of patented products without the authorization of the patent holder by withholding marketing approval until either the expiration of the patent or a determination by a governmental body, either executive or judicial, that the patents are either not infringed, invalid or unenforceable. In addition, the identity of the generic company requesting marketing approval must be made available to the patent owner. Patent term extensions and patent linkage are two examples of pharmaceutical-related IP provisions the United States negotiates for in FTAs that go beyond the minimum obligations in the TRIPS agreement. TRIPS article 33, which lays out the term of protection for a patented product, states that “the term of protection available shall not end before the expiration of a period of twenty years counted from the filing date.” There is no mention of patent term extensions to make up for delays in the patent or marketing approval process in the TRIPS agreement. Nevertheless, these patent term extension provisions exist in U.S. law and according to USTR officials are negotiated by USTR in FTAs. In addition, there is no mention of coordination between the health regulatory authority and the patent granting office, known as patent linkage, in the TRIPS agreement. However, U.S. law does establish linkage between the FDA drug approval process of generics and the patent status of the originator product, and USTR believes that such linkage is important to restrict marketing of infringing copies of patented drug products. Whether FTA provisions on data exclusivity go beyond TRIPS is less clear. TRIPS article 39(3) states that members who require the submission of undisclosed test data as a condition of marketing approval for a pharmaceutical or agricultural chemical product shall protect the data from unfair commercial use and disclosure. TRIPS Article 39(3) Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use. There are different interpretations of the obligations under TRIPS 39(3), and exactly what practices can be considered a fulfillment of this obligation. One interpretation of TRIPS 39(3) requires members to grant the originator of the data a period of exclusive use similar to that provided by data exclusivity laws in the United States. Under this interpretation, FTA provisions do not go beyond TRIPS. Others do not believe that Article 39(3) of TRIPS confers exclusive rights, but instead simply requires countries to prevent third parties from using the originators’ data for unfair commercial purposes. This interpretation suggests that the FTA provision goes beyond the TRIPS requirement. USTR officials stated that they did not change the initial demands USTR makes in FTA negotiations as a result of the Doha Declaration. However, they argued that USTR follows TPA guidance to respect the Doha Declaration by making concessions during negotiations with what it considers to be developing countries on the two TRIPS flexibilities specifically mentioned in the declaration. USTR officials told us that when developing country trading partners raise concerns during FTA negotiations about provisions that would restrict the use of parallel imports or compulsory licensing, USTR ultimately backs off and removes them from the proposed text; however, they stated that no such concessions were made for countries that USTR considered developed countries. A USTR official said that developed countries have more tools and resources with which to deal with public health situations and that they should not have to revert to such extraordinary measures outside of the cases specified in FTA provisions, such as national emergencies. Restricting these concessions to developing countries is in line with USTR’s belief that the Doha Declaration is intended to apply primarily to developing countries with limited resources. USTR also attaches side letters on public health to FTAs with developing countries. Our analysis in figure 2 shows that 7 of the 11 agreements include a side letter or understandings on public health. USTR officials noted that they use the side letters to further clarify that the provisions of the agreement leave intact a series of methods a country can use to respond to public health emergencies. However, according to a USTR official, these side letters do not create exceptions to the provisions in the FTA. USTR told us that some differences in the IP provisions among FTAs represented accommodations made to countries raising specific concerns during negotiations. For instance, USTR officials stated that, in the Central America-Dominican Republic-United States Free Trade Agreement (CAFTA-DR), a transition period was included for the implementation of patent term extensions. In the CAFTA-DR agreement, USTR dropped a proposal for data exclusivity protection on new uses of previously discovered chemical entities, and instead left data exclusivity in place only for new chemical entities. In addition, USTR revised the proposed provision on patentable subject matter in the Oman agreement in order to exclude plants and animals from patent protection in response to Oman’s concerns. USTR officials said that most concerns raised during negotiations regarding data exclusivity and patent linkage were not couched as health concerns, but rather as unease related to administrative burden or implementation concerns. When these types of implementation concerns are raised during negotiations, USTR said it consults with the U.S. agencies responsible for implementing those provisions in the United States, PTO, and FDA. USTR officials stated that USTR considers the remaining pharmaceutical IP provisions on data exclusivity, patent linkage, and patent term extension a central part of its strategy of pursuing the first two IP negotiating objectives, while it does not see these provisions as being specifically addressed by the Doha Declaration. Therefore, USTR officials noted that these three provisions are pursued universally by USTR in all of its FTAs. USTR officials noted that these provisions are very important for providing protection similar to that found in U.S. law and for maintaining incentives for the pharmaceutical industry. USTR officials explained that USTR does not believe that these three provisions are considered flexibilities under the Doha Declaration, and therefore sees no conflict between pursuing them and respecting the Doha Declaration. USTR officials noted that USTR maintains that these provisions do not restrict a country’s ability to protect public health. The pattern of IP provisions negotiated in the 11 FTAs completed to date confirms USTR’s stated negotiating strategy. Figure 2 demonstrates that data exclusivity, patent term extension, and patent linkage provisions are found in all 11 of the FTAs concluded under TPA, regardless of the development level in the country. Pursuing these provisions also confirms USTR’s stated strategy of seeking high IP standards related to pharmaceuticals in trade negotiations. On the other hand, figure 2 indicates that IP provisions on compulsory licensing are found in only 2 of 11 completed FTAs, those with Singapore and Australia, both of which USTR considered developed countries. Only 3 of 11 FTAs—Singapore, Australia, and Morocco—contain provisions on parallel imports. Although Morocco is considered a developing country, USTR officials explained that Morocco decided in 2000, well before the onset of negotiations, not to permit parallel imports. Therefore, USTR officials stated that the parallel importation provision reflected what was already provided in Moroccan law. Reactions to USTR’s approach to pursuing its TPA objectives in negotiating FTAs have been mixed, with controversy centered on the three key provisions of data exclusivity, patent linkage, and patent term extensions. The pharmaceutical industry stated that it supports the inclusion of these provisions in FTAs because it believes they maintain incentives for research and development. However, some experts and public health advocates have raised concerns that USTR’s approach delays generic competition and reduces access to medicines. Therefore, they believe that USTR’s strategy violates the principles and goal of the Doha Declaration. Pharmaceutical industry representatives stated that data exclusivity is a very important IP protection that provides incentives to innovate and invest in certain markets. Data exclusivity grants a company the exclusive use of its safety and efficacy test data, necessary to obtain marketing approval, for a fixed period after the marketing launch. Data exclusivity is one method by which the innovator company can recoup the costs involved with conducting clinical tests necessary for marketing approval, as well as the considerable costs associated with developing a new drug. Industry representatives explained that they consider patent protection and data exclusivity to be separate but complementary protections. Both can generally provide a period of exclusivity. Consequently, data exclusivity may effectively grant another layer of market exclusivity for the new product. Figure 3 contains three scenarios of how the periods of data exclusivity and patent protection can interact to create market exclusivity under U.S. law. Some time after the initial drug development takes place, the company applies for a patent and the 20-year patent term begins. During the patent term, the company completes all of the drug trials necessary to obtain the safety and efficacy data needed for marketing approval by the FDA. After approval is granted, the company can begin marketing its drug, and the set period of data exclusivity period begins. Industry representatives noted that the data exclusivity period generally is concurrent with the patent period and therefore does not add any additional period of effective market exclusivity, as shown in the first scenario in figure 3. However, as shown in the second scenario, if marketing approval is obtained further into the patent term, the 5-year data exclusivity period, which begins when marketing approval is granted, can extend beyond the term of the patent. As shown in the third scenario, when no patent protection exists, data exclusivity effectively provides the entire market exclusivity period. Pharmaceutical industry representatives stated that the first scenario is the most typical, with the data exclusivity running concurrently with patent protection. However, they noted that there are many instances in which companies do not obtain patents on their products (particularly for small markets), or patent protection is inadequate or poorly enforced. In these situations, data exclusivity ensures the innovator company a 5-year period of market exclusivity. The pharmaceutical industry believes that, in cases in which there is no patent or very little patent life remains when the drug first enters the market, data exclusivity is critical because without an effective market exclusivity period, incentives to research and develop new drugs are diminished. Pharmaceutical industry representatives have also advocated for patent term extensions in FTAs. It is common for a substantial portion of the patent life to be spent running drug trials. Therefore, the industry argues that patent term extensions ensure that innovators get enough time to recoup their costs and maintain the incentives for future innovation. In addition, industry representatives noted that, in many developing countries, the delays associated with getting a patent or obtaining marketing approval for a new drug can be far more extensive than in the United States. They argue that, under these circumstances, it is even more critical that a safeguard mechanism exists to ensure that these delays do not undermine the intentions of patent protection. Patent linkage is also considered important by the pharmaceutical industry. Patent linkage provisions in the FTAs provide for delay of marketing approval if a generic drug product is covered by an unexpired patent. Pharmaceutical companies claim that generic companies routinely launch patent-infringing products during the life of a patent in many developing countries and that patent linkage would help to minimize this problem. Some experts and NGOs believe that these provisions impair access to medicines and therefore are contrary to the “spirit” of the Doha Declaration and TPA guidance. These NGOs, academics, and generic pharmaceutical producers believe that these provisions limit generic competition, thereby maintaining high prices for pharmaceutical products, ultimately impairing access to medicines. These concerns have been extensively discussed and documented by academics, international organizations, think tanks, NGOs, and public health groups. Since many FTA partners implemented these pharmaceutical-related IP provisions for the first time very recently, it is difficult to identify the tangible effect of these provisions. However, these groups believe that the inclusion of these provisions has the potential to decrease public health and therefore is contrary to the spirit and principles and goal of the Doha Declaration. Many NGOs argue that the data exclusivity provisions included in U.S. FTAs will damage access to medicines and public health and worry that there might be instances where the data exclusivity period could extend beyond the length of the patent term, as in figure 3, scenario 2. This data exclusivity period effectively delays entry of generics onto the market, thereby maintaining monopoly prices for a longer period of time. While some NGOs recognize that it would be rare for the data exclusivity period to extend beyond the patent term, they are worried that if this situation occurs, generic competition will be delayed because of the presence of data exclusivity. In addition, where the innovator of a new drug did not obtain a patent in that country, either because it did not apply or because the new drug was not patentable, data exclusivity will effectively give the innovator a patent-like period of marketing exclusivity for the entire period of data exclusivity, from the time marketing approval is granted (see figure 3, scenario 3). NGOs are also concerned that data exclusivity provisions might prevent the marketing of generic drugs produced under a compulsory license. For instance, if a compulsory license is granted to a generic producer, but that producer is not able to rely on the data generated by the innovator company to obtain needed marketing approval, it will not be possible to distribute the drugs under a compulsory license. Some experts and NGOs are also concerned that variations in the data exclusivity periods across countries could further delay generic entry. An FTA partner country must normally provide 5 years of data exclusivity to the innovator once the product receives marketing approval. If the innovator waited to apply for marketing approval in the FTA partner country, thereby delaying the start date of its market exclusivity period, it would effectively extend the overall market exclusivity period beyond the intended 5 years. Some FTAs have addressed this issue by specifying that a country may require the innovator to apply for marketing approval in its country within a specified period of time. For instance, in the CAFTA-DR agreement, at their request, a Party may require that the innovator seek marketing approval in that Party within 5 years after obtaining marketing approval in any other territory in order to receive data exclusivity. This way, the innovator company can only delay the start date of its data exclusivity period by a fixed period of time. Patent term extension provisions in FTAs have also led to questions about their effect on access to medicines. Many NGOs and generic pharmaceutical producers believe that the 20-year patent term in TRIPS creates a balance between access and innovation and that extending the patent period would have a detrimental effect on generic competition. They are also concerned that the patent term extension provisions in U.S. FTAs do not contain the same limits present in U.S. law. For instance, under U.S. law, innovators cannot receive more than 14 years of patent protection through a patent term extension after they have received market approval, and in any case, the maximum period of extension determined on the basis of the regulatory review period cannot exceed 5 years. This limit on patent term extensions is not present in FTAs. Some also assert that patent linkage might negatively affect access to medicines. The patent linkage process in the United States involves numerous steps and actors, designed to enable resolution of patent disputes before marketing approval is granted for a generic drug product. As shown in figure 4, this linkage system places the burden on the private companies, not the regulatory authority, to monitor the patent system. Specifically, the U.S. patent linkage system puts the onus on the generic company producer to provide information on the applicability of an existing patent to the drug product for which it is seeking marketing approval. If the generic company decides to challenge the patent, it must notify the patent holder within a specified period of time in order to give the patent holder the chance to sue and defend the patent in the courts. When the patent litigation is resolved, the FDA can grant marketing approval to the generic company if the patent is overturned, and may be obliged to wait until the patent expires if the generic drug product is found to infringe the patent and the patent is not found to be invalid. NGOs and generic pharmaceutical producers are concerned that developing countries do not have the same set of protocols laid out in the FTA agreement or in their laws, and that this will ultimately affect access to medicines. Generic pharmaceutical representatives argue that countries might experience regular abuses and delays in the introduction of generic drugs if they are unable to institute an effective linkage process. Certain Members of Congress have expressed concern over the pharmaceutical-related IP provisions in FTAs with developing countries, and this concern was recently addressed through a bipartisan compromise between Congress and the administration. Through letters and correspondence with USTR, certain Members emphasized the need to better balance IP protection for pharmaceuticals with the promotion of access to affordable medicines, including through robust generic competition. These Members expressed unease over the balance achieved in the FTAs negotiated by USTR to date—specifically, the impact of the pharmaceutical-related IP provisions in FTAs on developing countries. These Members urged USTR to ensure that the FTA provisions do not restrict the availability of generic competition and put affordable health care at risk. In response to these concerns, in May 2007, Members of the congressional leadership agreed on a bipartisan compromise with the administration to revise four of the recently negotiated FTAs, in order to alter provisions pertaining to a variety of areas, including IP provisions and access to medicines. The bipartisan trade deal reached between Congress and the administration in May 2007 stipulated that certain disputed IP provisions in FTAs with Peru, Colombia, Panama, and Korea be revised prior to submission of the agreements for congressional approval, by USTR and the trading partners. According to USTR officials, the agreement preserves a strong overall level of IP protection in the FTAs, while incorporating flexibilities aimed at ensuring that trading partners are able to achieve the appropriate balance between innovation and promoting access to medicines. Specifically, USTR revised the FTAs with Peru, Colombia, Panama, and Korea to include a reference to the Doha Declaration and the ability of each country to protect public health in the body of the agreement, instead of in a side letter. In addition, the data exclusivity provision in each of these agreements was revised to provide an exception for public health. The agreements with Peru, Colombia, and Panama were revised further to alter the language of provisions on patent term extensions, patent linkage, and data exclusivity. A USTR official stated that USTR and Congress decided that these additional changes would not be applied to the Korea FTA in view of Korea’s relatively higher level of economic development. These additional changes to the Peru, Colombia, and Panama agreements revised the provisions on patent term extensions and patent linkage in order to provide more flexibility for trading partners in implementing these provisions. In addition, the data exclusivity provision was revised further to ensure that, in some circumstances, the data exclusivity period in those countries would not extend beyond the period of data exclusivity provided in the United States. These changes were renegotiated and finalized by USTR in June 2007. USTR’s approach to implementing and overseeing pharmaceutical-related IP provisions is consistent with its overall negotiating strategy pursued in FTAs. Before a signed FTA can go into force, the President determines, with USTR’s advice, whether the FTA partner has met all obligations, including, when appropriate, changes in laws and regulations. As part of this process of advising the President on the determination that he is required to make under U.S. implementation legislation for FTAs, USTR has vigorously pursued FTA partners’ implementation of pharmaceutical provisions related to data exclusivity, patent term extension, and patent linkage. In fact, in some cases, USTR has continued to work with countries after the agreement has entered in force. For example, USTR is still working with Chile to ensure that its data exclusivity provisions are implemented in a manner consistent with the Chile FTA. In its broader role of annually identifying countries that deny adequate and effective protection of IP rights, USTR has frequently raised data protection and patent linkage, in keeping with its strategy of gaining high levels of IP protection for pharmaceutical products, similar to U.S. law. With regard to the Doha Declaration flexibilities, USTR has not generally pressed for restrictions on compulsory licensing and parallel imports in its Special 301 reports. Furthermore, USTR has had a measured response to cases to date of countries actually issuing compulsory licenses. For example, when Thailand recently issued a compulsory license, USTR acknowledged its right to do so and thus far is restricting its criticism to a lack of transparency in the process. One USTR official noted that USTR oversees FTA partners’ implementation of the pharmaceutical-related IP provisions agreed to in the FTA in order to ensure that the negotiated standards are implemented as intended. In order for an agreement to enter into force, the President determines with the advice of USTR whether the FTA partner has met all obligations. A USTR official explained that USTR works with the trading partner to ensure that its IP laws are aligned with the provisions agreed to in the FTA. The USTR official further explained that, at the start of the implementation process, the trading partner provides USTR a comprehensive list of its laws related to each provision in the IP chapter of the FTA. The trading partner also provides USTR a list detailing the intended legal changes necessary to bring its laws into compliance with the agreement. USTR reviews the laws and proposed changes and provides the trading partner with comments regarding their degree of compliance. USTR monitors the changes in the other country, and has numerous exchanges with the trading partner on any legal changes necessary. One USTR official stated that they are careful to ensure that the agreement is implemented exactly as it was negotiated. For example, in response to Guatemala’s proposal to have an exception to data exclusivity written into its laws, USTR insisted that this exception undercut the original obligations, and it was therefore unwilling to accept the change. A USTR official explained that when the legal changes are complete and USTR is comfortable with the new legislation, USTR makes a recommendation to the President for the agreement to enter into force. The administration then makes a determination about the legal compliance before the agreement can officially enter into force. USTR and other agencies also provide technical assistance on implementing related IP provisions to FTA partner and nonpartner governments. (See appendix II.) USTR focuses on a wide range of IP provisions including data exclusivity, patent term extensions, and patent linkage during the FTA implementation phase to ensure that U.S. trading partners are properly implementing and enforcing pharmaceutical-related IP provisions. In 2005, Chile reformed its data protection regime; however, a USTR official stated that USTR has continued to monitor Chile’s implementation of data exclusivity in response to concerns raised by the pharmaceutical industry. Specifically, USTR officials noted that Chile had added a requirement that, in order to receive data exclusivity, companies must apply for marketing approval within a year of doing so in other countries. USTR is also monitoring Chile on specific issues with regard to the implementation of patent linkage and patent term extensions. In particular, USTR is responding to concerns that the Chilean health authorities issued a number of marketing approvals of generic versions of drugs still under patent. Chile appears to have no provision that would prevent such an approval from being issued during the patent term. In addition, USTR noted that Chile has yet to implement a law that would enact patent term extensions to compensate for delays in marketing approval. USTR officials noted that USTR regards the Special 301 report, which is subject to different statutory requirements distinct from TPA, as an important tool for overseeing and evaluating the implementation and adequacy of IP protection worldwide. USTR officials explained that USTR considers all items that are related to the effectiveness and adequacy of IP protection in its Special 301 report. They noted that in the Special 301 report there are considerations relevant to adequacy and effectiveness that sometimes go beyond the minimum standards laid out in TRIPS. In fact, there are many examples of situations discussed in the Special 301 reports that are not specifically part of TRIPS. Thus, the Special 301 report tracks progress of WTO member implementation of TRIPS and trading partner implementation of FTAs, as well as how adequately countries are protecting IP rights overall. While the Special 301 report focuses on a wide range of IP protection issues related to copyrights, patents, and trademarks, including piracy, counterfeiting, and enforcement, our analysis focuses only on the pharmaceutical-related issues discussed in this report. Thus, this analysis focuses only on the countries listed on the Special 301 report for which pharmaceutical-related issues were mentioned as a concern, which represent only a subset of the issues discussed and the total number of countries listed in the Special 301 reports over the years 2000-2007. (See table 1.) Consistent with its emphasis in FTAs, our analysis of the Special 301 reports indicates that USTR focuses heavily on data protection in its annual Special 301 reports. For countries listed in the Special 301 reports over the period 2000 through 2007 for whom pharmaceuticals was cited as an issue of concern, data protection was mentioned in almost every case. In fact, data protection is the most frequently mentioned of all pharmaceutical issues in the Special 301 reports over that 8-year period, appearing a total of 173 times. (See figure 5.) USTR’s focus on patent linkage is also similar to its negotiating strategy in FTAs. The second most frequently mentioned pharmaceutical provision in Special 301 reports from 2000 through 2007 is patent linkage, which is mentioned 56 times. Pharmaceutical counterfeiting is also discussed somewhat regularly in the Special 301 reports over this period, but not as frequently as data protection or patent linkage. There is limited mention of compulsory licensing or parallel imports in the Special 301 reports. In the Special 301 reports from 2000 through 2007, compulsory licensing regarding pharmaceuticals is only mentioned nine times, while parallel importing related to pharmaceuticals is mentioned only three times. While the IP objectives in TPA do not control the coverage of the Special 301 reports, USTR’s approach to these two provisions referenced in the Doha Declaration seems similar. USTR officials explained that USTR recognizes that the TRIPS agreement allows countries some flexibility regarding the use of compulsory licenses and parallel imports when protecting public health. By not mentioning these provisions frequently in the Special 301 report, USTR acknowledges the existence of these flexibilities, as highlighted in the Doha Declaration. However, USTR officials also noted that the infrequency with which these provisions are mentioned is due to the fact that the trading partners rarely make use of these flexibilities. Thailand recently issued a compulsory license on a pharmaceutical product, citing a public health need. In November 2006, Thailand issued a compulsory license on a drug for treating HIV/AIDS, followed by two more compulsory licenses issued in early 2007 for another HIV/AIDS drug and a heart disease medication. These compulsory licenses are government-use licenses issued under Thai law. The government of Thailand announced that these decisions were aimed at improving access to essential medicines and public health in Thailand. In addition, Brazil issued a compulsory license for one of the same HIV/AIDS drugs in May 2007. Public reaction to Thailand’s and Brazil’s actions has been mixed, with some defending their right to issue a compulsory license and others criticizing their actions as irresponsible. For instance, the pharmaceutical industry believes that the compulsory licenses were unnecessary and will ultimately negatively affect drug innovation, and is concerned the licenses will set a precedent for similar actions. However, many NGOs stated that they support countries like Thailand and Brazil using their right to issue compulsory licenses in order to improve access to medicines in their countries. USTR’s response to Thailand’s and Brazil’s issuance of compulsory licenses has been more measured. USTR officials told us that in all speeches, letters, and private conversations, USTR tried to recognize and convey that Thailand has the ability to issue compulsory licenses. However, they noted that, when issuing a compulsory license, it is important that the issuer engage with all of the affected stakeholders, including patient groups and patent holders, about the best way to meet public health needs. In both the Brazil and Thailand cases, USTR has tried to focus on the procedures and processes followed by the governments, rather than on the validity of the licenses. USTR officials noted that, in general, they are reluctant to insert themselves into price negotiations between governments and the pharmaceutical industry, but that they will advocate for transparency. Although USTR mentioned both the Thai and possible Brazil cases of compulsory licensing in the 2007 Special 301 report, the report limited its criticism to issues of good governance. USTR officials noted that, at the time the report was issued, all three compulsory licenses had already been issued by Thailand, and that they believed the Brazilian compulsory license was imminent. For example, in the Thai case, USTR was careful in its report to recognize a country’s ability to issue compulsory licenses subject to WTO rules and the country’s domestic laws. However, it expressed concern about what it considered to be the lack of transparency exhibited in Thailand, and emphasized the need for such transparency in discussions with all relevant stakeholders in Brazil. USTR officials stated that the decision to elevate Thailand from the watch list in its 2006 Special 301 report to the priority watch list in 2007 was based on broad IP concerns, not solely on its compulsory license decision. They explained that there were many major IP concerns in Thailand and many complaints that fueled their decision. In addition, they noted that, while Thailand was raised to the priority watch list, Brazil, which was also about to issue a compulsory license at the time, was lowered from the priority watch list to the watch list. They said that Brazil’s standing improved due to impressive work in other areas of IP enforcement, and that the imminent compulsory license did not alter USTR’s decision to improve Brazil’s standing. Nevertheless, in its 2007 Special 301 report, USTR noted that it will conduct an out-of-cycle review to evaluate Brazil’s progress in other areas and encourage additional progress in areas of outstanding concern. Since TPA, public health input into U.S. trade negotiations has been limited. In negotiating trade agreements under TPA, the President must seek advice and information from executive departments and the public and private sectors. Although U.S. agencies generally support USTR’s negotiations approach, interagency input on U.S. trade negotiations has not addressed the public health implications of IP pharmaceutical provisions negotiated under TPA and has been primarily technical in nature. For instance, HHS, the lead U.S. agency on global public health and social welfare issues, endorses USTR’s negotiating approach that strong IP protection promotes public health and access to medicines. However, HHS advice during trade negotiations has generally concentrated on technical advice from one of its subagencies, the Food and Drug Administration (FDA), to ensure that FTA provisions related to pharmaceuticals do not violate U.S. law and are consistent with U.S. health regulations. HHS has not addressed policy questions related to whether FTA provisions might affect public health in FTA partner countries. Within the formal private sector advisory system, two public health representatives were recently added to two private sector Industry Trade Advisory Committees (ITACs) after USTR had concluded nine trade agreements. These two committees are respectively composed of 20 and 33 private sector representatives from the pharmaceutical and other industry sectors. USTR has obtained some public health perspectives from stakeholders through other formal and informal means, including public hearings, Federal Register comments, and written correspondence. HHS officials told us they support the USTR position concerning the Doha Declaration and agree with USTR’s view that strong IP protection promotes innovation and access to medicines. The agency supports the administration’s vision for both global health and overall U.S. foreign policy, and HHS’s Office of Global Health Affairs (OGHA) is the U.S. focal point for policy coordination across multilateral health and science organizations. According to OGHA officials, the FDA’s generic drug preapproval process is a key example of HHS efforts to balance high IP standards and access to medicines. Officials stated that the FDA generic drug preapproval process exhibits HHS support for creating a market for high quality generics that meet international standards. The agency has also supported USTR’s interpretation of TRIPS flexibilities in multilateral discussions about IP and public health, such as those held at WHO. According to officials, HHS’s OGHA coordinates U.S. policy inputs and interests as they pertain to IP rights and public health in WHO, ensures that the U.S. policy position at WHO meetings reflects administration priorities, and works with USTR and other U.S. agencies to advance U.S. IP and public health interests internationally. Most recently, HHS hosted the newly formed WHO Commission on Intellectual Property Rights, Innovation, and Public Health, and has been the lead federal agency in coordinating the U.S. response across agencies, including USTR, to a 2006 WHO report on IP rights and public health. State Department officials also support the USTR’s view that IP protection is important for promoting access to medicines. However, State Department officials said they principally demonstrate the U.S. strategy to balance IP rights and public health through various programs and initiatives. For example, State’s Office of the Global AIDS Coordinator (OGAC) works with several other agencies, including HHS, to implement the President’s Emergency Plan for AIDS Relief (PEPFAR), which has programs in over 120 countries and a special focus on 15 countries that are primarily located in sub-Saharan Africa. OGAC and USAID also worked with the FDA to develop the generic drug preapproval process to support the purchase of low priced, high quality drugs for the PEPFAR program. This effort resulted in the preapproval of over 50 generic antiretrovirals (ARV) to date and almost $2 million in savings on generic drug purchases in 2006. In addition, USAID developed a centrally managed contract, the Partnership for Supply Chain Management, in order to work with generic companies to address drug supply chain challenges and increase research and development for a steady supply of ARVs in developing countries. USTR has obtained some input on IP rights and public health in trade negotiations through the formal interagency trade policy process, but public health perspectives on USTR’s negotiating approach to pharmaceutical issues in FTA negotiations are primarily technical in nature and have not included an examination of the public health impacts of FTA provisions. USTR coordinated with HHS when it first began to formulate its basic policy goals for negotiating FTAs, and HHS has had the opportunity to review draft FTA texts through the interagency advisory system. However, HHS has had limited involvement in the actual trade negotiations. According to USTR, most public health issues are worked out in advance of the negotiations. HHS and USTR occasionally convene an interagency working group to discuss IP rights and public health issues that arise at WHO or in other multilateral fora. Although USTR routinely briefs HHS after each round of FTA negotiations, OGHA officials stated that the health agency’s role in trade, IP rights, and the negotiation of pharmaceutical-related IP provisions in FTAs has primarily involved providing technical expertise through its subagencies when requested by USTR. For example, FDA officials stated that their overall mission is generally not related to trade, but instead focuses on regulatory matters as they affect public health. The agency offers technical advice to USTR during negotiations to ensure that FTA provisions related to pharmaceuticals do not violate U.S. law and are consistent with U.S. health regulations. For instance, the FDA has provided a perspective on regulatory issues in FTAs to ensure that provisions do not have implications for U.S. regulatory programs. HHS officials also stated that they have no role in assisting countries in pursuing objectives of the Doha Declaration. Although they have good working relationships with the health ministries of many countries, conversations generally focus on technical advice with regard to regulatory issues. For example, subagencies such as the FDA may provide regulatory advice and guidance to FTA partners, during negotiations or FTA implementation, on the regulatory responsibilities associated with various IP provisions, the manner in which provisions function in the United States, and how U.S. regulatory systems operate. OGHA officials told us they are satisfied with HHS’s role and input in the interagency advisory process and the public health considerations provided in U.S. trade negotiations and policy, and the office does not believe IP provisions in FTAs restrict access to medicines. However, there is little evidence that USTR consulted with HHS or OGHA regarding FTA partner countries’ concerns about the potential impact on public health of specific pharmaceutical provisions in FTAs since the Doha Declaration and the Trade Promotion Authority Act of 2002 were agreed upon, although the HHS OGHA’s mission includes promoting the health of the world’s population. OGHA officials noted that USTR has never approached them to discuss such country concerns about public health. According to USTR officials, USTR does not generally talk to HHS about countries’ concerns about the public health impact of FTA provisions, but instead relies on the countries themselves to raise concerns, since developing countries know their own public health systems and needs better than any U.S. agency would. Similarly, HHS has not been asked by USTR to conduct analyses of the impacts of FTA provisions on regulatory institutions in partner countries, and HHS has not provided such an assessment. There is also little evidence that the agencies have determined whether the FTAs affect public health, either positively or negatively, and HHS officials stated they do not have the technical capacity to do so. Similarly, the PTO Office of International Affairs is involved in the FTA negotiations process as a technical advisor under its statutory authority regarding IP issues. The office advises USTR on WTO issues and FTAs, meets with USTR to discuss strategy before each round of FTA negotiations, and participates in the negotiations. For example, USTR may ask PTO’s opinion about the use of a particular technical term. PTO also provides technical advice and training to FTA partner countries on pharmaceutical IP provisions during FTA negotiations, and provides clarification on the interpretation of negotiated provisions. For instance, in the CAFTA-DR negotiations, partner countries asked PTO to explain data exclusivity in further detail and how the provision functions in the United States. According to officials, PTO never states that the U.S. method of implementing a particular provision is the only way to implement or fulfill a particular FTA obligation, but instead simply provides U.S. examples. The State Department is also involved in interagency coordination on trade and public health through the interagency advisory system as well as during FTA negotiations, but agency officials stated that trade and IP efforts are only one small part of the larger U.S. government effort to increase access to medicines. USTR consults with State through the formal interagency advisory review process, and State officials are included in all discussions of IP chapters in the FTAs. However, the agency primarily makes an effort to balance IP rights and access to medicines through public health initiatives it coordinates with other agencies or administers itself, such as PEPFAR. USAID has extensive global health programs and had some involvement in policy discussions at the time of the Doha Declaration. The development agency has had little or no involvement in such discussions since, however. In January 2007, public health representatives were added to the two technical ITACs most relevant to pharmaceuticals and IP rights—the chemicals committee (ITAC-3) and the IP committee (ITAC-15)—where multiple brand-name pharmaceutical companies serve. However, by the time that USTR and the Department of Commerce had appointed one public health representative to each of these two committees, USTR had concluded nine FTAs. According to Commerce officials, the appointments were prompted by an April 2005 request by an NGO for public health perspectives in several of the industry trade advisory committees. Within 3 months, Commerce and USTR agreed to consider adding public health representatives to the industry advisory system, but the appointments were delayed until 2007. Although USTR and Commerce indicated at least one public health representative would be appointed to both the IP committee and the chemicals committee in December 2005, a coalition of NGOs filed a lawsuit against USTR during the same month for public health representation on six other ITACs in the trade advisory committee system as initially requested in 2005. The lawsuit is pending an appeal, after an initial ruling dismissing the case on the grounds that the court could not find any meaningful standards in the Trade Act of 1974 under which it could judge the balance of the membership of the trade advisory committees. Due to the ongoing litigation relating to the composition of the trade advisory system, we do not make any judgments about the appropriateness of a particular committee’s composition. USTR maintains that representatives in other trade advisory committees provided public health input on FTAs. For instance, USTR noted that Trade and Environment Policy Advisory Committee (TEPAC) members had access to the secure private sector advisory Website, and that some groups in that committee had expressed concern about provisions in several FTAs. Specifically, some environmental and consumer group NGOs on the committee have submitted concerns to USTR in committee reports on the FTAs about the impacts certain FTA provisions have on public health and access to medicines. In an alternative opinion attached to several committee reports, the minority group of TEPAC representatives maintained that U.S. FTAs are inconsistent with the Doha Declaration on TRIPS and Public Health and that FTA provisions on data exclusivity and patent linkage, as well as limitations on the use of compulsory licensing, reduce access to medicines. They recommended that Congress not approve some FTAs and requested Congress to take their public health concerns into account when considering other FTAs. There is little evidence that USTR discussed the concerns submitted about the public health impact of FTAs with U.S. health agencies or other members of the public health community. A member of the TEPAC committee also noted that although the environmental advisory committee reports provided to USTR include the committee members’ recommendations or concerns about public health in FTAs, there is little dialogue between USTR and committee members on these issues. In the member’s opinion, this is because the advisory consultations are not integrated into the FTA negotiations process, which limits the ability of members to advise USTR on the issues that arise during negotiations, including public health concerns, as opposed to after a draft has been developed. However, USTR notes that the concerns have been raised and discussed by the USTR personally during TEPAC meetings. The two individuals that were appointed as public health representatives on the ITACs individually serve on committees that are respectively composed of a total of 20 and 33 private sector representatives from the pharmaceutical and other industry sectors. (See figure 6.) Commerce officials explained that, in selecting among the 10 applicants who responded to the Federal Register notice, they considered candidates’ backgrounds to determine if the candidates understood both relevant IP issues and which public health concerns would be relevant to the intersection of public health, international trade, and IP rights or pharmaceuticals, respectively, as relevant to the work of the committees. According to these officials, the selection committee also tried to ensure that the representatives would make meaningful contributions to the committees and have the weight necessary to challenge the committees when necessary. Commerce officials did not believe it was necessary to have two public health representatives on one committee representing the same view, and they said that they did not find any other viable candidates with additional perspectives beyond the individuals selected. However, Commerce officials stated that the Federal Register notice announcing the positions on the ITACs remains open. If additional qualified public health candidates applied would contribute another perspective to either of these two committees applied, they said the agency would consider adding additional public health representation. Our review showed that, although USTR has received limited input on public health through formal advisory system communications channels, it has received public health input through other formal and informal processes, including input from the pharmaceutical industry and the public health community. Pharmaceutical Research and Manufacturers of America (PhRMA), the pharmaceutical industry trade group, has submitted annual reports to USTR on industry concerns about IP rights globally for the agency to consider in developing its Special 301 report. Both pharmaceutical industry representatives and public health community members have also provided input on IP rights and public health concerns for several FTAs that have been concluded through USTR’s formal public hearings and the Federal Register comments. In addition, USTR has received and responded to congressional correspondence regarding members’ public health concerns about the impact of FTAs. According to USTR officials, while there are some minor modifications to FTA texts during each negotiation, the public health community is aware of the provisions the United States proposes to be included in each agreement, given past FTAs implemented, and may also provide public health input through more informal mechanisms. For example, USTR has received and responded to some informal input on public health in trade negotiations through correspondence with NGOs. Moreover, USTR officials noted that they have an open door policy and will meet with anyone who requests a meeting, including NGOs, public health representatives, and generic industry representatives. Both USTR and private sector representatives, including NGOs, have confirmed that private sector representatives have provided informal input to USTR on public health concerns, in particular FTAs, through phone calls or requested meetings. However, input USTR receives through such channels may lack the weight of formal private sector input on public health issues in trade agreements, such as trade advisory committee reports on proposed trade agreements that are transmitted to the administration and Congress. USTR has followed a consistent approach in negotiating, implementing, and monitoring its trade agreements under TPA—namely, by protecting the minimum standards of IP rights provided in TRIPS and promoting high IP standards similar to U.S. law. Other than making concessions on compulsory licensing and parallel importation provisions, and on side letters that state that the IP chapter does not affect a country’s ability to take necessary public health measures, USTR has not changed its uniformly high demands with regard to IP protection in its FTAs. The degree to which USTR’s policy has achieved the right balance of IP protection and attention to public health, and more specifically whether it has respected the Doha Declaration as called for under TPA, depends in part on the stakeholder asking the question. This reflects a fundamental tension between protecting IP rights in order to allow companies to recoup investment and encourage innovation for the long term, and allowing competitors to sell lower cost drugs for short term public health needs. As Congress contemplates renewal of TPA, there are ongoing questions about the overall balance of IP rights and public health. If Congress disagrees with USTR’s interpretation and implementation of TPA guidance with regard to IP rights and public health, it should specify more clearly its intentions for U.S. trade policy and public health policy input related to balancing public health concerns and the negotiation of IP rights in trade agreements. We provided the U.S. Trade Representative; the Secretaries of the Departments of Commerce, Health and Human Services, and State; the Administrator of the U.S. Agency for International Development; and the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office with a draft of this report. The U.S. Trade Representative; the Secretaries of the Departments of Commerce, Health and Human Services, and State; and the Administrator of the U.S. Agency for International Development chose to provide technical comments. We modified the report where appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to the U.S. Trade Representative; the Secretaries of the Departments of Commerce, Health and Human Services, and State; the Administrator of the U.S. Agency for International Development; and the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office. 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 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 members who made major contributions to this report are listed in appendix IV. To evaluate how the U.S. has interpreted the intent and meaning of the Doha Declaration, we performed document reviews on agency documentation and correspondence as well as WTO documents, and conducted interviews. We also reviewed academic studies, pharmaceutical industry reports, position papers, and media reports. Specifically, we examined relevant WTO legal documents, including the declaration on TRIPS and Public Health; the 2003 General Council Chairperson’s statement; the August 30, 2003, General Council Decision on the Implementation of Paragraph 6 of the Doha Declaration on TRIPS and Public Health; the December 6, 2005, General Council Decision on the Amendment of TRIPS; and relevant articles of the TRIPS agreement. We reviewed WTO TRIPS Council minutes and other official documents, reviewed USTR official documents, interviewed USTR officials in Washington and Geneva, and interviewed WTO officials and WTO country representatives in Geneva. To investigate how the United States negotiates and oversees implementation of IP provisions related to pharmaceuticals in its trade agreements, we interviewed USTR officials, reviewed agency documents, and examined the text of the FTAs negotiated since the Trade Act of 2002. We spoke to USTR officials about their views on the three IP negotiating objectives in TPA and their overall approach for pursuing these objectives. Specifically, we learned about the pharmaceutical provisions pursued by USTR in the IP chapter of its FTAs, and how the pursuit of these provisions relates to their negotiating approach. We also reviewed agency documentation of negotiating policy, draft texts of FTAs, and other types of documentation in order to further examine the IP negotiating policy pursued by USTR. In order to analyze the patterns and results of USTR’s stated approach, we reviewed the text of each of the 11 FTAs negotiated under TPA. We evaluated the pharmaceutical-related IP provisions in each agreement and catalogued which related provisions were present in the final text of each agreement. Using this information, we were able to identify patterns and thereby confirm USTR’s stated policy regarding the pursuit of these provisions. We did not assess the reliability of the per capita income data contained in figure 2 because we are providing them as background information only. In addition, we interviewed officials from Department of State, Department of Health and Human Services (HHS), Department of Commerce, the Patent and Trademark Office (PTO), and the U.S. Agency for International Development (USAID) in order to obtain their perspectives on the pharmaceutical provisions pursued in the FTAs. We performed literature reviews of articles and studies documenting the multiple opinions regarding these provisions pursued by USTR. From this literature review and from agency meetings, we identified numerous stakeholders and experts to speak with, including pharmaceutical industry representatives, public health groups, NGOs, academics, and IP experts. These groups include Pharmaceutical Research and Manufacturers of America (PhRMA), Generic Pharmaceutical Association, (GPhA), The International Federation of Pharmaceutical Manufacturers & Associations (IFPMA), Oxfam, Doctors without Borders (MSF), Essential Information, Consumer Project on Technology, Health Global Access Project (GAP), Health Action International, Center for Policy Analysis on Trade and Health (CPATH), Access to Drugs Initiative (ADI), Third World Network, Center for International Environmental Law (CIEL), International Center for Trade and Sustainable Development (ICTSD), Drugs for Neglected Diseases Initiative (DNDI), as well as three academics, two intellectual property lawyers, and three public health experts specializing in this area. We interviewed these stakeholders and experts in order to gather a complete perspective on USTR’s negotiating strategy and the pharmaceutical-related IP provisions present in the FTAs. We also traveled to Geneva, Switzerland, to meet with officials from the U.S. Mission in Geneva; World Trade Organization (WTO); World Health Organization (WHO); World Intellectual Property Organization; The Joint United Nations Program on HIV/AIDS; United Nations Development Program; the Global Fund to Fight AIDS, Tuberculosis and Malaria, as well as NGOs from the pharmaceutical sector and public health community. In order to examine how USTR implements and oversees its trade agreements, we interviewed USTR officials, reviewed agency documentation, and analyzed USTR’s annual Special 301 reports. We spoke to USTR officials and reviewed agency documentation about their approach to implementing and overseeing its trade agreements. In addition, we examined trends and patterns of citations found in USTR’s annual Special 301 reports in order to analyze how USTR oversees its trade agreements with respect to IP provisions related to pharmaceuticals. We reviewed each Special 301 report from 2000 to 2007 in order to identify every mention of a pharmaceutical-related issue for all countries listed on the priority watch list, the watch list, and the Section 306 list. For each country listed in the report in every given year, we noted whether the report mentioned anything related to a pharmaceutical issue or concern. We reviewed the reports using decision rules we developed to identify the most frequently discussed pharmaceutical issues in Special 301 reports over this period. To enhance the accuracy and soundness of our review, two GAO staff members conducted independent reviews of the reports. These staff members had a high degree of concurrence in the pharmaceutical issues they identified and were able to reconcile the instances where they differed initially. We also interviewed USTR officials about some of the factors considered during the Special 301 process in order to determine limitations to our analysis. Limitations to our analysis include the inherent selection bias in the USTR reports, since the Special 301 report does not capture each IP concern in every country. Also, there are numerous factors governing a country’s inclusion, but USTR generally focuses on countries with relatively higher levels of development. The analysis is also limited to only pharmaceutical-related issues raised in the Special 301 report over this period and does not capture the weight of each concern. In addition, pharmaceutical counterfeiting may be undercounted in this analysis due to the fact that it may be subsumed into more general references to trademark counterfeiting and inadequate enforcement. We also obtained and compared the input provided to USTR by U.S. embassies and the pharmaceutical industry. Additionally, we spoke to USTR officials about the factors taken into account for the 2007 Special 301 report, specifically regarding the decision of Thailand and Brazil to issue compulsory licenses on pharmaceutical products. To investigate how USTR assists other countries in implementing FTAs and TRIPS obligations, we interviewed agencies involved in providing technical assistance to FTA partner and nonpartner countries, including USTR, HHS, PTO, and USAID. We spoke with agency officials about the type of technical assistance they provide on the FTAs, Doha Declaration flexibilities, and public health and about the audience receiving the assistance. We also reviewed technical assistance and training-related documents and correspondence to corroborate the testimonial evidence. In order to evaluate the extent of formal and informal IP and public health input into USTR’s trade agreement negotiations, we examined the formal interagency advisory process, the formal industry advisory committee process, and several informal means for providing input to USTR. To examine the level of interagency consultation on trade, IP, and public health issues between USTR and the Department of State, HHS, Department of Commerce, PTO, and USAID, we reviewed documentation of interagency discussions related to the TRIPS Doha Declaration and FTAs. Limited documentation was available. We also interviewed USTR, Commerce, HHS, State, PTO, and USAID officials about their roles in the interagency advisory process and the public health input they provided or received during WTO discussions on the TRIPS and Public Health Declaration and during FTA negotiations. To evaluate the type and extent of public health input USTR received through the industry trade advisory process, we reviewed industry advisory committee reports for the IP and chemicals committees, as well as the trade and environment committee. We also evaluated the membership of the IP and chemicals industry advisory committees to determine the composition of industries and interests represented. However, we did not make any judgments about the appropriateness of any particular committee’s composition. In addition, to better understand the selection and appointment process for the public health representatives on the IP and chemicals industry advisory committees, we interviewed USTR, Commerce, and HHS officials and reviewed documentation related to the representatives’ appointments. We also spoke with the primary NGO involved in the initial request for public health representation on the industry advisory committees, as well as several other NGO and academic members of the public health community, about their views on the public health representative appointments. Moreover, we interviewed selected members of the trade and environment committee, to obtain perspectives on the advisory process and public health input provided to USTR through it. Furthermore, we reviewed records of USTR’s public hearings on FTAs, Federal Register notice comments, and congressional and private sector correspondence with USTR on the FTAs and the issues of IP rights and public health. We also spoke with several NGOs about public health input they provided to USTR through meetings and phone calls. Technical assistance on IP rights and public health to FTA partner and nonpartner governments has been limited and provided mostly upon host country request. According to USTR officials, U.S. negotiators review each FTA provision in the text with the signatories, at which time they may also ask for technical assistance. Also, FTA partner countries always have the option of requesting trade-capacity building assistance from the United States at the conclusion of negotiations. However, USTR has never had a request for TCB on the Doha Declaration, and only on IP matters related to enforcement. USTR does not initiate technical assistance on FTA provisions and the use of TRIPS flexibilities, but responds to country requests, which it forwards to the appropriate agency. U.S. agencies tend to provide technical advice to FTA partner governments on regulatory issues, rather than public health issues. For example, the FDA has provided technical assistance to partner countries in developing implementing regulatory measures. Similarly, technical assistance activities conducted by USAID and PTO include conferences, workshops, capacity-building cooperation agreements, and patent program certificate programs on topics such as international IP standards in TRIPS, drafting trade reform legislation, and enforcement of IP rights. Specific IP issues discussed include data exclusivity, patent extensions, and implications of FTA IP rights commitments. According to USAID officials, USAID can provide technical assistance if the host country has requested assistance in a particular area. Although FTAs have helped promote training in the area of intellectual property and public health, the agency has not done much work on those topics. USAID officials said that most training occurs during FTA negotiations, but FTA partner countries often receive the training from WTO or another third party in order to gain a more objective training or perspective than they believe they would receive from the United States. Similarly, according to PTO officials, most requested PTO training is with respect to FTA agreements and primarily focuses on the implementation and enforcement of FTA provisions, and the audience is generally patent examiners conducting enforcement activities. The PTO Global IP Academy, established in 2005, is another example of PTO’s technical assistance on IP matters to other countries, whereby PTO trains foreign officials on IP enforcement. The agency also advises countries on drafting implementing legislation and the development of compliance regulations. Agencies also provide general technical assistance to countries on TRIPS obligations. For example, Commerce’s Commercial Law Development Program, which receives some funding from USAID, has provided training to Pakistan on TRIPS and the role of U.S. agencies in domestic patent and data protection. However, according to USTR, most requests related to TRIPS IP issues fall in nonpharmaceutical IP areas, such as trademark registration, enhancing patent processing, or enforcement capacity. PTO officials stated that they offered a course on biotechnology that covered all aspects of patent, copyright, and trademark WTO provisions. The State Department has also provides a standard training on IP rights to U.S. Foreign Service Officers through the Foreign Service Institute (FSI), which includes basic information on patents, data protection, and other U.S. and TRIPS IP provisions. The training also provides an overview of the Doha Declaration and TRIPS flexibilities, including the use of compulsory licenses, as well as a summary of the U.S. government’s objectives for access to medicines. While there has been no proactive agency effort to assist countries in using the Doha Declaration TRIPS flexibilities, agencies have developed and provided some information upon request. USAID has worked closely with USTR to develop such U.S.-sponsored training that is TRIPS compliant and has recently added discussion about the Doha Declaration and the implementation of compulsory licensing into training on the use of TRIPS flexibilities. For instance, USAID funded a presentation in Lebanon on TRIPS implementation in response to requests for assistance with its WTO accession. In addition, USAID technical assistance projects were implemented in Egypt related to IP rights and public health, including a conference on IP and pharmaceuticals that covered TRIPS, the Doha Declaration, compulsory licensing, and data exclusivity, under the auspices of the prime minister and minister of health. Similarly, USAID presented in Uganda a workshop on Developments at Doha, including TRIPS and public health, as part of assistance taking place in December 2001 and January - February 2002. USTR stated that Honduras also conferred with the United States about how to use the paragraph six waiver to issue a compulsory license, but the drug was not under patent and training was ultimately not necessary. PTO has also conducted training on relevant IP provisions, including on U.S. laws and regulations related to data exclusivity and patent linkage, in response to country requests. PTO officials emphasized, however, that it is not PTO’s role to ensure that these countries implement the provisions in the same manner as the United States. In fact, PTO makes an effort to understand the country’s legal context and capacity so that its advice is appropriate to its circumstances. In addition, U.S. agencies offer some assistance related to technology transfer, which is referred to in paragraph seven of the Doha Declaration on TRIPS and Public Health. For example, HHS provides significant assistance to developing countries though its technology transfer activities. The National Institutes of Health (NIH) has developed innovative programs to improve how technologies are transferred to developing countries, particularly by identifying those biomedical research companies and institutions that have the interest and capacity to receive and develop new biomedical products. According to HHS officials, NIH has one of the largest biomedical technology transfer offices in the world. NIH’s Office of Technology Transfer (OTT) has successfully transferred technologies, mostly for infectious disease diagnosis, treatment and prevention, to institutions in developing countries such as India, Mexico, Brazil, China, Egypt, and South Africa and currently is working with institutions in other developing countries. NIH OTT has also initiated a limited international technology transfer capacity building program to train scientists and managers from institutions in developing countries about intellectual property management and other technology transfer- related matters. Similarly, USAID is involved in some technology transfer assistance. According to agency officials, USAID recently established a technology transfer program in Columbia to assist the local generic industry. Kim Frankena, Assistant Director; Nina Pfeiffer; Diana Blumenfeld; Suneeti Shah; Yesook Merrill; and Grace Lui made significant contributions to this report. Martin De Alteriis, Karen Deans, and Etana Finkler also provided assistance. | The WTO Agreement on Trade-Related Intellectual Property (TRIPS) requires all 151 World Trade Organization (WTO) members to provide baseline protections, including 20-year patents for innovative pharmaceuticals. The Trade Act of 2002 granting Trade Promotion Authority (TPA) to the President outlined three negotiating objectives related to intellectual property (IP). The first two aim to strengthen IP rights and enforcement abroad. The third calls for respect of the WTO Doha Declaration on TRIPS and Public Health, which addresses access by developing countries to patented medicines, particularly in epidemic and emergency situations. This report (1) describes the Declaration and its interpretation by the United States and other nations; (2) analyzes how U. S. Trade Representative (USTR) has balanced respect for the Doha Declaration with the other two IP objectives in negotiating free trade agreements; and (3) evaluates the extent of public health input by agencies and the private sector. We reviewed official WTO and U.S. government documents, interviewed U.S. and foreign government officials, and obtained private sector views. The 2001 Doha Declaration on TRIPS and Public Health was adopted by WTO members to stress the importance of implementing the TRIPS Agreement in a manner supportive of public health. The U.S. interprets the Declaration as a political statement that recognizes the severity of public health crises while affirming the importance of IP protection. It maintains that the Declaration neither changes existing TRIPS obligations, nor creates new rights and does not assigns public health greater priority than IP protection. U. S. Trade Representative (USTR) says the Declaration clarifies flexibilities already in TRIPS, including the flexibility to compulsorily license patents under certain circumstances. USTR recognizes these as being allowed for WTO members, including those facing public health crises, but only in a fashion that will not unduly harm patent holders. Some developing countries assert they provide broad discretion to ensure access to medicines when IP regulations present barriers to affordable care. USTR balances respect for the Doha Declaration with TPA's other two IP negotiating objectives by actively promoting high levels of IP protection for pharmaceuticals while making targeted allowances for developing country partners. USTR believes that this longstanding U.S. pursuit of high IP protections for pharmaceuticals creates incentives for investment in research and development of new treatments, ultimately enhancing public health. With regard to the TPA objective of respecting the Doha Declaration, USTR's key policy change was to not insist upon two provisions it sees as relevant to the Declaration in FTAs with developing country trading partners. Otherwise, USTR has continued to pursue other pharmaceutical related IP protections that it does not consider related to the Doha Declaration. Reactions to USTR's record are mixed. The pharmaceutical industry considers these types of FTA provisions critical for preserving incentives for research and innovation. However, some academics, experts, nongovernmental organizations (NGOs), and generic producers have expressed concerns that these provisions may delay entry by cheaper generic products. In response to similar concerns in Congress, a bipartisan agreement was reached with the Administration to revise four recent FTA's prior to their submission for Congressional approval. U.S. interagency and private sector input into trade negotiations related to public health have remained limited since Congress enacted TPA. The Department of Health and Human Services (HHS) and other agencies generally endorse USTR's view that strong IP protection promotes public health and access to medicines, and interagency input has been primarily technical in nature. Within the formal private sector trade advisory system, a public health representative was recently added to 2 of the 16 private sector advisory committees, but not until USTR had concluded nine trade agreements. USTR did obtain some public health views through other formal and informal means during this period. |
ILOVEYOU is both a “virus” and “worm.” Worms propagate themselves through networks; viruses destroy files and replicate themselves by manipulating files. The damage resulting from this particular hybrid— which includes overwhelmed e-mail systems and lost files–is limited to users of the Microsoft Windows operating system. ILOVEYOU typically comes in the form of an e-mail message from someone the recipient knows with an attachment called LOVE-LETTER- FOR-YOU.TXT.VBS. The attachment is a Visual Basic Script (VBS) file.As long as recipients do not run the attached file, their systems will not be affected and they need only to delete the e-mail and its attachment. When opened and allowed to run, however, ILOVEYOU attempts to send copies of itself using Microsoft Outlook (an electronic mail software program) to all entries in all of the recipient’s address books, infect the Internet Relay Chat (IRC) programso that the next time a user starts “chatting” on the Internet, the worm can spread to everyone who connects to the chat server, search for picture, video, and music files and overwrite or replace them with a copy of itself, and install a password-stealing program that will become active when the recipient opens Internet Explorerand reboots the computer. (Internet accounts set up to collect this information were reportedly disabled early Friday). In short, ILOVEYOU looks a lot like Melissa in operation: it comes via e- mail; it attacks Microsoft’s Outlook; it’s a hybrid between a worm and a virus; and it does some damage–but it mostly excels at using the infected system to e-mail copies of itself to others. The one main difference is that it proliferated much faster than Melissa because it came during the work week, not the weekend. Moreover, ILOVEYOU sent itself to everyone on the recipient’s e-mail lists, rather than just the first 50 addressees as Melissa did. In fact, soon after initial reports of the worm/virus surfaced in Asia on May 4, ILOVEYOU spread rapidly throughout the rest of the world. By 6 pm the same day, Carnegie Mellon’s CERT Coordination Centerhad received over 400 direct reports involving more than 420,000 Internet hosts. And by the next day, ILOVEYOU appeared in new guises, labeled as “Mother’s Day,” “Joke,” “Very Funny,” among others. At least 14 different variants of the virus had been identified by the weekend, according to DOD’s Joint Task Force-Computer Network Defense. These variations retriggered disruptions because they allowed the worm/virus to bypass filters set up earlier to block ILOVEYOU. At least one variant—with the subject header “VIRUS ALERT!!!”–was reportedly even more dangerous than the original because it was also able to overwrite system files critical to computing functions. Reports from various media, government agencies, and computer security experts indicate that the impact of ILOVEYOU was extensive. The virus reportedly hit large corporations such as AT&T, TWA, and Ford Motor Company; media outlets such as the Washington Post and ABC news; international organizations such as the International Monetary Fund, the British Parliament, and Belgium’s banking system; state governments; school systems; and credit unions, among many others, forcing them to take their networks off-line for hours. The virus/worm also reportedly penetrated at least 14 federal agencies—including the Department of Defense (DOD), the Social Security Administration, the Central Intelligence Agency, the Immigration and Naturalization Service, the Department of Energy, the Department of Agriculture, the Department of Education, the National Aeronautics and Space Administration (NASA), along with the House and Senate. We still do not know the full effect of this virus on the agencies that were penetrated. While many were forced to shut down their e-mail networks for some time, many also reported that mission- critical systems and operations were not affected. Of course, if an agency’s business depends on e-mail for decision-making and service delivery, then the virus/worm probably had a significant impact on day- to-day operations in terms of lost productivity. It also appears that major efforts were required to control the virus. Based on a discussion with military CERT representatives, for example, responding to the virus/worm has been a tremendous task that took several days to get under control. Some DOD machines required complete software reloads to overcome the extent of the damage. The virus/worm spread rapidly through the department, penetrating even some classified systems. DOD’s operational commands responded in widely varying ways—some made few changes to their daily operational procedures while others cut off all e-mail communications for an extended period of time. Representatives of DOD’s Joint Task Force- Computer Network Defense said that they will recommend new procedures to better coordinate the department’s response to future incidents, based on experience with the ILOVEYOU virus/worm. While the ILOVEYOU worm/virus resulted in relatively limited damage in terms of systems corrupted, the incident continues to underscore the formidable challenge that the federal government faces in protecting its information systems assets and sensitive data. It again shows, for example, that computer attack tools and techniques are becoming increasingly sophisticated; viruses are spreading faster as a result of the increasing connectivity of today’s networks; commercial-off-the-shelf (COTS) products can be easily exploited for attack by all their users; and there is no “silver bullet” solution to protecting systems, such as firewalls or encryption. Moreover, ILOVEYOU illustrates the difficulty of investigating cyber crime. In particular, investigations of computer attacks such as ILOVEYOU must be conducted on an international scale. Moreover, only the computer used to launch the virus can be traced–not the programmer. Lastly, evidence is fleeting–the more time that passes between the first attack and an arrest, the more time the programmer has to destroy all links to the crime. Additionally, ILOVEYOU once again proved that governmentwide reporting mechanisms are ineffective. Like Melissa more than a year ago, little information was available early enough for agencies to take proactive steps to mitigate the damage. The CERT Coordination Center posted its advisory at approximately 9:30 pm May 4, while FBI’s National Infrastructure Protection Center (NIPC) issued a brief notice at 11:00 am on May 4 and more information at 10:00 pm. In addition, there is still no complete information readily available on the impact that this virus had across the federal government. More important, like Melissa and other attacks this Subcommittee has focused on, our experience with ILOVEYOU is a symptom of broader information security concerns across government. Over the past several years, our analyses as well as those of the inspectors general have found that virtually all of the largest federal agencies have significant computer security weaknesses that place critical federal operations and assets at risk to computer-based attacks. Our most recent individual agency review, of the Environmental Protection Agency (EPA),identified many security weaknesses associated with the computer operating systems and the agencywide computer network that support most of EPA’s mission-related and financial operations. In addition, EPA’s own records identified serious computer incidents in the last 2 years. EPA is currently taking significant steps to address these weaknesses, but resolving them on a lasting basis will require substantial ongoing management attention and changes in the way EPA views information security. EPA is not unique. Within the past 12 months, we have identified significant management weaknesses and control deficiencies at a number of agencies, including DOD, NASA, State, and VA. Although the nature of operations and related risks at these and other agencies vary, there are striking similarities in the specific types of weaknesses reported. I would like to briefly highlight six areas of management and general control problems since they are integral to understanding and implementing long-term solutions. First, we continue to find that poor security planning and management is the rule rather than the exception. Most agencies do not develop security plans for major systems based on risk, have not formally documented security policies, and have not implemented programs for testing and evaluating the effectiveness of controls they rely on. These are fundamental activities that allow an organization to manage its information security risks cost-effectively rather than by reacting to individual problems ad hoc. Second, agencies often lack effective access controls to their computer resources (data, equipment, and facilities) and, as a result, are unable to protect these assets against unauthorized modification, loss, and disclosure. These controls would normally include physical protections such as gates and guards and logical controls, which are controls built into software that (1) require users to authenticate themselves through passwords or other identifiers and (2) limit the files and other resources that an authenticated user can access and the actions that he or she can take. Third, in many of our audits we find that application software development and change controls are weak. For example, testing procedures are undisciplined and do not ensure that implemented software operates as intended, and access to software program libraries is inadequately controlled. Fourth, many agencies lack effective policies and procedures governing the segregation of duties. We commonly find that computer programmers and operators are authorized to perform a wide variety of duties, such as independently writing, testing, and approving program changes. This, in turn, provides them with the ability to independently modify, circumvent, and disable system security features. Fifth, our reviews frequently identify systems with insufficiently restricted access to the powerful programs and sensitive files associated with the computer system’s operation, e.g., operating systems, system utilities, security software, and database management system. Such free access makes it possible for knowledgeable individuals to disable or circumvent controls. Sixth, we have found that service continuity controls are incomplete and often not fully tested for ensuring that critical operations can continue when unexpected events (such as a temporary power failure, accidental loss of files, major disaster such as a fire, or malicious disruptions) occur. Agencies can act immediately to address the weaknesses I just described and thereby reduce their vulnerability to computer attacks, including the ILOVEYOU worm/virus. Specifically, as explained in figure 1, they can (1) increase awareness, (2) ensure that existing controls are operating effectively, (3) ensure that software patches are up-to-date, (4) use automated scanning and testing tools to quickly identify problems, (5) expand their best practices, and (6) ensure that their most common vulnerabilities are addressed. Ensure that agency personnel at all levels understand the significance of their dependence on computer support and the related risks to mission-related operations. Better understanding of risks allows senior executives to make more informed decisions regarding appropriate levels of financial and personnel resources to protect these assets over the long term. Ensure that policies and controls already implemented are operating as intended. Our audits often find that security is weak, not because agencies have no policies and controls, but because the policies and controls they have implemented are not operating effectively. Ensure that known software vulnerabilities are reduced by promptly implementing software patches. Security weaknesses are frequently discovered in commercial software packages after the software has been sold and implemented. To remedy these problems, vendors issue software “patches” that users can install. In addition, organizations such as the CERT Coordination Center routinely issue alerts on software problems. Use readily available software tools to help ensure that controls are operating as intended and that systems are secure. Examples of such tools are (1) scanners that automatically search for system vulnerabilities, (2) password cracking tools, which test password strength, and (3) network monitoring tools, which can be used to monitor system configuration and network traffic, help identify unauthorized changes, and identify unusual or suspicious network activity. Expand on the good practices that are already in place in the agency. Our audits have shown that even agencies with poor security programs often have good practices in certain areas of their security programs or certain organizational units. In these cases, we recommend that the agency expand or build on these practices throughout the agency. Develop and distribute lists of the most common types of vulnerabilities, accompanied by suggested corrective actions. Such lists enable individual organization units to take advantage of experience gained by others. They can be developed based on in-house experience, or adapted from lists available through professional organizations and other centers of expertise. To combat viruses and worms specifically, agencies could take steps such as ensuring that security personnel are adequately trained to respond to early warnings of attacks and keeping antivirus programs up- to-date. Strengthening intrusion detection capabilities may also help. Clearly, it is difficult to sniff out a single virus attached to an e-mail coming in but if 100 e-mails with the same configuration suddenly arrive, an alert should be sounded. User education is also key. In particular, agencies can teach computer users that e-mail attachments are not always what they seem and that they should be careful when opening them. By no means, should users open attachments whose filenames end in “.exe” unless they are sure they know what they are doing. Users should also know that they should never start a personal computer with an unscanned floppy disk or CD-ROM in the computer drive. I would like to stress, however, that while these actions can jump-start security improvement efforts, they will not result in fully effective and lasting improvements unless they are supported by a strong management framework. Based on our 1998 studyof organizations with superior security programs, this involves managing information security risks through a cycle of risk management activities that include assessing risks and determining protection needs, selecting and implementing cost-effective policies and controls to meet these needs, promoting awareness of policies and controls, and of the risks that prompted their adoption, among those responsible for complying with them, and implementing a program of routine tests and examinations for evaluating the effectiveness of policies and related controls and for reporting the resulting conclusions to those who can take appropriate corrective action. Additionally, a strong central focal point can help ensure that the major elements of the risk management cycle are carried out and can serve as a communications link among organizational units. Such coordination is especially important in today’s highly networked computer environment. I would also like to emphasize that while individual agencies bear primary responsibility for the information security associated with their own operations and assets, there are several areas where governmentwide criteria and requirements also need to be strengthened. First, there is a need for routine periodic independent audits of agencies to provide (1) a basis for measuring agency performance and (2) information for strengthened oversight. Except for security audits associated with financial statement audits, current information security reviews are performed on an ad hoc basis. Second, agencies need more prescriptive guidance regarding the level of protection that is appropriate for their systems. Currently, guidance provided by the Office of Management and Budget (OMB) and the National Institute of Standards and Technology (NIST) allows agencies wide discretion in deciding what computer security controls to implement and the level of rigor with which they enforce these controls. As a result, existing guidance does not ensure that agencies are making appropriate judgments in this area and that they are protecting the same types of data consistently throughout the federal community. More specific guidance could be developed in two parts: the first being a set of data classifications that could be used by all federal agencies to categorize the criticality and sensitivity of the data they generate and maintain and the second being a set of minimum mandatory control requirements for each classification which would cover such issues as the strength of system user authentication techniques, appropriate types of cryptographic tools, and the frequency and rigor of testing. Third, there is a need for stronger central leadership and coordination of information security related activities across government. Under current law, responsibilities for guidance and oversight of agency information security is divided among a number of agencies, including OMB, NIST, the General Services Administration, and the National Security Agency. Other organizations have become involved through the administration’s critical infrastructure protection initiative, including the FBI’s National Infrastructure Protection Center and the Critical Infrastructure Assurance Office. The federal Chief Information Officers Council is also supporting these efforts. While all of these organizations have made positive contributions, some roles and responsibilities are not clear, and central coordination is lacking in key areas. In particular, as this latest attack showed, information on vulnerabilities and related solutions is not being adequately shared among agencies, and requirements related to handling and reporting security incidents are not clear. In conclusion, more than 12 months later, not much is different with the ILOVEYOU worm/virus than with Melissa. Many agencies were hit; most were fortunate that the worst damage done was to shut down e-mail systems and temporarily disrupt operations; and early warning systems for incidents like these still need to be improved. Moreover, our audits continue to find that most agencies continue to lack the basic management framework needed to effectively detect, protect against, and recover from these attacks. Lastly, as seen with ILOVEYOU’s variations, we can still expect the next virus to propagate faster, do more damage, and be more difficult to encounter. Consequently, it is more critical than ever that federal agencies and the government act as whole to swiftly implement both short- and long-term solutions identified today to protect systems and sensitive data. Madam Chairwoman, this concludes my testimony. I would be happy to answer any questions you or Members of the Subcommittee may have. For information about this testimony, please contact Keith Rhodes at (202) 512-6415. Cristina Chaplain made key contributions to this testimony. (511998) | Pursuant to a congressional request, GAO discussed the "ILOVEYOU" computer virus, focusing on the need for agency and governmentwide improvements in information security. GAO noted that: (1) ILOVEYOU is both a virus and a worm; (2) the damage resulting from this particular hybrid is limited to users of the Microsoft Windows operating system; (3) ILOVEYOU typically comes in the form of an electronic mail (e-mail) message from someone the recipient knows; (4) as long as recipients do not run the attached file, their systems will not be affected and they need only to delete the e-mail and its attachment; (5) if opened, the ILOVEYOU can spread and infect systems by sending itself to everyone in the recipient's address book; (6) there are areas of management and general control that are integral to improving problems in information security; (7) most agencies do not develop security plans for major systems based on risk, have not formally documented security policies, and have not implemented programs for testing and evaluating the effectiveness of controls they rely on; (8) these are fundamental activities that allow an organization to manage its information security risks cost-effectively rather than by reacting to individual problems ad hoc; (9) agencies often lack effective access controls to their computer resources and, as a result, are unable to protect these assets against unauthorized modification, loss, and disclosure; (10) these controls would normally include physical protections such as gates and guards and logical controls, which are controls built into software that: (a) require users to authenticate themselves through passwords or other identifiers; and (b) limit the files and other resources that an authenticated user can access and the actions that he or she can take; (11) testing procedures are undisciplined and do not ensure that implemented software operates as intended, and access to software program libraries is inadequately controlled; (12) GAO found that computer programmers and operators are authorized to perform a wide variety of duties; (13) this, in turn, provides them with the ability to independently modify, circumvent, and disable system security features; (14) GAO's reviews frequently identify systems with insufficiently restricted access to the powerful programs and sensitive files associated with the computer system's operation; (15) such free access makes it possible for knowledgeable individuals to disable or circumvent controls; (16) service continuity controls are incomplete and often not fully tested for ensuring that critical operations can continue when unexpected events occur; and (17) agencies can act immediately to address computer weaknesses and reduce their vulnerability to computer attacks. |
The end of the Cold War and the evolution of a new security environment have resulted in new operating realities for the U.S. military. Amid significant reductions in the overall size of U.S. forces, defense budgets, and overseas presence, the U.S. military must continue to deploy its forces for traditional combat training and simultaneously manage increased demands to deploy forces for peace operations and other activities. U.S. military forces have participated in peace operations for many years. For example, the United States has committed military personnel to the Multinational Force and Observers since 1982 to ensure that Israel and Egypt abide by the provisions of the Sinai Peace Treaty. However, in recent years, U.S. participation in peace operations has grown. In 1992 alone, the United States began deployments eventually totaling 26,000 personnel to Somalia, 3,000 to Bosnia, and 14,000 to Southwest Asia. The ongoing deployment to Bosnia is expected to involve over 20,000 troops. Congress and others have expressed concern about the overall impact of peace operations on unit and personnel readiness. Deployments for some operations can impair unit and personnel combat training and equipment readiness and divert funds from planned operations and maintenance activities. In other cases, however, deployments can enhance the combat capabilities of units. For example, such deployments provide excellent experience in the tasks essential to wartime proficiency for light infantry, supply, or other support units. All services have experienced increased deployments since the late 1980s, with the Air Force and the Army absorbing the largest percentage of changes. However, a small group of units in each service with unique skills in high demand absorbed most of the impact. Peace operations were the major reason for the increases, with smaller increases for joint activities. DOD cannot precisely measure the increase in deployments because, until 1994, only the Navy had systems to track PERSTEMPO. The Defense Manpower Data Center attempted to reflect the level of PERSTEMPO by matching personnel and pay records with readiness information identifying units in a deployed status. As shown in figure 1, between 1987 and 1995 the percentage of personnel deployed, as measured by the Center’s data, increased for all services. This analysis assumed that all members of a unit were deployed if a certain percentage of its personnel were receiving family separation allowances, which are paid to servicemembers away from their families for over 30 days, or imminent danger pay. from bases in the United States or from locations in Europe and elsewhere, where their families were also located, with relatively few deployments. Now, fewer personnel are being asked to respond to more deployments, travel farther in doing so, and leave their families while deployed. The Navy and the Marines experienced much smaller percentage increases, but they were already deploying about two to three times more than the other services. In the late 1980s, about 11 percent of the Navy’s force was deployed at any given time. By early 1995 this figure had increased to about 14 percent. Over the same period, the Marine Corps increased the average of its force deployed from about 12 percent to 13 percent. The Navy and the Marine Corps have always had relatively high deployment rates. Personnel in these services have traditionally operated on cyclical deployment schedules on board ships or at forward presence locations across the globe, unaccompanied by their families. Because of their forward-deployed mode of operations, the Navy and the Marines were generally able to respond to increased demands with forces already deployed. Increased deployments have fallen most heavily to a few types of units with unique skills in high demand, such as special forces, electronic warfare squadrons, Patriot air defense units, and military police. Many of these critical units are in short supply in the active force, with much of the capability residing in the reserve component. For example, about 75 percent of the military’s psychological operations capability resides in the reserve component. We recently reported that the extended or repeated participation of such units in peace operations could impede their ability to respond to major regional contingencies because of the difficulty in quickly disengaging and redeploying them. DOD officials told us that the services should periodically examine force structure to ensure that frequently used capabilities are not contained primarily in the reserves. DOD is examining the need to increase the number of some high-deploying units. According to the Commander in Chief (CINC) of the European Command, the unified command responsible for operations in Bosnia, the forces needed to fulfill the National Security Strategy—that is, to be prepared to respond to two nearly simultaneous major regional contingencies—and those needed for peace operations like Bosnia are not necessarily the same. The major regional contingency scenario requires traditional combat forces, while peace operations and other non-war activities draw heavily upon the types of unique units that are few in number (those units discussed above). The CINC believed that the PERSTEMPO issue is driven by this dichotomy and that current forces should be reevaluated and realigned to address this problem. The European Commander also believed that better coordination of contingency planning among CINCs could reduce the tasking of high PERSTEMPO units. Such planning is currently focused within each unified command’s sphere of operations and may not adequately account for changes in one theater that can increase PERSTEMPO in others. Our analysis of high-deploying units shows that most had at least one element, such as a company or detachment, deployed for over one-half of each year from fiscal year 1992 through June 1995. For example, Air Force electronic warfare squadrons had at least one element deployed an average of 313 days each year. Marine support, ground combat, and aviation units and Army support units had one or more elements deployed, on average, at least 210 days annually during the period. Some individuals were deployed for even longer periods. Even when units return to their home station, individuals may have to spend time away from their homes on other duty. For example, some sailors must provide ship security every fourth night on board ship. The amount of time deployed between 1992 and 1995 was stable or increasing for most types of units we analyzed. For example, the Army military police units averaged about 160 days on deployment in 1992, but this figure had increased to an average of 172 days in 1995 (projected from third quarter figures). The Navy was the only service whose pace of deployments appeared to be abating. For example, deployments of the five nuclear submarines in our sample dropped from an average of 210 days in 1992 to a projected average of 173 days in 1995. According to officials at the submarine units we visited, the number of submarines had not yet been reduced by the drawdown, so the full complement of ships has been available to deal with the demand. However, officials were concerned that once the number of submarines is reduced, which is expected in the next several years, they would encounter the same difficulties as the other services. According to Navy officials, Navy PERSTEMPO has recently been dropping to pre-Gulf War levels. In the high-deploying units we studied, most of the increased deployments were for peace operations, particularly those of Air Force and Army units. However, after declining between 1992 and 1993, joint activities between the United States and other nations’ forces also increased during 1994-95. Figure 2 illustrates the Air Force and the Army’s steep growth in deployments for peace operations. Navy and Marine officials also noted significant increases in peace operations, but both services generally met increased requirements using units already on scheduled deployments. We were unable to develop detailed statistics on the amount of time these services spent for peace operations because detailed records were not available to isolate time spent on one activity versus another during scheduled deployments. Average percent of time deployed Despite the increases in peace operations, the high-deploying units continued to spend most of their time deployed for training, scheduled forward deployments, or other traditional missions. We found no major reductions in the amount of time deployed for training. Throughout 1992-95, each service stayed within about 12 percentage points of its yearly averages for training deployments. However, as shown in figure 3, after declining between 1992 and 1993, joint activities began to increase somewhat in 1994 for the Air Force, the Army, and the Marine Corps. We were unable to separate joint activities from the Navy Atlantic Fleet data on overall training. Air Force Army Marine Corps According to many of the CINCs, in addition to the increased deployments for peace operations, there have been large increases in joint activities since the end of the Gulf War. In some commands such activities have more than doubled. These deployments involve myriad actions, such as training exercises between U.S. services and those of other countries, computer simulation exercises, intergovernmental and multinational requirements such as the show of U.S. force to promote regional stability, and support required by treaties with other nations. For example, Partnership for Peace is a new type of exercise that emerged after the Gulf War. This initiative seeks to intensify military and political cooperation throughout Europe and includes participation of North Atlantic Treaty Organization countries and countries from eastern Europe and the former Soviet Union. According to DOD officials, no system tracks all of these activities, and no standardized terminology distinguishes them. Consequently, individual contributions to the increases are difficult to analyze precisely. Increased deployments are rooted in the changing national military strategy. According to DOD officials, the increased focus on regional security and stability has been accompanied by increased deployments for peace operations. Many of these operations involve an increasingly complex integration of diverse land, sea, and air assets from U.S. and other nations’ military services, making joint training increasingly important and spurring increased deployments for joint activities. However, the need for deployments for training in each service’s individual mission also continues unabated. DOD officials acknowledged that better balance and management of these competing demands is needed, and DOD has begun to address this need. The Chairman of the Joint Chiefs of Staff Exercise Program annually administers about 200 activities, over two-thirds of which have been focused on objectives other than joint training. Program officials told us that many joint training exercises involve small groups of servicemembers, and they are attempting to reduce them by combining or canceling some exercises. Moreover, program officials said they are continuing to develop joint mission essential task lists to help integrate joint and service training tasks, which could lead to less redundant training. At the request of the Chairman of the Joint Chiefs of Staff, the CINCs are also examining exercise plans to prevent redundant training by consolidating, synchronizing, reducing participation in, or canceling exercises. Many of the CINCs and Joint Staff personnel told us that the scope and duration of joint exercises, particularly those involving ineffective large-scale exercises, are already being reduced and many exercises are involving fewer people. One CINC reduced the number of scheduled exercises in his area from 112 in fiscal year 1995 to 85 in fiscal year 1996 by combining smaller, single-service exercises into larger, joint training exercises. According to DOD officials, many other deployments are generated by intergovernmental and other demands outside the Chairman’s program. These officials are developing definitions for all the various types of activities to provide a better basis for analyzing such demands. Officials from the U.S. Atlantic Command, which is responsible for training, packaging, and deploying forces in response to requirements identified by other CINCs, told us that DOD should have a policy regarding the use of DOD assets and personnel to fulfill tasks generated by other government agencies, such as the Department of State. DOD assistance is currently based on guidance and criteria provided by the Office of the President and the Secretary of Defense, and in response to requirements in support of the national security strategy or decisions by the President or other officials in the National Command Authorities. Atlantic Command officials also believe that DOD needs to establish a policy to improve discipline in the long-term scheduling of exercises. More judicious management of deployments may also require cultural adjustments in the services. Commanders from the unit level through major commands acknowledged that turning down deployment requests was very difficult because they believed that doing so would reflect negatively on the unit and/or on them. The Army Special Forces Commander, for example, recently acknowledged that the command “never met a deployment opportunity that we didn’t like” and challenged the command to curb its traditional appetite for deployments. In fact, a number of officials were concerned that commanders in all the services were competing for deployments to underscore the value of their units during the current drawdown. DOD systems are inadequate to assess the full impact of high PERSTEMPO on readiness. Although unit readiness reports indicated a stable level of readiness during the 1990s, the high-deploying units we visited voiced pronounced concern that some personnel have been stressed to their saturation point, with attendant concerns about difficulties in family life and lowered retention rates. The SORTS reports do not capture all the factors that DOD considers critical to a comprehensive readiness analysis, and indicators of personnel readiness—such as retention rates—are generally not available in the form needed to analyze stress on individual units. We and the Defense Science Board recently reported that readiness of the overall force has remained generally stable during the 1990s, despite the high level of deployments. However, these reports raise concerns that the high rate of deployments was reducing readiness in a small number of units. Our analysis of SORTS reports for a sample of high-deploying units yielded similar results. During the past 5 years, deployments—particularly unscheduled ones—were a primary cause of a reduction in readiness below planned levels in 22 of the 78 units (28 percent) analyzed, as seen in table 1. Most of the affected units were in the Army and the Air Force. In the Air Force, about one-half the units analyzed experienced reduced readiness during the 5-year period analyzed. About one-third of the Army units experienced reductions. Many of the declines were of short duration and were caused by shortages of personnel; increased consumption of spare parts, which resulted in shortages; and reduced training opportunities associated with the high pace of deployments. Service officials pointed out that factors other than deployments can have as much, or more, influence on reported readiness levels. For example, Army and Marine Corps officials noted that shortages of noncommissioned officers in certain job skills were affecting many units. During our visits to 29 of the high-deploying units, there was pronounced concern about the impact of high PERSTEMPO on servicemembers and families in all the services except the Navy. Unit officials and personnel told us that while many were experiencing personal and career hardships as a result of the high rate of deployments, they expected to be deployed for some period of the year and most were coping with the stress. Officials said, however, that some had almost reached their saturation point and that further increases could create significant retention, substance abuse, and family problems. Unit personnel described a variety of stresses on individuals and families, such as difficulties in financial management for many young servicemembers and missing the birth of children and their birthdays as well as Christmas and other holidays. Many spoke of retention problems and high divorce rates in high-deploying units. On an Air Force quality-of-life survey conducted in May 1995, more than one-third of Air Force officers and enlisted personnel who responded noted deployment-related impacts on their personal lives and finances. A similar proportion reported career hardships such as difficulty in obtaining professional military education. Army air defense unit officials concluded from a unit-conducted survey that soldiers and spouses were unhappy with frequent deployments. Conducted at the end of a deployment to Southwest Asia, this survey indicated that about 27 percent of the married personnel believed their marriages could be in serious jeopardy if the unit deployed again in the year following its return. About 40 percent of the respondents indicated that they had decided to “get out of the Army” during the deployment. Members of one Air Force electronic warfare squadron we visited were so stressed by deployments that one wrote to Members of Congress and the Chief of Staff of the Air Force asking for relief due to his concerns about the safety of the squadron. Three of its seven aircraft had been deployed to Bosnia nearly continuously since July 1993. With nearly half its aircraft still in Bosnia, the squadron was unexpectedly tasked to send two more aircraft to Haiti for 2 weeks in September 1994 and three to Saudi Arabia in mid-October 1994. At the same time, the squadron was asked to complete a planned move to a new base. Efforts were made to bring back individuals to accompany their families during the move, but spouses were upset when some servicemembers were redeployed within 48 hours of arrival at the new base. These deployments harmed morale and degraded the unit training program and overall readiness. An Air Force investigation of the incident concluded that the squadron would need 8 to 12 months to regain its prior level of training proficiency. Although a portion of the squadron’s aircraft continued to be used for missions, the Chief of Staff directed a portion of the squadron’s aircraft to be protected from deployments until the unit had recovered. According to Air Force officials, the squadron had largely recovered by November 1995. These concerns, however, generally were not reflected in the personnel readiness statistics that we reviewed. To supplement SORTS data, DOD and the services developed a large number of statistics on personnel readiness, such as retention, spouse and child abuse, drug abuse, divorces, and court-martials. However, many statistics are not collected consistently across the services or are aggregated at major command and/or servicewide levels only, preventing comparisons of conditions in individual units with others. We also found little agreement among the services as to which indicators are the best measures of personnel readiness. We did, however, obtain data comparing retention in our Navy sample of units with those Navy-wide. Personnel retention rates in the sampled units were 6 to 15 percentage points lower than overall Navy levels between 1991 and June 1995. These results are consistent with Center for Naval Analyses reports conducted in 1992 and 1994, which found that more time at sea reduces retention rates for enlisted personnel. The Navy was the only service that maintained this data at the unit level. The other services aggregated their retention data at major commands and above. The Defense Manpower Data Center prepared a special analysis comparing reports of (1) positive drug tests and (2) spouse and child abuse in our sample of units with servicewide rates between 1991 and 1994. In general, rates in both areas were lower in the high-deploying units than in the services as a whole. DOD is developing a central registry for all reports of child and spouse abuse with standardized data elements for collection of case information. The central registry is expected to be fully implemented in 1996. The President, Congress, and DOD have recognized the problems generated by increases in PERSTEMPO and have taken steps to address them. In addition, DOD is considering a number of recommendations intended to mitigate PERSTEMPO problems. However, DOD policy on PERSTEMPO is unclear in many areas. In May and July 1994, the President signed a new Presidential Decision Directive and national security strategy that included policies designed to make U.S. involvement in peace operations more selective. For example, one policy sets forth specific standards of review to help determine when the United States should participate or support peace operations, including whether the role of U.S. forces is tied to clear objectives and an identified end point. It also states that the primary mission of the U.S. armed forces remains to be prepared to fight and win two nearly simultaneous regional contingencies. Legislation has also been introduced in Congress to address the impact of high PERSTEMPO. For example, in the National Defense Authorization Act for Fiscal Year 1996, Congress recognizes that excessively high PERSTEMPO for military personnel degrades unit readiness and morale and can adversely affect unit retention. The act encourages DOD to continue improving techniques for defining and managing PERSTEMPO with a view toward establishing and achieving reasonable PERSTEMPO standards for all military personnel. DOD and the services have also taken actions to better manage high PERSTEMPO. In addition to the actions taken to reduce deployments by better integrating joint and service training requirements, the Joint Staff has drafted the global military force policy. This policy is designed to help guide decisions to use units few in number but high in demand for peace operations and other types of deployments. The policy will outline the impact that successively higher levels of deployment have on unit maintenance, training, and other readiness areas. DOD officials hope to finalize the policy during the spring of 1996. DOD is also developing a new Joint Personnel Asset Visibility System, which uses electromagnetic identification cards to track personnel assigned to Joint Task Force operations. In addition, PERSTEMPO is discussed at the Joint Monthly Readiness Review, which provides a venue for input from both the services and the CINCs on readiness assessments. DOD and the services are using the reserves to relieve active duty units and lower PERSTEMPO. For example, the Air Force used reserves to relieve highly stressed squadrons in Europe, and the Marine Corps used reserve rifle companies to relieve active duty Marines in Guantanamo Bay, Cuba. According to DOD officials, the success of this approach is dependent on (1) better identification of and planning for requirements, (2) flexibility in the training and use of reservists, and (3) programming the funding to meet needs. The services continuously monitor retention levels of individuals and job specialties, and the Army and the Air Force already have or plan to offer bonuses and increase the number of personnel in some high-deploying units, such as air defense artillery or airborne warning and control system units. The Air Force has sought relief from the taskings for airborne warning and control system units to catch up on lost training opportunities. It has also instituted its Palace Tenure System, which helps ensure that support taskings are balanced across their entire force. The Navy has adopted a revised training strategy tailored to the new requirements and expects to reduce the days deployed for training up to 10 percent for ships underway. The Navy has also reorganized the fleets and established a permanent Western Hemisphere Group to more efficiently fulfill Caribbean, counternarcotics, and South American commitments. It is difficult for DOD to determine the actual time that either military personnel or their units are deployed. This information is important to planning and managing contingency operations. Although all services now have systems to measure PERSTEMPO, each service has different (1) definitions of what constitutes a deployment, (2) policies or guidance for the length of time units or personnel should be deployed, and (3) systems for tracking deployments (see table 2). As noted on table 2, the Army defines a deployment as a movement during which a unit spends 7 days (3 days for Special Forces) or more away from its home station. However, deployments to combat training centers, which generally last about 3 weeks, are not counted. In contrast, the Marine Corps defines a deployment as any movement from the home station for 10 days or more, including a deployment for training at its combat training center. DOD is currently considering several recommendations made by its PERSTEMPO Working Group and a Defense Science Board task force. For example, these reports recommend that (1) a Joint Staff readiness and training oversight panel oversee joint exercises and service inspection activities to help reduce deployment demands and (2) the CINCs establish plans for the rotation of units and personnel involved in operations that exceed 6 months. DOD and European Command officials said that they do not plan to rotate the combat units in Bosnia after 6 months. Rather, they will stay as long as needed, up to 364 days. However, they will receive a rest and relaxation break after 179 days. According to these officials, rotating units in and out of Bosnia is costly and could cause operating inefficiencies. The Defense Science Board report also recommends that DOD issue a single formula for counting deployed time among the services: 1 day away equals 1 day deployed. In this regard, the report of the Working Group recommended that the services continue to refine their PERSTEMPO systems but, at a minimum, permit a computation of averages for length of deployment, time between deployments, percent of time deployed, and percent of inventory deployed—at the unit or individual skill level. One key issue in the decision of whether and how much to standardize PERSTEMPO systems is the need for flexibility to accommodate the unique nature of each service’s missions and deployment practices. In this regard, officials in the U.S. Special Operations Command told us that they have developed their own PERSTEMPO system because of concerns that the various service systems do not reflect the unique demands placed on Special Forces personnel. U.S. Atlantic Command officials believed that all services should be required to track PERSTEMPO by unit to help them make better decisions concerning unit deployments. Similarly, European Command officials called for DOD to direct a single method to identify which units are tasked, including an objective goal for PERSTEMPO management. The Working Group’s June 1995 report noted that the services had a number of concerns in this regard, including concerns that such systems and thresholds could erode traditional service roles and such thresholds may lead to unmanageable restrictions on unit and such systems may require an unnecessary and expensive level of detail. The PERSTEMPO Working Group is finalizing its second study and is due to report in the near future. The report will address whether current deployment measurement systems are appropriate and provide overall conclusions on the status of PERSTEMPO today as well as recommendations for further courses of action. To provide the oversight and guidance needed for long-term management of PERSTEMPO, we recommend that the Secretary of Defense identify key indicators that provide the best measures of deployments’ impact on personnel readiness and adjust existing databases to allow research comparing these indicators in high PERSTEMPO units, skill groups, or weapon systems to other such groups and issue DOD regulations that guide service management of PERSTEMPO by (1) establishing a DOD-wide definition of deployment; (2) stating whether each service should have a goal, policy, or regulation stipulating the maximum amount of time units and/or personnel may be deployed; and (3) defining the minimum data on PERSTEMPO each service must collect and maintain. In a meeting to discuss the Department’s comments on a draft of this report, DOD officials said they generally agreed with our findings and recommendations. In written comments on the draft report (see app. II), DOD said that it has taken, and will continue to take, numerous initiatives to manage PERSTEMPO. Also, DOD said that it will be considering recommendations made in the PERSTEMPO Working Group’s report that is due to be published in the near future. To assess the frequency of deployments and their impact on readiness, we focused our analyses on about 80 high-deploying active duty units in the four services and the Special Operations Command (see app.I). At our request, the Army, the Navy, and the Air Force provided us with a list of 68 combat and support units that were the highest deployers in the 5 types of units most frequently deployed. The Marine Corps did not have the historical data to identify units with particularly high deployment rates. Instead, we used a group of 18 Corps-identified units representing a cross-section of Marine units. We obtained deployment histories for 83 of these units and complete SORTS readiness histories for 78 of the units. For these units, we analyzed available readiness-related statistics and conducted case study visits to 29 judgmentally selected units. The case study units were selected to provide broad coverage of the types of units in each service as well as geographical diversity. To determine the frequency of deployments in recent years, we relied primarily on an analysis performed by the Defense Manpower Data Center, based on a special database approximating the frequency of deployments by measuring family separation and imminent danger pay. We did not verify the Center’s data. We supplemented this data with deployment histories collected directly from the high-deploying units and information from a recently created Joint Staff database. We also discussed the status of efforts to measure PERSTEMPO with each service and the Joint Staff. We assessed the impact of high PERSTEMPO on readiness through a two-tiered process. We assessed readiness of the overall force at the unit level by using our recently completed analysis of force readiness. We also compared SORTS ratings for the high-deploying units from 1991 to 1995 with profiles of targeted ratings. We then compared ratings below expected levels with unit explanations of degradations in readiness, supplementing this analysis with discussions at the major command level. To assess the impact of deployments on individual readiness, we reviewed available literature and held discussions with individual service and unit officials. Because there was no agreement regarding the best indicators of the impact of deployments on individuals and because of data limitations, our work in this area was limited to data on spouse and child abuse and positive drug tests from the Defense Manpower Data Center and Navy data on retention. To review DOD actions to mitigate the impact of high PERSTEMPO, we reviewed DOD reports and held discussions with DOD, service, and unit officials. We conducted our review from May 1995 to January 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen, Senate and House Committees on Appropriations, Senate Committee on Armed Services, and House Committee on National Security, and to the Secretaries of Defense, the Army, the Navy, and the Air Force. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix III. If you or your staff have questions about this report, please call me on (202) 512-5140. John W. Nelson John H. Pendleton Gerald L. Winterlin The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO examined the United States' military readiness, focusing on the: (1) frequency of deployments in recent years; (2) effects of increased deployment on combat readiness; and (3) Department of Defense's (DOD) efforts to limit personnel temporary (PERSTEMPO) deployment. GAO found that: (1) Army and Air Force deployments have increased among special forces, electronic warfare squadrons, and Patriot air defense, and military police units; (2) the percentage of personnel deployed from 1987 to 1995 has increased from 2 to 6 percent for the Air Force and 5 to 9 percent for the Army; (3) the Navy and Marine Corps traditionally deploy units at twice the rate of the other services and remain active for at least half of the year; (4) peace operations, along with smaller increases in joint activity, are the driving force behind increased deployments; (5) DOD believes that deployments can be reduced by eliminating redundant military training and combining or cancelling some exercises; (6) the Status of Resources and Training System reports less than one-third of frequently deploying units dropping below planned readiness levels; (7) DOD is concerned about the nature of frequently deploying units' personnel problems; (8) DOD statistics on personnel readiness are not useful because they are inconsistent and are only compiled at the major command level; and (9) high PERSTEMPO is likely to continue unless DOD directs the services to set up goals and policies to manage PERSTEMPO. |
Each year, over 18,000 aircraft and more than 500 million passengers travel through the air transportation system in the United States. The Federal Aviation Administration (FAA) has responsibility for managing this system and ensuring the safe and efficient movement of air traffic. To successfully accomplish this mission, FAA must have a sufficient number of adequately trained air traffic controllers working at air traffic control (ATC) facilities. Currently, FAA operates nearly 400 ATC facilities and employs over 17,000 individuals in its controller workforce. For nearly a decade after the air traffic controller strike in August 1981, FAA had to rebuild its controller workforce. Between fiscal years 1982 and 1990, FAA hired thousands of controllers to replace those fired by a presidential directive in 1981 and indefinitely barred from seeking future employment as FAA controllers. Most controllers hired during that period have remained with FAA. In August 1993, the bar was repealed through a presidential memorandum, and in 1995, FAA began rehiring some of the former controllers. FAA anticipates that a large number of these controllers, in addition to the controllers who did not participate in the strike and controllers hired after the strike, will become eligible to retire beginning in the early 2000s, when they first meet minimum retirement qualifications. Air traffic controllers play a critical role in the nation’s air transportation system. Specifically, controllers are responsible for ensuring the safe, orderly, and expeditious flow of air traffic in the air and on the ground. Controllers manage air traffic visually and through the use of various types of equipment, such as radars and computers, at various ATC facilities—control towers, terminal radar approach control (TRACON) facilities, and air route traffic control centers (commonly called “en route centers”). Controllers’ responsibilities for managing air traffic vary according to the type of ATC facility. For instance, controllers that work at control towers are responsible for ensuring the safe separation of aircraft on the ground and in flight in the vicinity of airports, generally within a 5-mile radius. These controllers manage the flow of aircraft during takeoffs and landings and coordinate the transfer of aircraft with adjacent ATC facilities as aircraft enter or leave an airport’s airspace. Controllers working at TRACON facilities manage the arrival and departure of aircraft within a 5- to 30-mile radius of airports. Controllers working at en route centers manage aircraft beyond a 30-mile radius. These controllers assign aircraft to specific routes and altitudes to separate aircraft while they are flying along federal airways or when operating into or out of airports not served by a terminal facility. These controllers also coordinate the transfer of aircraft control with adjacent en route centers or terminal facilities. The typical en route center has responsibility for more than 100,000 square miles of airspace, which generally extends over several states. Depending on the location of the en route center, some controllers manage domestic, international, and oceanic air traffic. Figure 1.1 shows how controllers working at the different ATC facilities track aircraft during ground, take off, landing, and in-flight operations. As of April 10, 1996, FAA operated 387 ATC facilities, consisting of 24 en route centers and 363 terminal facilities. FAA determines the appropriate level of staffing for its ATC facilities by using staffing standards forecast models. These models produce staffing standards—the specified level of controller staff needed to manage the ATC system, within 10 percent. For example, the staffing standards indicated in fiscal year 1996 that there should have been 17,465 controllers in the controller workforce. The standards also specified staffing levels for each ATC facility, but according to FAA officials, the facility-level standards are not designed to be as accurate as the national standards. FAA relies on a number of sources to fill its controller positions. These sources are (1) individuals with no prior controller training or work experience in the ATC environment, (2) individuals who have received some controller training but generally do not have work experience in the federal ATC environment, and (3) individuals with prior controller work experience. The first group includes individuals who respond to vacancy announcements for controller positions. The second group includes graduates of the collegiate training initiative (CTI) program, who received initial ATC academic and technical skills training prior to being hired by FAA as controllers. This type of training introduces the students to the terminology, airspace configurations, and technical skills necessary to manage air traffic and operate equipment. The third group includes former controllers fired in 1981, who were members of the Professional Air Traffic Controller Organization (PATCO) union; former controllers who left FAA voluntarily and are eligible for reinstatement; and former Department of Defense (DOD) civilian and military controllers. Controller candidates who have no prior controller training or work experience had received initial controller training at the FAA Academy in Oklahoma City, Oklahoma. However, FAA discontinued initial controller training for newly hired controllers at the Academy in 1992 due to a sharp decrease in controller hiring. Candidates who currently receive initial controller training through the CTI program are trained at one of four CTI schools located in various parts of the country. These schools are the Community College of Beaver County in Beaver Falls, Pennsylvania; Hampton University in Hampton, Virginia; University of North Dakota in Grand Forks, North Dakota; and University of Alaska-Anchorage in Anchorage, Alaska. The type, length, and cost of controller training provided by the CTI schools vary, and students pay the cost of their training at all these schools. In addition, in 1989 the Congress established the Mid-America Aviation Resource Consortium (MARC) in Eden Prairie, Minnesota, to train controller candidates. Unlike the CTI schools, the MARC program is not part of a broader academic program, and the cost of training MARC students is paid by federal funds. Controller candidates with prior controller work experience, such as former PATCO members and former DOD controllers, are not required to repeat the initial controller training when hired by FAA. However, they must complete certain refresher courses at the FAA Academy. Once assigned to an ATC facility, controllers are classified as “developmental controllers” until they complete all requirements to be certified for all of the ATC positions within a defined area of a given ATC facility. It generally takes new controllers who have had only initial controller training 2 to 4 years—depending on the availability of facility staff or contractors to provide on-the-job training—to complete all the certification requirements to become full-performance-level (FPL) controllers. It normally takes individuals who have prior controller experience 1 to 2 years to become FPL controllers. Controllers working at FAA’s ATC facilities are eligible to retire under two sets of retirement rules—the general retirement rules for federal employees and special rules for controllers only. Depending on when they were hired, controllers are covered by either the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS). Under these rules, controllers can retire if they meet certain age and years-of-service requirements. For example, a controller who is 55 years old can retire after 30 years of federal service. Under the special controller retirement rules, controllers may be able to retire earlier than under the general CSRS and FERS rules if they have enough service time as an active controller or immediate supervisor. For instance, controllers can retire at age 50 if they have spent at least 20 years as an active civilian controller or immediate supervisor or at any age if they have spent at least 25 years as an active civilian controller or immediate supervisor. Table 1.1 summarizes all of these rules. In March 1996, the Chairman and Ranking Member of the Subcommittee on Transportation, House Committee on Appropriations, and Ranking Member of the House Committee on Transportation and Infrastructure, asked us to examine FAA’s efforts for addressing future and existing controller staffing needs. Specifically, we were asked to (1) identify the key variables FAA uses to project future controller staffing needs and evaluate their reasonableness, (2) determine whether FAA has identified a sufficient number of controller candidates to satisfy its short- and long-term controller staffing needs and evaluate FAA’s plans to train new controllers, and (3) identify impediments that hinder FAA from staffing ATC facilities at specified levels. To address the first objective, we interviewed officials in FAA’s Office of Air Traffic Resource Management, Office of Human Resources Management, and Office of Business Information and Consultation who are responsible for managing the controller workforce and preparing the staffing standards models. These officials provided information on the data used to support FAA’s staffing requests, including FAA’s projections of air traffic and attrition, which we compared to available data on actual traffic and attrition. We also used personnel data supplied by FAA to estimate the age and service characteristics of future retirees on the basis of characteristics of actual retirees between fiscal years 1992 and 1996. Additional information on how we made these projections is in appendix I. We did not, however, verify the validity of the staffing estimates generated by the staffing standards forecast models because the National Research Council—which is the principal operating agency of the National Academy of Sciences and the National Academy of Engineering—was reviewing FAA’s methodologies for estimating the number of controllers needed at ATC facilities. However, the Council was not reviewing the part of the models that estimates future attrition. Furthermore, the Council expects to issue a final report in the spring of 1997. To address the second objective, we interviewed officials at the FAA Academy in Oklahoma City, Oklahoma, the MARC, and the four CTI schools to obtain information on the number of controller candidates trained at those facilities during fiscal years 1993 to 1996 and the annual capacity of these facilities to train new controllers. We also interviewed FAA headquarters officials and analyzed pertinent data to determine (1) what was the pool of controller candidates available to meet anticipated staffing needs, (2) whether FAA had developed plans to satisfy long-term staffing needs, and (3) what actions FAA had under way to expand the pool of available controller candidates. To address the third objective, we compared controller staffing levels specified by FAA’s controller staffing standards with actual staffing at the national, regional, and facility levels as of April 10, 1996. We also reviewed pertinent documents and interviewed officials in FAA’s Air Traffic Resource Management Office and the National Air Traffic Controller Association (NATCA) in Washington, D.C. To obtain a nationwide perspective on controller staffing issues, we sent a survey to, followed by a semistructured telephone interview with, air traffic managers at the nine FAA regional offices. In addition, we sent the same survey to air traffic managers at 15 ATC facilities (see app. II), including 3 en route centers, and at 12 terminals, as well as NATCA representatives located at the Eastern, Great Lakes, and Southern regions to obtain their perspectives on (1) their staffing needs as compared to current controller staffing levels and the impact of these differences on controller operations, (2) the impediments or principal causes of staffing differences at ATC facilities, and (3) the initiatives FAA has under way to address the impediments. We selected a judgmental sample of 15 ATC facilities to obtain geographical diversity and a representative mix of facilities where the current controller staffing levels were greater or less than the 10-percent difference acceptable to FAA. The three NATCA regions were selected because all 15 ATC facilities that we contacted were located in these regions. We conducted our review from April 1996 through February 1997 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to FAA for its review and comment. FAA officials, including the Acting Deputy Associate Administrator for Air Traffic Services, commented on the report, and changes in response to their comments are contained throughout the report. FAA’s projections of future controller staffing needs are primarily based on its staffing standards forecast models that use two key variables to forecast future needs—estimates of future air traffic growth and estimates of future controller attrition. While the air traffic estimates have been reasonable, FAA could not provide data needed to evaluate its attrition estimates. FAA’s attrition estimates could overstate retirements in future years because the agency has not compiled some of the information needed to determine when controllers will be eligible to retire and because it does not consider available data on controllers’ age and service time in its attrition estimates. By analyzing such data, we found that controller retirements could be significantly lower than FAA projects beginning in 1999. Historically, FAA has based its staffing requests on its long-standing staffing standards forecast models—it uses separate models for en route centers, TRACON facilities, and control towers. The models forecast the number of controllers that will be needed by using three types of data: periodic industrial engineering studies that measure the amount of time it takes a controller to perform necessary work tasks, such as assigning an airplane to a new altitude; estimates of changes in air traffic activity; and estimates of future controller attrition. According to FAA officials, the staffing standards process undergoes periodic revision to update data and improve methodologies. As a result of these updates, FAA’s estimate of the total number of controllers it needs can change from year to year. According to FAA officials, its models have been used to estimate controller staffing needs at ATC facilities nationwide, plus or minus 10 percent, and have served as key components for formulating FAA’s annual budget. Before being submitted to the Congress, the staffing budget is reviewed within FAA, as well as by the Department of Transportation and by the Office of Management and Budget. The size of the controller workforce grew each fiscal year from 1981 through 1992, when it reached 17,982 controllers. In fiscal year 1991, the last full year in which FAA offered initial training only at its Academy in Oklahoma City, FAA hired a total of 1,235 new controller candidates. Subsequently, FAA’s hiring of new controllers decreased significantly because it had more controllers than specified by the staffing standards. Between fiscal years 1993 and 1996, FAA hired a total of 611 new controllers—fewer than the 1,513 who had left the controller workforce over the same period—resulting in a decrease in the size of the controller workforce (see fig. 2.1 and table 2.1). According to FAA officials, most of the decrease in the size of the controller workforce was due to the congressionally directed initiative to contract out the functions of lower-level control towers to private companies, instead of staffing them with FAA employees. As part of a larger presidential effort to reduce the number of federal employees, in 1994 FAA also offered a retirement incentive, called a buyout, to staff, including those controllers who worked at the towers whose functions were contracted out. In fiscal year 1995, FAA’s end-of-year controller workforce dropped below the level specified by the staffing standards. Although the actual controller workforce differed from the staffing standards by as much as 400 in some years, nationwide staffing levels were well within the standards’ 10-percent tolerance level. This report does not evaluate FAA’s staffing standards. We have previously reported on FAA’s staffing standards, and FAA has taken action to address our prior recommendations. In addition, the standards process is currently undergoing a congressionally requested review by an expert panel convened by the National Academy of Sciences. The study was requested to determine if a comprehensive methodology could be developed to provide more accurate estimates of the required number of controllers at each ATC facility, and its findings are expected to be published in the spring of 1997. After the controller workforce dropped below the levels specified by the standards in 1995, FAA initiated plans to increase hiring. FAA currently plans to increase both hiring and the overall size of the controller workforce over the next 4 years. In fiscal year 1997, FAA requested and received funds to hire 500 new controllers—250 to replace controllers expected to leave the workforce that year and 250 to meet projected future needs. FAA’s fiscal year 1998 request includes funds for 800 new controllers—300 replacements and 500 new positions. Table 2.2 provides FAA’s estimates of controller hiring, attrition, and the total workforce through fiscal year 2002. As the table shows, estimated attrition is expected to increase from 280 controllers in fiscal year 1997 to 550 controllers in fiscal year 2002. According to officials at FAA headquarters, the attrition estimates that support its recent staffing requests are based in part on the staffing standards forecast models and in part on another method that is intended to address an anticipated increase in the number of controllers eligible to retire. This second method is based on FAA’s assumption that 20 percent of those who are eligible to retire will do so each year. According to FAA officials, because many controllers hired after the 1981 PATCO strike will first be eligible to retire around fiscal year 2001, they expect more controllers to retire each year as more become eligible. Figure 2.2 shows FAA’s estimates of the number of controllers who will become eligible to retire each year though fiscal year 2007, as well as the estimated size of the total pool of those eligible to retire each year through fiscal year 2002, the last year of FAA’s controller staffing plan. However, FAA officials were not able to specify how much of the estimated increase in attrition is predicted by the staffing standards forecast models and how much is derived from its estimate of future retirements. In addition to reflecting changes in the number of controllers eligible to retire, FAA’s staffing plan also differs from the annual staffing levels projected by the staffing standards in several other ways. First, the plan anticipates hiring replacements 3 years before they are needed to provide them with adequate training. In this way, FAA will have fully trained replacements for those who retire. According to FAA officials, the plan also reflects an effort to spread out hiring over several years to reduce the training burden on its Academy and ATC facilities. Thus, because FAA’s staffing plan is designed to hire enough controllers to be at the level specified by the standards in fiscal year 2002, controller staffing is expected to again be above the standards in fiscal years 1998-2001. Officials we interviewed in eight of FAA’s nine regions expressed concerns about the adequacy of the future controller workforce that were similar to those expressed by headquarters officials. The regional officials were concerned about an increase in attrition in the coming years due to the pending retirement eligibility of those controllers who did not strike, those hired after 1981, and former PATCO members who have been rehired by FAA. Many of these officials also emphasized that FAA needs an adequate supply of new controllers to provide time to train replacements for those who retire. The first key variable FAA uses to project future controller staffing needs is an estimate of the growth in the volume of air traffic, which FAA’s Office of Aviation Policy and Plans derives from a model that includes several measures of overall economic activity (e.g., the consumer price index) and aviation-specific statistics, as well as expert opinions on future trends. These estimates have been closer to actual traffic levels in the short term than over longer periods. For example, between fiscal years 1992 and 1995, the estimates of activity at en route centers that were made 1 year earlier came, on average, within 1 percent of the actual level of activity. The estimates made 4 years earlier were, on average, 7.4 percent higher than the actual level (see table 2.3). According to FAA officials, these estimates are reasonable because they fall within the 10-percent tolerance level of its models. In addition to estimates of future workload, FAA’s staffing standards forecast models use projections of future attrition to determine controller staffing needs. These projections, called pipeline models, are based on actual experience over a recent 3-year period. FAA looks at who entered and left the controller workforce through several methods, such as retirement or resignation, promotion, or moving to or from a staff position. Using 3 years of data on actual movements, FAA determines what percentage of controllers entered or left the workforce by each method, then projects that percentage to future years. For example, in fiscal year 1995, 114 of 6,432 controllers at en route centers (or 1.8 percent) retired or resigned. By performing the same comparison for fiscal years 1993 through 1995 and averaging the results, FAA determined that on average 1.69 percent of the controllers at en route centers retired or resigned during that period. FAA then used this percentage to project future retirements or resignations of controllers at its en route centers. By using similar calculations for all types of controller movements to estimate the net gain or loss of controllers, FAA annually determines how many new controllers need to enter the training pipeline as replacements. FAA uses a separate model that uses similar variables to estimate the pipeline needs of its TRACON facilities and control towers. FAA’s two pipeline models are currently based on actual changes in its controller workforce during fiscal years 1993 through 1995 and are used to forecast the workforce needed for fiscal years 1996 through 2006. While the pipeline models include estimates of the number of controllers who leave the workforce to take staff positions or return from such positions each year, according to agency officials, the number of controllers leaving to take such positions has roughly equalled the number of controllers returning, so there has been little net impact on the overall size of the controller workforce. Also, agency officials estimate that the number of controllers resigning from the workforce without qualifying for retirement will remain steady at about 40 controllers per year. As a result, although the models forecast attrition from all sources, the forecasts for new controllers are primarily the result of retirement estimates. We asked FAA for previous versions of its pipeline models so we could compare attrition estimates made by earlier models to actual data from recent years. Because FAA does not maintain copies of the models from previous years, officials could not provide us with attrition estimates for years prior to fiscal year 1995. However, FAA did provide copies of the models used to project attrition for fiscal year 1995. Table 2.4 shows that 20 more controllers retired or resigned in fiscal year 1995 than projected by the terminal and en route center models. Without data from earlier years, however, we were not able to evaluate the reasonableness of the attrition estimates produced by FAA’s previous pipeline models. Because the actual rate at which controllers retire depends on the decisions of thousands of individual controllers, definitively predicting how many controllers will actually retire in any year is impossible. Most controllers hired under FERS are required to retire from actively controlling air traffic when they first become eligible, if they are at least 56. In contrast, most controllers hired under CSRS are not subject to mandatory retirement rules, unless hired after 1972. According to FAA officials, if a controller is not subject to mandatory retirement, such considerations as the state of the economy and the family status of the controller can affect the controller’s decision about whether to continue working after becoming eligible to retire. Because such considerations are not within FAA’s control, either a greater or lesser number of controllers could retire than forecast. If attrition estimates are too high, FAA could hire too many controllers, unnecessarily increasing the cost of operating the nation’s ATC system. If attrition estimates are too low, FAA could have fewer controllers than needed, causing an unanticipated increase in the use of overtime and, in extreme cases, flight delays to ensure that the safety of the ATC system would not be compromised. Despite the difficulty of accurately predicting future needs, FAA has to estimate these needs to justify its budget requests for staffing and equipment. Without accurate projections of controller staffing levels and retirements, FAA cannot hire sufficient replacements and provide them with the 2 to 4 years of training needed to achieve full performance level. However, five aspects of the way FAA determines its projections of future staffing needs raise questions about the reasonableness of projections in future years. FAA’s practice of estimating attrition as a fixed percentage of the controller workforce may not accurately reflect future attrition because the agency expects to experience a significant increase in the number of controllers becoming eligible to retire in the next several years. For example, between fiscal years 1995 and 2000, FAA estimates that the number of controllers who will become eligible for retirement each year will remain relatively constant at about 330 to 440. However, FAA also estimates that in fiscal year 2001, the number eligible to retire will increase to 522 controllers, in fiscal year 2002 to 841 controllers, and in fiscal year 2007 to 1,361 controllers. Should these estimates prove correct and more controllers become eligible to retire, it is likely that more controllers will exercise their option to retire. Since retirements account for most controller attrition, it is possible that the percentage of controllers who actually leave the workforce will be different than was experienced in fiscal years 1993 through 1995. The staffing standards forecast models estimate future attrition according to data on actual attrition during fiscal years 1993 through 1995. However, during fiscal 1994, 139 of the 510 controllers who retired voluntarily took the buyout previously described. Most of these controllers worked at level-1 towers, which were being contracted out to the private sector. Because FAA does not plan to offer buyouts for controllers in the future, including the departure of these controllers in estimates of future retirements could inflate future attrition estimates. Several of the regional FAA and NATCA officials we interviewed questioned the reliability of using data on past retirees to predict future retirement, as FAA’s staffing standards forecast models do. These officials indicated that recent changes in the workforce, including an increased workload, a better educated workforce, and the establishment of mandatory retirement rules, suggest that controllers who are working today may not retire at the same rate as past retirees. For example, these officials noted that because controllers with a college education could have more options for post-FAA employment, they could be more likely to retire early. FAA’s staffing standards forecast models do not consider future changes in FAA’s technology or policy. For example, FAA is currently purchasing new ATC equipment and developing a plan to allow for “free flight,” or the ability of pilots to set their own flight path in certain areas. There was no consensus, however, among the FAA regional and headquarters officials that we spoke with on the impact of these changes. While some believe the changes will only increase the reliability of the air traffic system, others believed there will be a long-term increase in productivity, resulting in a need for fewer controllers in the future. Others anticipate a short-term decrease in productivity while controllers learn to use the new equipment. In addition, FAA is finalizing changes to its training program (see ch. 3) that could reduce the training burden on local ATC facilities. To the extent that current controllers and supervisors are used to provide on-the-job-training for newly hired controllers, these changes could allow the facilities to use more staff to control traffic. Because these changes are still being developed, FAA has no way to quantify their impact on controller workload. However, if FAA continues to estimate future needs by looking at past performance without regard for planned changes, it will not be able to take advantage of the increased efficiency those changes could deliver until several years after they are implemented. As discussed earlier, FAA’s hiring plan for controllers is based on two main factors—the staffing standards forecast models and an adjustment to account for an increase in the number of controllers eligible to retire. However, the accuracy of FAA’s estimates of controller retirements may be limited because FAA has not determined exactly when each controller can become eligible to retire, because of a lack of easy access to data on controllers’ work history. Specifically, FAA estimates, on the basis of past retirement rates, that future retirements will equal about 20 percent of those controllers eligible to retire each year. Figure 2.3 shows FAA’s estimates of the number of controllers who will become eligible to retire each year, as well as the number expected to retire though fiscal year 2002, the last year of FAA’s current staffing plan. This figure illustrates FAA’s position that the number of retirees will increase as the number of those eligible increases. While it is logical to conclude that more people would retire if more became eligible, the accuracy of FAA’s projections is limited because the agency has not compiled the data necessary to determine when each controller will be eligible for special controller retirement. While FAA can determine when an individual controller will be eligible to retire, the information is not currently stored in a way in which it could be used to determine the retirement eligibility of FAA’s entire controller workforce. Instead of actual retirement eligibility data, FAA has based its estimates of future retirements on the assumption that all controllers spend their entire career as active controllers. For example, FAA has assumed that all controllers who are at least 50 years old and have worked for FAA for at least 20 years would be eligible to retire. While this assumption could prove true in many cases, data from FAA’s pipeline models have indicated that more than 1,300 controllers moved between the controller workforce and staff positions each year between 1993 and 1995. Because many controllers spend at least some time in staff positions where they do not actively control traffic, the date on which they become eligible for special controller retirement may be later than the one FAA has used in its estimates. As a result, they could retire later than FAA has anticipated. Rather than estimating future retirements on the basis of assumptions about who will be eligible to retire, FAA could use actual information on the age and service time of those controllers who retired in recent years, as well as current controllers, to predict future retirements. Using data provided by FAA, we conducted such an analysis and found that, on average, controllers could retire later than projected by FAA’s fiscal year 1999 through 2002 staffing plan. The simplest way to use recent experience to estimate future retirements is to apply the average age and service time of recent retirees to those controllers currently working for FAA. Using this approach, we found that, on average, controllers who retired in fiscal years 1992 through 1996 had about 31 years of federal service. Fewer than 15 percent retired with 25 years of federal service or less, one of the requirements for special controller retirement. As figure 2.4 shows, should current controllers not retire until they have earned 31 years of federal service, the number of retirees will be much lower than FAA has projected for each year between fiscal years 1998 and 2002. In fact, while FAA expects 510 controllers to retire in fiscal year 2002, the first year in which at least 510 current controllers reach 31 years of federal service is fiscal year 2008. Next, we looked at the age of the controllers who retired during the past 5 years and found that their average age was about 56. This age is also significant because federal law mandates that most controllers hired under FERS and controllers hired under CSRS after 1972 retire from actively controlling air traffic at age 56 unless granted an exemption. As figure 2.5 shows, the number of controllers who will turn 56 is lower than the number FAA expects to retire each year between fiscal years 1997 and 2002. The first year in which at least 510 current controllers turn 56 is fiscal year 2009. While using data on either the age or the service time of current controllers can illustrate changes in the characteristics of future retirees, it is preferable to base estimates of future retirements on both variables because future retirees must meet both age and service criteria. According to the official responsible for FAA’s staffing standards forecast models, such an analysis would project future retirements more accurately than the current staffing standards models. However, such an analysis is also more complicated. To illustrate the combined effect of the age and service of current controllers, we developed a probability model based on both factors to project when each current controller would be likely to retire. Figure 2.6 compares FAA’s retirement projections with our model’s projections for fiscal years 1997 through 2011. For each fiscal year between 1999 and 2002, our model projects that at least 100 fewer controllers will retire than FAA estimates. Using this model, the number of estimated retirees does not exceed 510 controllers until fiscal year 2008. Appendix I explains the model in more detail and contains additional data. Table 2.5 compares the number of controller retirements FAA has projected with projections based on age, service time, and a combination of both. As this table shows, while FAA’s estimated levels of retirements are close to those calculated using the age and service data in fiscal years 1997 and 1998, the difference between the number of potential retirements under FAA’s assumptions and the projections derived from the age and service data is greater in later fiscal years. FAA officials said that the accuracy of the agency’s retirement estimates is not a significant issue because the agency monitors retirements monthly and can hire more or fewer controllers as needed in future years should its predictions prove inaccurate. However, while FAA can adjust its hiring plans annually to ensure that the actual controller workforce remains equal to the levels specified by its standards, that does not eliminate the need for accurate projections because of the time needed to fully train a new controller. FAA tries to hire new controllers about 3 years before the retirement of those they are intended to replace. As a result, while adjusting hiring to reflect actual retirements each year can ensure that FAA has the correct number of controllers in its workforce, this approach will not ensure that FAA has an adequate number of fully trained controllers. While we do not question the need for FAA to hire enough controllers to safely operate our nation’s ATC system in the current budget cycle, we are concerned that, should future controller retirements more closely follow the projections derived from FAA’s data on controllers’ age and service time, the agency could hire too many controllers in later years. Should fewer controllers retire than FAA has forecast, this would in effect increase the cost of running the ATC system because FAA would be paying for both its new controllers and those who the agency anticipated would retire but did not for several years. Considering the salary of starting controllers and the time it takes to fully train them, hiring new controllers before they are needed can be costly. For example, FAA’s estimate of future retirees for fiscal year 2002 differs from those projected by using age and service data by between 211 controllers and 273 controllers. A new controller currently makes about $29,000 annually, and once benefits are added, the total cost of employing a new controller reaches about $40,000 annually. Because it takes about 3 years for a new controller to reach the full performance level, the approximate cost of the salary and benefits for a fully trained new controller totals about $120,000 for the first 3 years. If actual controller retirements in fiscal year 2002 are 211 controllers to 273 controllers fewer than FAA projects, FAA would spend between $25.3 million and $32.8 million between fiscal years 2000 and 2002 to hire and train those replacements that would not be needed. Conversely, if FAA did not hire enough controllers to replace those who retired, those who remained would have to handle more of the workload. According to FAA officials, this increased workload could cause an unanticipated increase in the use of overtime, and, in extreme cases, lead to flight delays caused by the reduction in services at some air traffic facilities. According to FAA officials, while such delays would be costly to the airlines and their passengers, the delays would not affect flight safety. FAA was not able, however, to provide us with the data needed to estimate the costs associated with such delays. Although officials we interviewed in eight of the nine FAA regions anticipated a significant increase in retirements in the next 10 years, they disagreed on how soon this increase could occur. While some stated that they expected to see a significant increase by fiscal years 2001 or 2002, others believed retirements would not increase significantly until fiscal year 2005 or later. Because air traffic controllers are responsible for the safety of millions of passengers each year, better estimates by FAA of the future attrition of controllers would help ensure that the agency hires and trains an adequate workforce. While hiring enough controllers to meet future needs created by increases in air traffic and attrition, especially from retirements, is essential, hiring more controllers than needed would increase the overall cost of running the nation’s ATC system. On the other hand, hiring too few controllers would also be costly, due to an increased use of overtime and flight delays. Predictions of the number of controllers FAA will need in the future depend on many unknown variables, including how the workload of controllers might change as a result of technological advances, policy changes, and the future attrition rate of the current workforce. While there is no way to exactly predict how many controllers will retire in each of the next 15 years, the accuracy of FAA’s methods of forecasting future staffing needs can be improved if FAA uses some key information on the age and service of current controllers. We recommend that the Secretary of Transportation direct the Administrator of FAA to incorporate actual information on the age, years of service, and retirement eligibility date of current controllers into its projections of future controller retirements. Although FAA officials told us that they have management controls in place to adjust for actual attrition, they agreed with our recommendation and plan to take action to better project future controller retirements. FAA plans to hire about 1,300 new controllers in fiscal years 1997 through 1998 to meet its short-term controller staffing needs. A sufficient number of controller candidates is available to fill these staffing needs. The majority of candidates available are former PATCO members who left the controller workforce during the 1981 strike and could be eligible to retire at the same time as current controllers. In fiscal years 1999 through 2002, FAA plans to hire a large number of new controllers to satisfy its long-term controller staffing needs. Because it is uncertain whether enough controller candidates will be available from the current sources to fill these needs, FAA officials have announced plans to expand the CTI program to include more schools and have reactivated the cooperative education program. Furthermore, FAA has also developed plans to revise its new controller training program by requiring all new controller candidates enrolled in the CTI and MARC programs to receive standardized training at the FAA Academy before being assigned to ATC facilities. FAA believes that the revised training program will reduce on-the-job training time and costs at the facility level. However, agency officials have not performed any analyses to determine if the expected savings will offset the increased costs FAA will incur by providing training at the Academy to all newly hired controllers. FAA hired 257 new controllers during fiscal years 1995 through 1996 to meet its controller staffing needs. One hundred and twelve (or 44 percent) of the new controllers were former PATCO members, 99 (or 39 percent) were CTI and MARC graduates, and the remaining 46 (or 18 percent) were cooperative education program graduates, air traffic assistants working at the FAA, and former FAA and DOD controllers. FAA plans to begin significantly increasing controller hiring by adding 500 new controllers in fiscal year 1997 and 800 new controllers in fiscal year 1998. The new controllers will consist of former PATCO members, CTI and MARC graduates, cooperative education graduates, and former FAA and DOD controllers. As shown in table 3.1, we found that more than enough such controller candidates are available from these sources to fill FAA’s projected staffing needs for fiscal years 1997 and 1998. In August 1993, after nearly 12 years, the bar on hiring former PATCO members was repealed, and they were allowed to compete for employment as air traffic controllers within FAA. To date, FAA has hired 112 former PATCO members—37 in fiscal year 1995 and 75 in fiscal year 1996. The age range of former PATCO members hired in fiscal years 1995 and 1996 was 42 to 67, and the average age was 50.2 years. According to FAA’s data, the age range of the over 4,400 former PATCO members eligible for rehire in fiscal year 1996 was 37 to 68, with the average age being 49.9 years. The majority of the FAA officials interviewed at the headquarters, regional, and facility levels commented that while former controllers have prior controller work experience and could be a solution to the controller staffing problem, they could only be a short-term solution. The officials commented that many of the former PATCO members already hired or still eligible to be rehired could retire within a few years after being reemployed with FAA because their average age is about 50. We could not verify what the officials told us because FAA has not compiled the data necessary to determine when current controllers, including former PATCO members already hired, will become eligible to retire under the different controller retirement rules. FAA officials commented that although they will rely on former PATCO members in fiscal years 1997 and 1998, and possibly in later years, to fill controller vacancies, they are uncertain about how long these former controllers will be able to work as air traffic controllers and when they will need to be replaced. The officials believe that because of the age range of the former controllers and the different retirement rules, FAA could be faced with an even more critical staffing shortage in future years because many former PATCO members and current controllers may be eligible to retire at the same time. Nevertheless, the officials told us that they have not conducted any analyses to determine when the former PATCO members currently in the controller candidate pool will become eligible for retirement. In addition to the 1,300 new controllers FAA plans to hire in fiscal years 1997 and 1998 to meet its short-term staffing needs, FAA plans to hire a large number of new controllers in fiscal years 1999 through 2002 to meet its long-term controller staffing needs. To satisfy the agency’s long-term staffing needs, FAA officials said they expect to get some controller candidates from current sources. Specifically, the officials commented, and CTI and MARC officials agreed, that these schools can produce at least 200 graduates per year under their existing programs, which represents about 800 candidates during this 4-year period. PATCO members may also provide some controller candidates, and there is high interest from former FAA and DOD controllers to fill controller positions. However, taken together, these current sources may not provide enough controllers after fiscal year 1999. To expand the pool of available controller candidates, FAA headquarters officials announced in January 1997 their plans to expand the CTI program to include 18 additional schools and to reactivate the cooperative education program. According to FAA officials we interviewed, schools currently offering aviation degrees and located near hard-to-staff facilities will be given higher priority. The officials believe this approach will provide a better geographical match between staffing needs at the facility level and the available candidates. The final school selections will be completed by September 1997. Although FAA has decided on the number of schools to include in its expanded program, the officials could not tell us the number of controller candidates they expect to be available from these programs to meet their long-term staffing needs. In addition to expanding the pool of available controller candidates, FAA officials told us that they have revised the agency’s initial controller training program. This revision will be the third major change in FAA’s training program within the past 10 years. Until fiscal year 1990, all new controller candidates were required to receive initial screening and controller training, which included academic and skill-building training, at the Academy in Oklahoma City, Oklahoma. In fiscal years 1990 and 1991, FAA began relying on the MARC and CTI schools, respectively, to supplement its training program and to make more controller candidates available. FAA hired CTI and MARC graduates and placed them directly at ATC facilities, bypassing any training at the Academy. The graduates completed their on-the-job training, which consisted of classroom and hands-on instructional training provided by FPL controllers and contractors, at the facilities. In fiscal year 1992, however, FAA stopped providing initial controller training for newly hired controllers at the Academy because of a sharp decrease in controller hiring. Nevertheless, the MARC and CTI schools continued to provide controller training even though only 250 graduates were hired by FAA from fiscal years 1992 through 1995. Beginning in fiscal year 1998 under its revised controller training program, FAA will require all controller candidates enrolled in the CTI and MARC programs to successfully complete the technical skill-building portion of initial controller training at the Academy before being assigned to a facility. The CTI and MARC controller candidates will continue to receive academic and some technical skill-building training at their schools. Newly hired controllers, other than ones from the CTI and MARC programs, will receive academic and technical skill-building training at the Academy. Former PATCO members, as well as FAA and DOD controllers will continue to receive refresher training at the Academy. Figure 3.1 compares FAA’s existing and revised training programs. FAA believes that the revised approach to controller training will reduce on-the-job training time and costs at the facility level because all new controllers entering ATC facilities will receive standardized training on the latest ATC equipment and will be well versed in existing ATC policies, procedures, and requirements. The officials told us that in the long term, the Academy can provide the skill-building training more efficiently than hundreds of individual ATC facilities. Furthermore, the officials said that they expect graduates of a combined CTI-Academy training program to spend less time in on-the-job training because the Academy will give them early experience working with the ATC equipment actually used at the facilities. Although FAA headquarters officials commented that revising the controller training program will reduce training time and costs at the facility level, we did not find nor could FAA provide evidence to support this position. While some CTI schools do not have the latest ATC equipment, they are able to simulate air traffic conditions. Moreover, FAA could not provide evidence that there is any difference between controllers trained on the latest ATC equipment and simulators. Although FAA believes that it may realize some cost savings from centralizing training at the Academy, federal training costs will increase in the short term because FAA will pay the expenses for a portion of the training of CTI graduates, who currently pay these costs themselves as part of the controller training curriculum. Despite the lack of data on controller training costs, FAA still plans to revise its training program—without knowing whether the anticipated reduction in training time and costs for newly hired controllers will occur and offset increased training costs at the Academy. During the 1997 calendar year, FAA plans to hire CTI and MARC graduates with and without Academy training. By monitoring its training costs and following the progress of the two groups of new controllers, FAA could determine whether the anticipated savings will be realized. FAA predicts that it will need to hire about 3,400 new controllers over the next 6 years. Although a sufficient number of controller candidates are available to meet the agency’s short-term staffing needs, the majority of the candidates are former PATCO members, who could, if hired, be eligible for retirement at the same time as many current controllers. Because FAA does not know when these controllers will retire, it is uncertain when they will need to be replaced. In addition, it is uncertain whether FAA’s current sources for controller candidates can provide a sufficient number of candidates to meet its long-term staffing needs. Therefore, FAA’s efforts to expand the pool of available candidates could help to address this potential problem. Although FAA officials believe that revising the existing controller training program will reduce on-the-job training time and costs, this change could result in FAA incurring training costs currently being paid by controller candidates. Also, since FAA has no data to support it assertion that CTI and MARC graduates take longer to complete on-the-job training than other controller candidates or that centralizing a portion of the training at the Academy will reduce training costs, the savings FAA expects to gain from revising its program may not offset the increased training costs at the Academy. We recommend that the Secretary of Transportation direct the Administrator of FAA to (1) determine, for future planning purposes, when former PATCO members currently in the controller candidate pool will become eligible to retire and would need to be replaced, by evaluating demographic data, such as the former controllers’ age, years spent actually controlling traffic, and years of potential retirement eligibility, and (2) monitor the training costs for CTI and MARC graduates hired in fiscal years 1997 and 1998, who will be trained under the old and new programs, to determine whether the anticipated savings will be realized and whether such savings will offset the increased costs of providing centralized training at the Academy. FAA officials agreed with our recommendations and plan to take action to better determine when controllers will retire and the cost of training new controllers. Controller staffing at the national and regional levels closely reflected the levels specified by the staffing standards. However, we identified significant differences between actual staffing and the levels specified by the standards at about half of FAA’s ATC facilities. According to FAA officials, certain circumstances, such as workload factors unique to particular facilities, justify deviations from the standards. In addition, FAA officials believe that some differences are justified on the basis of the professional judgment of facility managers. However, they also believe that some facilities have too many controllers, while others have too few, relative to the workload at the facilities. FAA officials pointed out that at facilities where there are too many or too few controllers, several factors hinder FAA’s ability to alleviate the staffing differences. These impediments include FAA’s practice of waiting until the end of the fiscal year to distribute funds to move controllers, regional officials’ inability to conduct regional hiring of new controllers, and limited hiring in recent years of new controllers to fill vacancies. Although several FAA officials commented that staffing differences can not be totally alleviated, FAA has proposed a variety of initiatives to address existing differences. Because these initiatives are relatively recent, their effectiveness may not be known for several years. As of April 10, 1996, we found that at the national and regional levels, there were only slight differences between the actual number of controllers and the levels specified by the standards. For example, at the national level, the actual controller workforce was 17,163, compared to 17,465 as specified by the staffing standards, representing a difference of less than 2 percent. At the regional level, the actual staffing levels for all nine regions were within 5 percent of the levels specified by the standards. In response to our survey, FAA regional and NATCA officials said that a larger number of controllers were needed than the levels specified by the staffing standards. More specifically, FAA officials in six of the nine regions commented that nearly 1,100 additional controllers were needed in their regions. In contrast, FAA’s staffing standards indicated that over 400 additional controllers were needed in those regions. FAA officials in the other three regions considered their current staffing levels adequate to meet their needs. According to NATCA representatives, controller staffing needs were even greater at the regional level than those reported by FAA’s regional officials. For example, according to NATCA’s estimates, FAA needs an additional 1,750 controllers in the three regions they represent, while FAA regional officials estimated that only 670 additional controllers are needed in those regions. FAA headquarters officials told us that different staffing needs estimates exist because FAA regional officials and NATCA representatives use different approaches to determine the estimates. However, FAA headquarters officials rely on validated engineered staffing standards. In responding to our survey, most of the FAA regional officials told us that they based their estimates on the staffing standards, as well as other data, such as staffing needs information gathered directly from facility managers. In addition, NATCA officials reported using data on facility workloads and projected attrition. We did not verify the validity of the data or the procedures reported to us by the regional FAA and NATCA officials. As shown in figure 4.1, staffing levels at 16 of the 24 en route centers were within 10 percent of the levels specified by the standards. Four of the eight remaining facilities were staffed at levels greater than 10 percent over the staffing standards, whereas the other four facilities were staffed at least 10 percent under the standards levels. More than 25% over the standards 10% to 25% under the standards FAA officials at the headquarters, regional, and facility levels acknowledged that significant differences exist between actual staffing and the levels specified by the standards at many terminal facilities. However, they also noted that the standards are used as a management tool in conjunction with professional judgment and that certain circumstances could cause terminal facilities to justifiably deviate from the standards. Circumstances, such as changes in air traffic levels or a given terminal facility’s capacity, could increase or decrease the number of controllers needed. For example, officials in FAA’s Southern Region told us that ongoing airport improvements, which are expected to be completed in the summer of 1997, have the potential to significantly increase the capacity at a principal international airport in that region. As a result of these improvements, the officials commented that controller staffing needs could increase significantly. Although they could not estimate the exact number of additional controllers needed because the impact of the increased capacity will not be known until the airport improvements are completed, they indicated that the additional staffing needs are not reflected in the latest staffing standards. Circumstances such as these often explain why some facilities are overstaffed or understaffed relative to the staffing standards. However, FAA headquarters officials acknowledged that there are facilities where staffing differences are not justified and pointed out that they are working to address staffing problems. FAA officials at the headquarters, regional, and facility levels identified a number of impediments that hinder FAA’s ability to reduce staffing differences at facilities where there are too many or too few controllers relative to their workloads. These impediments include FAA’s practice of not providing funds to move controllers until the end of the fiscal year, a practice that delays the prompt movement of controllers to fill vacancies, and regional officials’ inability to recruit local candidates to minimize controller transfers among facilities. In addition, regional officials we contacted cited the recent lack of hiring and the need for a continuous source of new controllers to fill vacancies caused by ongoing attrition. The officials also said that other factors, such as their inability to attract controllers to less desirable facilities, quality of life concerns, and unexpected attrition, will continuously impede their ability to alleviate staffing differences. FAA designates a specified amount of funds at the beginning of the fiscal year for permanent-change-of-station (PCS) moves to relocate controllers from facility to facility to address staffing needs. Also, these funds are used to fill critical managerial and controller vacancies nationwide and maintain an appropriate level of controllers at ATC facilities. We found that FAA does not distribute the majority of PCS funds until the end of the fiscal year. FAA headquarters officials told us that PCS funds are often used as discretionary funds throughout the fiscal year to supplement shortfalls in the Air Traffic Services (ATS) budget. These funds are reprogrammed to pay for cost increases related to salaries and for the contract tower and weather programs. FAA headquarters officials told us that while PCS moneys are used to supplement cost increases for other ATS operations during the year, there have been sufficient funds by the end of the fiscal year to pay for all requested and approved controller moves. These end-of-year funds are available because other ATS units do not spend all moneys budgeted for their operations. FAA headquarters officials then reprogram the unspent funds to pay for controller moves. For example, as shown in table 4.1, FAA designated $17.5 million in fiscal year 1996 for PCS moves. Initially, ATS distributed $3.7 million in PCS funds and reprogrammed $13.8 million to supplement cost increases for the contract tower and weather programs. Subsequently, ATS made an additional $19.2 million available for PCS moves, which was not provided to the FAA regions until the end of the fiscal year. According to FAA regional officials we surveyed, the practice of distributing PCS funds at the end of the fiscal year delays the prompt transfer of controllers. At facilities where vacancies are not filled promptly, overtime use may be excessive and some controllers may be denied opportunities to take leave or attend training. In addition, regional officials commented that reprogramming PCS funds creates uncertainty and inhibits the effective allocation of resources within their regions. They believe that a stable distribution of funds throughout the fiscal year would help them better address existing staffing differences. A majority of facility managers we surveyed also expressed concerns about PCS funding levels, and several commented that the availability of sufficient PCS funds would help them reduce staffing differences at ATC facilities. We found that officials at the FAA headquarters, regional, and facility levels had different views about whether sufficient funds have been available in past years to pay for all requested PCS moves. While FAA headquarters officials stated that sufficient funds for requested and approved PCS moves have been available by the end of the fiscal year, a majority of the regional officials we surveyed said that sufficient PCS funds were often not available for all controller moves throughout the fiscal year. We could not verify what the officials told us because FAA does not maintain information on the number of PCS moves initially requested and subsequently approved at the end of the fiscal year. FAA headquarters officials commented that the practice of using PCS funds to supplement cost increases for ATS operations could create problems in the controller workforce in the future if FAA continues to experience substantial shortfalls in its overall budget. Specifically, the FAA headquarters officials told us that if funds were not made available by the end of a fiscal year, controller moves could not be made, and staffing differences at ATC facilities could increase. FAA headquarters officials noted, however, that the agency’s flexibility to provide PCS funding throughout the fiscal year has been constrained by the necessity to have discretionary funding available to supplement potential budget shortfalls, such as cost increases related to salaries and contract programs. Although FAA regional officials have the authority to recruit controller candidates for facilities in their regions, they do not have the ability to recruit locally due to constraints in hiring on an agencywide basis. While some regional officials have recruited controller staff under certain circumstances, they must generally select new controllers from the available pool of controller candidates—primarily former PATCO members and graduates from the four CTI schools and MARC—regardless of the candidates’ geographic preferences. FAA officials also told us that the ability to recruit locally would help improve retention because new controllers could be recruited directly from their preferred geographic areas. FAA headquarters officials believe that controllers tend to stay longer in locations more desirable to them, thereby, reducing the potential for controller transfers from facilities with staffing problems. In response to our survey, regional and terminal facility officials also told us that localized hiring would allow them to recruit and retain controllers in areas where hard-to-staff facilities are located. Under current practice, a controller from a small town in the Midwest may be placed at a facility in a large metropolitan area that is difficult to staff. As a result, the controller may later request a transfer to another facility that the controller prefers or resign from FAA; such events may cause a staffing shortage and adversely affect employee morale. Officials in all nine of FAA’s regions expressed concerns about the lack of recent hiring and the need for a continuous supply of new controllers to fill vacancies due to transfers, promotions, and retirements at ATC facilities. The majority of regional officials said that an ongoing supply of newly hired controllers would help address staffing shortages that increase the use of overtime and limit opportunities for controllers to take leave or attend training. In response to our survey, some officials raised concerns that the shortages could increase if large numbers of controllers retire in future years. For example, officials in the Great Lakes Region told us that although they hired 40 new controllers in fiscal year 1996, these new controllers were insufficient to replace the controllers lost through ongoing attrition. In addition, officials in the Western-Pacific Region told us that a sufficient supply of new controllers is needed for lower-level facilities, which serve as a staffing source for higher-level ATC facilities. Although the Western-Pacific officials said that they have been working with headquarters officials to acquire more new controllers for their region, they have been unsuccessful because FAA has hired very few new controllers in recent years. Officials at the FAA headquarters, regional, and facility levels commented that certain circumstances will continuously affect their ability to alleviate staffing differences. These circumstances include (1) FAA’s inability to attract controllers to facilities located in less desirable—remote or high-cost—areas; (2) quality of life concerns, such as controllers’ desire to live in certain parts of the country; (3) unanticipated attrition resulting from controller retirements, resignations, and deaths; and (4) unexpected changes in air traffic in certain areas, such as the openings and closings of air carrier hubs. FAA headquarters officials cited several initiatives under way at the headquarters, regional, and facility levels to address staffing differences. These initiatives include programs to promote regional recruitment and hiring of new controllers for regions with staffing problems, an interim incentive pay program to attract controllers to facilities with long-standing controller staffing problems, and the creation of the Office of Air Traffic Operations (ATO) within FAA headquarters to better coordinate controller transfers and develop an information-based method to more accurately determine controller staffing needs at the facility level. As part of its initiatives to alleviate staffing problems, FAA is considering actions to increase hiring directly from areas with hard-to-staff facilities, such as expanding the CTI program to include more schools near these facilities and reactivating the cooperative education program. By creating a pool of candidates near hard-to-staff facilities, FAA expects that regions can attract additional new controllers from their preferred geographic areas. Under the proposed initiatives, regional officials will play a greater role in recruiting employees on a more localized basis. In response to our survey, the majority of regional officials we contacted told us that a greater role in local hiring would significantly help reduce controller staffing differences. Moreover, FAA officials told us that localized hiring would reduce the costs for PCS moves and produce a more motivated and satisfied controller workforce. In April 1996, FAA established an interim incentive pay program, similar to a pay demonstration program implemented in 1989, to attract controllers to seven major facilities that have a history of staffing problems. This program provides an incentive of 10-percent of the base pay for controllers working at these seven facilities: the New York En Route Center, New York TRACON facility, Chicago En Route Center, O’Hare TRACON facility, O’Hare Tower, Bay TRACON facility, and Oakland En Route Center. The interim incentive program is intended to be in effect until fiscal year 1998 when a new ATS pay system is expected to be implemented. The new pay system is one of several efforts under FAA’s new personnel reform initiatives, which the agency began implementing in April 1996. In response to our survey, officials at the Chicago En Route Center commented that the interim incentive pay program has played an important role in attracting new controllers to their facility. For example, over the last year, several new controllers have transferred to the facility, which has helped address staffing problems. FAA headquarters officials told us that they expect the interim program will help recruit and retain controllers at other hard-to-staff facilities until a long-term program is in place, such as the new pay system FAA is developing. In early 1996, FAA headquarters created ATO to (1) ensure that facilities are staffed at appropriate levels, (2) verify that newly-hired controllers are placed where critical staffing vacancies exist, and (3) monitor regional staffing allocations, among other resource allocation functions. ATO officials work with headquarters, regional, and facility officials to ensure that staffing imbalances do not occur due to controller transfers or reassignments and to verify that new controllers are placed where vacancies exist. For example, ATO officials gather information on staffing requirements and air traffic operations from regional and facility officials to verify that facilities are staffed according to current needs. Using this information, ATO officials have consulted with headquarters officials who are responsible for agencywide resources and budgeting to make recommendations on staffing allocations. As part of this process, ATO officials have monitored controller moves and transfers to ensure that staffing imbalances do not occur because of changes in controller allocations. Agreement between ATO and other headquarters officials must be reached on changes in controller allocations. To better address staffing needs at ATC facilities, ATO has developed and is testing a new computer program to provide a mechanism for air traffic managers in FAA headquarters, regions, and facilities to evaluate the past utilization of controller resources and more effectively project controller staffing requirements. According to ATO officials, the new computer program will provide more accurate facility-level staffing requirements than the staffing standards because it includes operational data on the number of hours controllers have actually performed ATC functions and activities such as training, leave, and administrative duties. ATO officials told us that the new computer program will also provide a standardized method to better project controller staffing needs at individual ATC facilities. They plan to use this program in conjunction with the staffing standards. FAA is currently pilot testing this program at some en route centers, with plans to have it fully operational by the end of fiscal year 1997. While FAA officials face several impediments that have hindered the alleviation of staffing differences at many terminal facilities, the impediments are not insurmountable. However, FAA’s practice of distributing PCS funds at the end of the fiscal year not only delays controller transfers but could create staffing problems in future years. FAA officials recognize the potential for these problems but face difficult choices in their efforts to move controllers to fill critical vacancies, while maintaining the flexibility to respond to budget shortfalls throughout the fiscal year. Although FAA’s recent initiatives may reduce some staffing differences, it is too soon to determine their effectiveness. | Pursuant to a congressional request, GAO reviewed the Federal Aviation Administration's (FAA) efforts to address short- and long-term controller staffing needs, focusing on: (1) the key variables FAA uses to project future controller staffing needs and evaluate their reasonableness; (2) whether FAA has identified a sufficient number of controller candidates to satisfy its short- and long-term staffing needs and evaluate FAA's plans to train new controllers; and (3) impediments that hinder FAA from staffing air traffic control (ATC) facilities at specified levels. GAO noted that: (1) FAA uses two key variables to project future controller staffing needs; (2) while FAA's estimates of air traffic growth are reasonable, GAO's analysis indicated that FAA could be overstating retirements, which account for most controller attrition, for fiscal years (FY) 1999 through 2002; (3) rather than using actual information on controllers' age and service time to project future retirements, FAA bases its estimates on assumptions about when controllers will be eligible to retire; (4) FAA has identified a sufficient number of controller candidates to meet its short-term staffing needs in FY 1997 and 1998; (5) however, beyond FY 1998, it is uncertain whether current sources can provide the controller candidates FAA will need to meet its hiring goals for FY 1999 through 2002; (6) the majority of available candidates are controllers who were fired in 1981 and who FAA officials believe could be eligible to retire within a few years of reemployment; (7) however, FAA has not conducted any analysis to support this position; (8) to help meet its long-term hiring goals, FAA is expanding its collegiate program to include more schools and has reactivated the cooperative education program; (9) beginning in FY 1998, FAA will require that all new controllers receive some training at its Academy; (10) FAA believes that this will reduce on-the-job training time and costs; (11) this revision, however, could increase the federal costs of initial controller training because FAA will pay a portion of training expenses currently being paid by participants in the collegiate program; (12) FAA officials identified several principal impediments that hinder their ability to staff ATC facilities at specified levels; (13) the first is FAA headquarters' practice of generally not providing funds to relocate controllers until the end of the FY, which causes delayed controller moves and continued staffing imbalances; (14) the second impediment is the limited ability of regional officials to recruit controller candidates locally to fill vacancies at ATC facilities; (15) in addition, FAA regional officials also believe that limited hiring of new controllers in recent years has hindered their ability to fill vacancies; (16) partly due to these impediments, as of April 1996, about 53 percent of ATC facilities were not staffed at levels specified by FAA's staffing standards; (17) there are facilities where staffing differences are not justified; (18) FAA has implemented several initiatives to improve its ability to staff the facilities at specified levels; and (19) it is too early, however, to determine the effectiveness of these initiatives. |
Through map modernization, FEMA intends to produce more accurate and accessible flood maps by using advanced technology to gather accurate data and make the resulting information available on the Internet. Many of the flood maps in FEMA’s inventory do not accurately reflect the true flood hazard risks because over time, new development and other factors altered watersheds and floodplains faster than the maps could be updated. Prior to fiscal year 2004, the $35 million to $50 million in annual flood insurance policy fees had been the only source of funding for updating flood maps, and according to FEMA, the agency had not been able to keep the maps updated with the funds available. As a result, at the time of our review, nearly 70 percent of the nation’s approximately 92,222 flood maps were more than 10 years old and many contain inaccurate data, according to FEMA. Over time, physical conditions in watersheds and floodplains can change, and improvements in the techniques for assessing and displaying flood risks are made. FEMA plans to use the latest technology, such as GIS, to create accurate digital flood maps. GIS technology provides the foundation for achieving FEMA’s goals of melding different types and sources of data to create the new digital flood maps and making the new digital flood maps available to a variety of users over the Internet. The primary function of GIS is to link multiple digital databases and graphically display that information as maps with potentially many different types of “layers” of information. When layers of information are formatted using the same standards, users can potentially overlay various layers of information about any number of specific topics to examine how the layers interrelate. Each layer of a GIS map represents a particular “theme” or feature, and one layer could be derived from a data source completely different from the other layers. For example, one theme could represent all the streets in a specified area. Another theme could correspond to the topography or elevation data of an area, and others could show aerial photography and streams in the same area. These themes are all key elements needed to create flood maps that accurately depict floodplains and can be used to identify properties in these areas. In preparing for full-scale implementation of map modernization, FEMA had established standards and graphic specifications for digital flood maps created with GIS. GIS technology also enables the creation of more accurate and accessible maps than would be possible with older mapping methods and technology. The majority of FEMA’s flood map inventory was produced using manual techniques that have inherent accuracy and accessibility limitations. For example, in creating traditional paper flood maps, field measurements taken by surveyors would have been transferred by hand to paper base maps. If the paper base map contained any inaccuracies, then the field- survey data could be shown in the wrong place on the final flood map. This would then result in floodplain boundaries being shown in the wrong place. By their nature, paper flood maps have limited accessibility as compared with a digital map that can be made available on the Internet. The expansion of Internet connectivity in recent years has substantially enhanced the potential value of digital maps created with GIS because now it is possible to locate and connect data from many distinct GIS databases to develop analytical information on almost any topic that is associated with physical locations. Digital flood maps created according to FEMA’s standards are intended to provide users not only with the ability to determine the flood zone and base flood elevations for a particular location, but also with the ability to access other information like road, stream, and public land survey data. Communities could use this information for a variety of purposes, including decisions on future development and evacuation routes. As part of map modernization, FEMA has promoted the use of a variety of advanced technologies to improve the accuracy of flood maps. In recent years, for example, where it deems it appropriate, FEMA has promoted the use of Light Detection and Ranging (LIDAR) remote sensing technologies to generate highly detailed, digital elevation data. Elevation data are a key component needed to determine flood risk and identify floodplain boundaries. According to FEMA, for very flat areas where small changes in elevation can have a large impact on where flood plain boundaries are drawn, LIDAR can provide the level of detail needed to accurately delineate these boundaries. Communities can also use detailed, digital elevation data for planning and land development purposes. FEMA expects map modernization to increase the likelihood that the more accurate and accessible maps will be used for risk management purposes. Specifically, FEMA expects the new maps to be used to (1) improve flood mitigation, (2) increase flood insurance participation, and (3) improve “multi-hazard” mitigation and risk management capabilities. First, FEMA expects communities to be able to use these new and revised maps to better manage and mitigate flood risk by regulating floodplain development through building codes, ordinances, and regulations. Second, the new maps also have the potential to help increase flood insurance participation because they will more accurately identify those properties that are in the floodplain and whose owners would be required to purchase flood insurance. Third, the data and infrastructure developed by map modernization is also expected to help national, state, and local officials mitigate and manage risk from multiple hazards, both natural and man-made. Accurate digital maps can provide more precise data on such things as the location of hazardous material facilities, power plants, railroads, and airports to state and national officials for planning development as well as to assess internal weaknesses and evacuation routes. The more accurate and updated flood hazard information produced through map modernization is expected to help improve flood mitigation in participating communities. The NFIP requires participating communities to adopt and enforce building standards based on the floodplain boundaries and base flood elevations when maps are updated. For example, the lowest floor of structures in new construction must be elevated to at least the base flood elevations identified on the maps. FEMA’s policy is to monitor communities to ensure that they have adopted building standards that meet the minimum NFIP criteria and to ensure that they are effectively enforcing these standards. If communities fail to establish and enforce minimum NFIP flood plain building standards, FEMA can suspend availability of federal flood insurance. Communities also may use updated flood hazard data to take actions to mitigate flooding that go beyond adopting the building standards required by the NFIP. For example, communities may use the data from the maps to identify where to conduct capital improvement projects designed to mitigate flooding of structures in the floodplain. In addition, FEMA has established a Community Rating System that provides discounts on flood insurance premiums for those communities that take mitigation actions beyond those required by the NFIP. Map modernization has the potential to help increase flood insurance participation. The accuracy of the new maps should better identify at-risk property owners who would be best served by obtaining flood insurance whether or not the owners would be required to purchase insurance under the NFIP’s mandatory purchase requirement. Moreover, the digital, GIS- based maps should make flood risk information more accessible to a variety of users such as lenders and community officials who could conduct targeted outreach to these property owners. It is important to note, however, that FEMA, states, and communities do not have the authority to ensure that property owners who are subject to the mandatory purchase of flood insurance requirement actually purchase flood insurance. It is the federally regulated lenders’ responsibility to ensure that borrowers purchase flood insurance and that the insurance policy is maintained throughout the loan’s life as each new lender servicing the loan becomes aware that the affected property is at risk for flooding. Furthermore, owners of properties without mortgages or properties with mortgages held by unregulated lenders are not required to purchase flood insurance, even if the properties are in floodplains. FEMA expects that the data developed, collected, and distributed through map modernization will help national, state, and local emergency managers mitigate and manage risk posed by other natural and man-made hazards. Accurate digital base maps provide more precise data to state and national officials for planning, such as the location of hazardous material facilities, power plants, utility distribution facilities, and other infrastructure (bridges, sewage treatment plants, buildings, and structures). According to FEMA, map modernization will also support DHS’s overall goal to reduce the nation’s vulnerability to terrorism by providing GIS data and capabilities to other departmental functions. For example, more accurate information on transportation systems such as railroads, airports, harbors, ports, and waterways should be helpful in assessing internal weaknesses and evacuation routes. FEMA’s strategy for managing map modernization is intended to support the achievement of the expected program benefits of improved flood mitigation, increased NFIP insurance participation, and improved multi- hazard mitigation and risk management capabilities. However, in reviewing FEMA’s approach to implementing the strategy, we identified several challenges that could hamper the agency’s efforts. FEMA’s approach is based on four objectives. Two objectives FEMA hopes to achieve through map modernization—building and maintaining a premier data collection and delivery system and expanding outreach and better informing the user community—have the potential to improve the use of flood maps for improved flood mitigation and increased NFIP participation, as well as multi-hazard risk management. The other two objectives—building and maintaining mutually beneficial partnerships and achieving effective program management—are intended to facilitate the achievement of the first two objectives and their intended benefits efficiently and effectively. The goal of FEMA’s objective to develop a new data system using the latest technology is more efficient production, delivery and, thereby, the use of flood maps. As discussed previously, FEMA hopes to accomplish this by using geographic information systems technology that provides the foundation for the production and delivery of more accurate digital flood maps and multi-hazard data that is more accessible over the Internet. In developing the new data system to update flood maps across the nation, FEMA’s intent is to develop and incorporate flood risk data that are of a level of specificity and accuracy commensurate with communities’ relative flood risks. According to FEMA, there is a direct relationship between the types, quantity, and detail of the data and analysis used for map development and the costs associated with obtaining and analyzing those data. FEMA believes it needs to strike a balance between the relative flood risk faced by individual communities and the level of analysis and effort needed to develop reliable flood hazard data if it is to update the nation’s maps efficiently and effectively. FEMA ranked all 3,146 counties from highest to lowest based on a number of factors, including, among other things, population, growth trends, housing units, flood insurance policies and claims, repetitive loss properties, and flood disasters. On the basis of this ranking, FEMA established mapping priorities. However, at the time of our review, FEMA had not established standards on the appropriate data and level of analysis required to develop maps based on risk level. FEMA had historically applied the same minimum standards for all flood maps and supporting data. FEMA’s Guidelines and Specifications for Flood Hazard Mapping Partners provided guidance for selecting the level of analysis and effort to produce flood hazard data and the guidelines had generally been used on a case-by-case basis. We found that the guidelines do not specify standards to be used for all mapping projects within a given risk category and concluded that, without establishing standards for different categories of risk, FEMA could not ensure that it uses the same level of data collection and analysis across all communities within the same risk category. These standards could also provide a consistent basis for estimating the costs of developing maps in each risk category. At the time of our review, FEMA had not yet developed draft standards or incorporated this task into its implementation plan. As a result, we recommended that FEMA develop and implement data standards that would enable FEMA, its contractor, and its state and local partners to identify and use consistent data collection and analysis methods for communities with similar risk. In November 2004, FEMA issued its Multi-Year Flood Hazard Identification Plan. The plan describes FEMA’s strategy for updating flood maps used for NFIP purposes and discusses the varying types of data collection and analysis techniques the agency plans to use to develop flood hazard data in order to relate the level of study and level of risk for each county. FEMA’s objective to expand the scope and frequency of its outreach efforts is intended to increase community and public acceptance of revised maps and use of those maps. Historically, FEMA has only contacted communities when initiating remapping and again when preliminary maps are completed. These expanded outreach efforts reflect FEMA’s understanding that it is dependent on others to achieve the benefits of map modernization. For example, under the structure of the NFIP, FEMA is dependent on communities to adopt and enforce FEMA’s minimum building standards and on mortgage lenders to ensure compliance with mandatory flood insurance purchase requirements. To expand the scope of its outreach efforts, FEMA plans to involve a wide variety of community participants—e.g., mayors, emergency managers, lenders, property owners, insurance agents, and developers—in the mapping process. To expand the frequency of outreach, FEMA intends to increase community involvement, awareness, and participation throughout the entire flood mapping process. Through a continual education process, FEMA’s goal is to inform property owners and others potentially affected by remapping efforts of steps they can take to mitigate the risk of flooding, the types of damage and costs caused by flooding, and the benefits of flood insurance. According to FEMA, if a community is involved in and understands the map modernization process, the community is more likely to accept and trust the accuracy of the final, revised maps and is more likely to use the maps’ hazard data to mitigate natural and man-made disasters. Conversely, if affected property owners do not understand why their communities are being mapped (or remapped) or why their property is now in a flood zone, the unexpected additional expense of new or increased flood insurance premiums can form the basis of significant community opposition to map modernization activities and lead to formal appeals, litigation, and delays in implementing map changes. FEMA’s expanded outreach efforts are intended to educate the public of the potential flood risk in communities and to encourage them to take action. Communities that participate in the NFIP are required to establish floodplain management ordinances that require new and substantially improved structures in newly designated floodplains to meet NFIP building standards. However, if a property was not located in the floodplain in the old map but is in the floodplain in the new revised map, NFIP floodplain management regulations do not require those owners to implement mitigation measures unless they make substantial improvements to the structure. FEMA cannot compel affected property owners to take steps to protect their properties against flood risks or to purchase flood insurance. Under current notification requirements, federally regulated lenders, not FEMA, serve as the primary channel for notifying property owners whose mortgaged properties are subject to flood insurance requirements. When property owners seek new financing, through purchase or refinancing, federally regulated mortgage lenders are required to determine if the property is in the floodplain and, if so, require the purchase of flood insurance. Lenders are not required to monitor map changes or to notify property owners with existing mortgages whose properties are identified in a floodplain by remapping if they are not aware of the change in status. Nonetheless, if federally regulated lenders become aware of flood map changes that affect properties for which they hold mortgages through FEMA notifications or flood zone determination companies, then they must notify the property owner and require the purchase of flood insurance. The information that must be provided to property owners is limited to notifying property owners that their structure is in a floodplain, providing a definition of a flood plain, and requiring the purchase of flood insurance if they live in a participating NFIP community. As a result, FEMA’s outreach efforts are important for supplementing the formal requirements for notifying communities and property owners of map changes. FEMA’s objective for building and maintaining mutually beneficial partnerships is intended to facilitate and support the efficient production and effective use of flood maps. According to FEMA, local, state, and federal partners that have invested resources and assisted in managing mapping activities have the potential to positively affect the detail, accuracy, and quantity of the data collected and improve how these data are used. As part of their strategy for partnering, FEMA provides guidance to the states on how to develop “business plans” that document planned efforts to develop states’ and communities’ capability and capacity to oversee the collection, analysis, and implementation of flood data in their state and community and to justify funding for these efforts. According to FEMA, 38 states had begun drafting such plans. FEMA intends to use these state business plans to help prioritize its continuing efforts to develop map modernization partners. Through its CTP program, FEMA has developed partnerships with a variety of states and communities that have developed their own data and provided their own funds to help update local flood maps. Since 2000, FEMA has leveraged millions of dollars in funding from 171 partners (states and local communities) for producing maps through its CTP program. For example, from fiscal years 2000 to 2002, FEMA used $70 million of its federal map modernization funding along with state and local funds to develop what FEMA has estimated to be more than $155 million worth of new mapping data. According to FEMA, partnering has other benefits as well. For example, in the long-term, those states and communities with whom FEMA has established partnerships may be more likely to accept final map changes, expand their capabilities, and assume greater responsibility for periodically developing and incorporating updated flood data, resulting in cost savings to FEMA. Some states and communities with few resources and technical capacities or little history of flood mapping activities are likely to pose a challenge to FEMA’s ability to fund and implement mapping activities. For example, we talked with flood management officials in several smaller communities in Montgomery County, Texas; Santa Cruz County, Arizona; and Larkspur, Colorado. These officials said that their communities lacked either the funding needed to develop flood data, the technological capability to develop digital flood data and use geospatial information systems, or, in some cases, the community support needed to conduct mapping activities. One approach for obtaining additional resources, capabilities, and community support would be for FEMA to facilitate coordination with other agencies within the state that have a stake in, or could benefit from, mapping activities. For example, state departments of transportation can benefit from information in FEMA’s geospatial information system, such as elevation data, in planning and building state roads and bridges. North Carolina was able to get its state transportation department to help fund the development of elevation data used for flood maps. At the time of our review, FEMA had not yet developed a strategy for how to partner with communities that do not have the resources, capabilities, or motivation to initiate and sustain mapping activities. Such a strategy could focus on how to assist these potential partners in garnering community resources and developing technological capabilities, how to coordinate with other agencies in their state, and how to integrate these efforts with FEMA’s community outreach efforts to gain community support for mapping activities. As a result, we recommended that FEMA develop and implement strategies for partnering with state and local entities with varying levels of capabilities and resources. FEMA’s Plan does not explicitly address such strategies. For fiscal year 2004, the Plan notes that, nationwide, dollars leveraged from local, non-FEMA sources substantially exceeded the target level of 20 percent, with 36 percent of the effort leveraged from other partners. In 4 of the 10 FEMA regions the leverage exceeded 40 percent. However, in 3 of the 10 FEMA regions the leverage was less than 10 percent. This experience, along with a projected 50 percent increase in the total cost of the program, supports the need for strategies to address disparities and maximize map modernization stakeholders’ contributions to the program. In March 2004, FEMA awarded a performance-based contract to obtain assistance from a nationwide mapping contractor to manage tasks associated with the significant expansion of the map modernization program. Unlike many traditional government service contracts, which emphasize inputs rather than outcomes, a performance-based contracting approach gives the contractor the flexibility to determine how best to achieve the outcomes and links payment to the contractor’s ability to achieve these outcomes—an approach supported by our past work in federal contracting. Overseeing these types of contracts requires agency staff with the knowledge, skills, and abilities to monitor the contractor’s efforts using performance measures that accurately measure agreed-upon outcomes. We concluded that FEMA might be limited in its ability to effectively manage the contract, as well as the significant expansion of tasks associated with a five-fold increase in funding and related mapping activities that will continue to be performed by agency staff. These tasks include managing grants for many new mapping partners and administering contracts with independent firms to develop and process a significantly larger quantity of flood data to support local efforts. A staffing needs assessment completed by FEMA in December 2003 identifies a need for an additional 75 staff with additional skills, including contracting and program management capabilities. In appropriating fiscal year 2004 map modernization funds, Congress included a provision that would allow FEMA to use up to 3 percent, or $6 million, for administrative purposes. As of March 2004, FEMA had filled 1 of the 75 positions by reallocating existing resources. At the time of our review FEMA planned to fill another 33 positions using the administrative funding identified in the fiscal year 2004 budget. In addition, FEMA also planned to fill an additional 10 positions by moving staff from other FEMA departments or filling vacancies. However, at the time of our review, FEMA had not yet established a plan for filling the remaining 31 headquarters and regional positions. As a result, we recommended that FEMA ensure that it has the staff capacity to effectively implement the nationwide mapping contract and the overall map modernization program. One element of effective program management is establishing performance measures to determine how well FEMA is achieving its map modernization program objectives. FEMA had established performance measures for all four of its program objectives. However, we concluded that FEMA’s measures for two of those objectives that directly support the use of flood maps for risk management—to develop a premier data system and to expand and better inform the user community were not clearly defined or fully developed. FEMA’s principal measure for developing and maintaining a premier data collection and delivery system is the percent of the national population with community-adopted, GIS data-based flood maps. However, this measure does not indicate whether the maps themselves meet any FEMA-established standards for accuracy (because FEMA had not yet defined the minimum level of data collection and analysis for communities with similar risk). To measure the progress and success of expanding and better informing the user community, FEMA established performance measures related to the percent increase in communities’ awareness and use of new maps. FEMA plans to use surveys as the primary means of measuring increased community awareness and use of the new maps. However, FEMA had not yet fully developed an operational definition of how it plans to measure “awareness” or “use,” for example, that reflect mitigation steps taken or the purchase of flood insurance. Because the link between revising maps and the use of maps in terms of increased NFIP participation is not direct, we recognized that it may be a challenge to develop a performance measure that accurately reflects the impact on NFIP participation rates of efforts to expand and improve outreach. Nonetheless, without developing such a measure (or measures), we concluded that FEMA would be less able to ensure that its map modernization program will have resulted in one of FEMA’s primary intended benefits. As a result, we recommended that FEMA develop and implement useful performance measures that define FEMA’ s progress in increasing stakeholders’ awareness and use of the new maps, including improved mitigation efforts and increased participation rates in purchasing flood insurance. In response to our recommendation, FEMA’s set goals in its November 2004 Multi-year Flood Hazard Identification Plan to improve public safety through the availability of reliable flood risk data. Specifically, FEMA plans to increase the safety for at least 85 percent of the U.S. population through availability of accurate flood risk data in GIS format. To achieve this goal, FEMA has set targets for key performance indicators (KPI) through fiscal year 2009 (production is scheduled for completion in fiscal year 2010). FEMA’s four KPIs are (1) Population with Digital GIS Flood Data Available Online, (2) Population with Adopted Maps that Meet Quality Standards, (3) Percent of Effort Leveraged; that is, state and local resources provided for map modernization as a percentage of FEMA resources provided, and (4) Appropriated Funds Sent to CTPs. To track its progress of map modernization annually, FEMA set target percentages for achieving these performance indicators in fiscal years 2006 through 2009. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions you and the Committee Members 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]. 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 contributors to this testimony included Grace Coleman, Christopher Keisling, Raul Quintero, and John Vocino. 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. | Floods inflict more damage and economic losses upon the United States than any other natural disaster. During the 10 years from fiscal year 1992 through fiscal year 2001, flooding resulted in approximately $55 billion in damages. The Federal Emergency Management Agency (FEMA) is responsible for managing the National Flood Insurance Program (NFIP). The program uses flood maps to identify the areas at greatest risk of flooding and make insurance available to property owners to protect themselves from flood losses. According to FEMA, many of the nation's flood maps are more than 10 years old and no longer reflect current flood hazard risks because of erosion and changes in drainage patterns. Moreover, because many flood maps were created or last updated, there have been improvements in the techniques for assessing and displaying flood risks. This testimony is based on GAO's findings and recommendations in its March 2004 report related to (1) how map modernization intended to improve the accuracy and accessibility of the nation's flood maps, (2) what the expected benefits of more accurate and accessible flood maps are, and (3) to what extent FEMA's strategy for managing the map modernization program support the achievement of these benefits. Through map modernization, FEMA intends to produce more accurate and accessible flood maps by using advanced technology to gather accurate data and make the flood maps available on the Internet. For example, displaying map data in digital Geographic Information Systems format permits consistent, accurate display, and ready electronic retrieval of a variety of map features, including elevation data and the location of key infrastructure, such as utilities. FEMA expects that by producing more accurate and accessible digital flood maps through map modernization, the nation will benefit in three ways. First, communities can use more accurate digital maps to reduce flood risk within floodplains by more effectively regulating development through zoning and building standards. Second, accurate digital maps available on the Internet will facilitate the identification of property owners who are statutorily required to obtain or who would be best served by obtaining flood insurance. Third, accurate and precise data will help national, state, and local officials to accurately locate infrastructure and transportation systems (e.g., power plants, sewage treatment plants, railroads, bridges, and ports) to help mitigate and manage risk for multiple hazards, both natural and man-made. At the time of GAO's review, FEMA had not yet established clear standards for the types, quantity, and specificity of data collection and analysis associated with different levels of flood risk. We recommended that FEMA develop standards to better ensure that data collection and analysis is consistent for all communities with similar risk and that it is using its resources efficiently while producing maps that are accurate and useful for communities at different levels of flood risk. In November 2004, FEMA issued its Multi-Year Flood Hazard Identification Plan. The plan describes FEMA's strategy for addressing GAO's recommendation by using varying types of data collection and analysis techniques to develop flood hazard data in order to relate the level of study and level of risk for each county. GAO concluded that FEMA's performance measures would not effectively measure the extent to which the agency's map modernization program would result in its primary intended benefits. As a result, GAO recommended that FEMA develop and implement useful performance measures. In response to GAO's recommendation, FEMA has set target percentages in its Multi-Year Flood Hazard Identification Plan for four key performance indicators in fiscal years 2006 through 2009. FEMA's four indicators are (1) Population with Digital GIS Flood Data Available Online, (2) Population with Adopted Maps that Meet Quality Standards, (3) Leveraged Digital GIS Flood Data, and (4) Appropriated Funds Sent to Coordinating Technical Partners. |
Changes to the JTR are coordinated through the Committee, which is responsible for publishing the JTR and evaluating significant travel and transportation matters, such as the flat rate per diem policy change. The Committee is chaired by the Deputy Assistant Secretary of Defense for Military Personnel Policy and also includes Military and Civilian Advisory Panels (the Advisory Panels), composed of members of each of the uniformed services, among others. Besides serving as the Committee Staff and chairing the Advisory Panels, the DTMO is the focal point for commercial travel and assists in establishing and administering commercial travel policy within DOD, among other things. Other offices from across the department also participate on the Committee and Advisory Panels, but not all members have voting rights. Figure 1, below, provides an overview of the Committee structure and members. The Per Diem, Travel and Transportation Allowance Committee Organization and Functions Manual provides guidance for how the Committee should operate and coordinate major changes to the JTR, as described in figure 2, below. Specifically, the Committee coordinates a proposed major change through a series of memorandums to members of the Advisory Panels. Memorandum 1 provides the Advisory Panels with information and instructions concerning the policy change, such as information concerning the source of the proposed policy change; examples of the proposed revisions to the JTR; and the due date for comments. The Advisory Panels’ comments and positions (concurrence or non-concurrence) concerning a proposed major policy change are formalized in a subsequent memorandum, described in the guidance as Memorandum 2. Subsequent to the memorandums, the Advisory Panels vote to approve the proposed major policy change. Information concerning the Advisory Panels’ actions and comments regarding the policy change is then forwarded to the Committee’s members and Chair for further coordination, review, and approval. The flat rate per diem policy for long-term TDY became effective November 1, 2014. According to DTMO officials, the flat rate per diem policy change was made in response to government-wide efforts—such as OMB Memorandum M-12-12—to reduce travel costs, and internal efforts to simplify DOD’s travel policies. The JTR states that the flat rate per diem policy applies to long-term TDYs of more than 30 days. Specifically, the policy reduces the amount of per diem paid for long-term TDYs: for TDYs of between 31 and 180 days’ duration, the flat rate per diem is 75 percent of the locality rate payable for each full day at the location. For TDYs of greater than 180 days’ duration, the flat rate per diem is 55 percent of the locality rate. Further, the JTR states that there are exceptions and additional factors related to the flat rate per diem policy that, under certain circumstances, may affect per diem reimbursement. These exceptions and factors include the following circumstances: Lodging receipts are not required, but proof that lodging costs were incurred shall be required. The fixed rate per diem may not be reduced further even if the actual lodging costs incurred are less than the lodging portion of the reduced per diem. The Secretary concerned, combatant command commander, or Director of a DOD agency/component may authorize/approve payment of actual expenses for M&IE, up to the full locality rate when the reduced flat rate M&IE is not sufficient, based on the circumstances of the TDY. Authority may not be delegated below the three-star general officer/flag officer (or civilian equivalent) deputy/vice commander level. Travelers requesting reimbursement in excess of the authorized flat rate M&IE must provide receipts to substantiate claims for actual expenses unless itemized charges are documented through the use of the government travel charge card. All authorizations for payment of actual costs for M&IE for TDYs over 30 days must be reported to the Committee. This waiver was approved by the Committee Chair in May 2016. The M&IE portion of the flat rate per diem may be waived in advance when the mission, health, welfare, or safety of the traveler, TDY to a foreign location, would result in extreme personal hardship if the M&IE were reduced. The combatant command commander/joint task force commander may authorize payment of the full locality rate M&IE when the reduced flat rate M&IE is not sufficient. Authority may not be delegated below the three-star general officer/flag officer deputy/vice commander level. The Secretarial Process for each service may authorize full per diem M&IE for a traveler who is not located in or part of the combatant command/joint task force area of responsibility, but is operating in a support capacity or located in the combatant command/joint task force area of responsibility. Full per diem M&IE requests may be authorized, only in advance of the dates required. All authorizations for payment of full M&IE for TDYs over 30 days must be reported to the Committee, Chief. The M&IE portion of the flat-rate per diem policy does not apply to the Johnston Atoll, Midway Islands, Republic of Palau, or Wake Island because these locations are deemed to be so remote that the traveler has very limited access to a food source for meals, such that the cost of meals exceeds the meal portion of reduced flat rate per diem. If a traveler is unable to arrange suitable commercial lodging (e.g., safe, secure, clean, and within a reasonable proximity to the TDY duty location) at the flat rate per diem on their own, the Travel Management Center (i.e., commercial travel office) must be contacted for assistance. If the Travel Management Center is unable to arrange suitable lodging at the reduced per diem rate, then the authorizing official may authorize actual lodging (i.e., full lodging), not to exceed the locality per diem rate. However, M&IE is still paid at the 75 percent or 55 percent rate, as applicable. The military services operate 17 government-owned facilities (i.e., depot maintenance industrial sites)—such as Anniston Army Depot at Anniston, Alabama; Air Force Logistic Complex at Ogden, Utah; Norfolk Naval Shipyard at Portsmouth, Virginia; and Marine Depot Maintenance Command at Albany, Georgia—that primarily perform depot-level maintenance on a wide range of vehicles and other military assets, including helicopters, combat vehicles, ships, aircraft, engines, and software. According to DOD, in fiscal year 2015 there were approximately 45,000 civilian employees at the depots that perform maintenance and 30,000 other civilian non-maintainers—engineers, scientists, analysts, and supply specialists—essential to depot maintenance production. Figure 3, below, provides a map of the depot maintenance industrial sites. The flat rate per diem policy went into effect at the depots at different times, in part depending on bargaining with unions. At the time of our review, the flat rate per diem policy was in effect at 13 of the 17 depots for bargaining unit employees, and was in effect at all depots for non- bargaining unit employees. Specifically, one depot reported that the policy was in effect for one, but not all, unions; and three depots reported that the policy was not yet in effect for bargaining unit employees. Appendix II provides a list of the depot maintenance industrial sites and the dates when the policy went into effect at each depot for bargaining and non- bargaining employees. Officials at the depots identified both benefits and challenges resulting from the flat rate per diem policy. Further, while more than half of depot officials responding to our questionnaire reported that the policy has affected civilian employees’ willingness to volunteer for long-term TDYs, the majority of depot officials reported that the policy has not affected depot operations. Depot officials responding to our questionnaire identified some benefits and some challenges associated with the flat rate per diem policy. Depot officials reported some benefits associated with the flat rate per diem policy, including the following: Flexibility: Depot officials from 3 of the 16 depots reported that a benefit from the flat rate per diem policy is the flexibility it provides to depot workers traveling on long-term TDY in choosing how to distribute their flat rate per diem allotment between lodging and M&IE, as they no longer have to provide lodging receipts. Additionally, depot workers in the discussion groups at Puget Sound Naval Shipyard also indicated that this flexibility was a benefit of the policy. Cost savings: Depot officials from 6 of the 16 depots reported that a benefit from the flat rate per diem policy is cost-savings; however, they were unable to provide documentation of cost-savings that were attributable to the policy change. Depot officials from 3 of these 6 depots reported that they do not track increased or decreased costs related to the flat rate per diem policy. In response to a different question related to costs, depot officials from one depot provided documentation related to lodging and M&IE savings; however, depot officials from this depot indicated that the flat rate per diem policy has resulted in higher overall costs, but they did not provide documentation to support this statement. Depot officials also reported some challenges associated with the flat rate per diem policy, including the following: Lodging accommodations: Depot officials from 8 of 16 depots reported that it is more difficult to find lodging accommodations that will accept the flat rate per diem; that some hotels are not willing to reduce their rates to accommodate the flat rate; and that some depot workers are staying in less desirable hotels. These challenges were confirmed in our meetings with Army depot officials and during discussion groups at Puget Sound Naval Shipyard. For example, an official at Anniston Army Depot explained that before the flat rate per diem policy change was made, booking hotel accommodations for a team of travelers was accomplished within an hour, but since the policy change occurred this same process can take up to a day to look for hotels that will accept the flat rate per diem. Depot workers at Puget Sound Naval Shipyard explained in our discussion groups that the accommodations willing to accept the flat rate per diem may be farther from the job site, which increases the employees’ commuting time. Administrative burden: According to the questionnaire responses we received from depot officials from 4 of the 16 depots, the flat rate per diem policy is administratively burdensome, in that it has increased processing and adjustments related to travel. This was also a challenge explained during a meeting with Puget Sound Naval Shipyard officials who provided a comparison of voucher-processing times before and after the flat rate per diem policy change, showing that the processing time has nearly doubled. According to their estimates, processing a voucher took up to 10 minutes and processing an authorization took up to 5 minutes before the policy change, but after the policy change these tasks have taken twice the amount of time (20 minutes and 10 minutes, respectively). According to Puget Sound Naval Shipyard officials, this represents a significant increase in workload for the four full-time employees who process travel vouchers. Puget Sound Naval Shipyard officials also said that they have had to log more overtime hours and will have to hire more employees in the travel office as a result of the flat rate per diem policy. More than half of depot officials responding to our questionnaire reported that the flat rate per diem policy has affected civilian employees’ willingness to travel on long-term TDYs. Specifically, depot officials from 9 of the 16 depots reported, as seen in figure 4, that depot workers are less willing to volunteer for long-term TDY as a result of the policy. However, none of the depot officials from these depots provided documentation of volunteer rates before or after the policy took effect at their depots, or documentation of the impacts caused by decreased volunteer rates. In a related question regarding willingness to volunteer on long-term TDYs, depot officials from 5 of the 16 depots also reported having to direct depot workers to travel for such assignments. The majority of depot officials reported that the flat rate per diem policy has not had an effect on depot operations. As seen in figure 5, depot officials from 12 depots reported that there was no meaningful difference in the quality of work performed by depot workers while on long-term TDY; 9 depots reported there was no meaningful difference in the ability to deliver a quality product or in the timeliness of work; and 10 depots reported that there was no meaningful difference in the ability to perform the mission as a result of the flat rate per diem policy change. However, depot officials were unable to provide documentation to support those statements. In our questionnaire, none of the depot officials from the 16 depots provided documentation for questions related to quality of civilian work, ability to deliver a quality product, timeliness, or the ability to perform the mission as a result of the flat rate per diem policy. Officials from one depot reported in the questionnaire that policies that affect traveler payment, such as the flat rate per diem policy, do not have any impact on the quality of work provided to the customer. Further, Portsmouth Naval Shipyard officials we met with said it is difficult to make a causal link between operations-related issues, such as slipped timeframes, and the implementation of the flat rate per diem policy. They explained that a variety of other issues can affect timeframes, such as unforeseen repair work that was not identified when the project began. Some aspects of DOD’s flat rate per diem policy, such as the guidance for lodging receipts and application of the M&IE waiver, are not clear. This unclear guidance may hinder the policy’s achieving its intended objectives, such as simplifying travel. In its November 2014 changes to the JTR regarding the flat rate per diem policy, the Committee removed the receipt requirement for lodging, but it added language that is not clear regarding what is required to demonstrate that lodging costs were incurred. Before the flat rate per diem policy was added, the JTR required travelers to provide receipts for all lodging costs. According to DTMO officials, the requirement to provide lodging receipts for long-term travel was removed to simplify the reimbursement process, which had required long-term travelers to provide lodging receipts and to divide the charges evenly throughout the travel period, either on a weekly or monthly basis. According to these officials, those procedures were burdensome for both the traveler and the approving official. The Deputy Assistant Secretary of Defense for Military Personnel Policy stated that the removal of the receipt requirement for long-term TDY was intended to make the process less stressful for travelers. The lodging receipt guidance in the new flat rate per diem policy states that lodging receipts are not required, but proof that lodging costs were incurred shall be required; however, the policy does not specify what is meant by proof that lodging costs were incurred. As a result of the unclear guidance, a majority of depots still require lodging receipts. Based on results from our questionnaire, we found that 15 out of 16 depots still require long-term travelers to submit lodging receipts, which is contrary to the intent of the flat rate per diem policy to simplify the reimbursement process for long-term travelers. DTMO officials told us that they intentionally did not define “proof of lodging costs” in the JTR so as not to be too prescriptive. Officials said that they were concerned that if they were to provide a list, authorizing officials and travelers would view it as a definitive list. Similarly, the M&IE waiver, approved by the Committee Chair in May 2016, does not clearly state when long-term travelers should submit requests to receive actual expenses. While the Deputy Assistant Secretary of Defense for Military Personnel Policy maintains that the submission process is clearly explained in the JTR, our review of the JTR flat rate per diem policy and our contact with depot officials showed that there was a lack of clarity in the guidance. Specifically, we found that the flat rate per diem policy does not specify when long-term travelers should submit requests to receive actual expenses for M&IE—that is, whether before going on the TDY, or after returning from it. Additionally, we found that depot officials from across the military services varied as to when the traveler would receive approval for the M&IE waiver. Army officials said it would be granted prior to the TDY, while Navy, Marine Corps, and Air Force officials varied as to when the waiver would be granted. Further, a senior DTMO official we met with told us that the waiver should be approved before the traveler leaves for TDY, and that it did not make sense for the approval to occur after returning from TDY—especially if the point of the policy is to not harm the traveler. If the waiver were not to be approved until the traveler returned, the traveler would be unsure during the trip whether actual expenses for M&IE would be approved. According to the Standards for Internal Control in the Federal Government related to information and communications, information should be recorded and communicated to management and others within the entity in a form and within a timeframe that enables them to carry out their internal control and other responsibilities. A senior DTMO official affirmed that information related to the flat rate per diem policy may not have been communicated effectively, and that more information regarding the policy could be included—for example, in DTMO’s newsletter. Without clear guidance in the JTR relating to the flat rate per diem policy specifying what is meant by proof of lodging and at what point in the travel process the M&IE for actual expense should be requested and approved, the Committee and DTMO may not have assurance that the policy is meeting stated objectives, such as the simplification of the travel reimbursement process for long-term TDYs. The Committee does not have procedures to ensure that required processes are completed prior to finalizing a major JTR change, and its assessment of costs and benefits was not comprehensive, lacking other potential costs and benefits that could result from the policy change. The Committee did not ensure that certain required processes to inform the flat rate per diem policy change were completed prior to the policy’s approval. According to the Per Diem, Travel and Transportation Allowance Committee Organization and Functions Manual, the Committee should follow certain processes when considering a major change to the JTR. Specifically, the manual states that the Advisory Panels should provide cost data and budgetary impact statements when considering major changes to the JTR, among other things. With respect to cost data and budgetary impact statements, the November 15, 2013, memorandum (Memorandum 1) from the Committee to the Advisory Panels stated that the military services must provide the number of personnel affected and the costs related to the flat rate per diem for long-term TDY. According to DTMO officials, the military services were unable to provide the number of affected personnel. Officials also said that DTMO calculated the number of personnel who would be affected annually by the flat rate per diem policy using 2013 voucher data from the Defense Travel System, but this calculation did not include travel data from other DOD systems. According to a May 2010 Under Secretary of Defense for Personnel and Readiness report to Congress, the Defense Travel System includes only 70 percent of DOD travel data; approximately 30 percent of the department’s travel is processed outside of this system. Further, our review of the Committee’s February 3, 2014, memorandum (Memorandum 2) found that the Advisory Panel's comments did not include information concerning the number of personnel affected, and that they provided little to no information concerning costs. Only the Air Force provided cost data that were specific to cost-savings that could be achieved as a result of the flat rate per diem policy. No other comments by members of the Advisory Panels in Memorandum 2 included information concerning costs. Regarding the requirement in the manual to provide cost data and budgetary impact statements, DTMO officials told us that from their perspective, the flat rate per diem policy did not have any budgetary impacts, so they did not prepare these statements. Further, according to DTMO officials, the military services did not provide any cost data. They said that there is no requirement for the military services to provide costs, including administrative costs, to implement a policy change, such as the flat rate per diem policy. However, these statements contradict the requirements in the manual and Memorandum 1 from the Committee, which state that the military services must provide costs related to the flat rate per diem for long-term TDY. The process for coordinating legal review is another example of the need to establish procedures to ensure that required processes to inform major JTR policy changes are completed prior to the approval of those changes. According to the Per Diem, Travel and Transportation Allowance Committee Organization and Functions Manual, legal counsel should review proposed JTR changes, as requested, to determine their legal sufficiency. Further, in Memorandum 1 to the Advisory Panels, the Committee requested that legal counsel provide a statement of legal sufficiency concerning the flat rate per diem policy change. However, we could not verify that a legal sufficiency review took place prior to the policy’s approval. We identified a document in the Committee Chair’s materials that stated that legal counsel had reviewed and concurred with the flat rate per diem policy. A similar statement also appeared in other documents related to the coordination of the flat rate per diem policy change. However, according to DTMO officials, any documentation indicating that the policy was coordinated for legal review was incorrect. In a subsequent meeting, DTMO officials told us that a legal review of the policy did occur, but that they could not find any documentation of this review. As such, we were unable to verify that this process was completed by the Committee when considering the flat rate per diem policy change prior to the policy’s approval. The Committee does not have procedures in place to ensure that required processes, such as completing cost data and budgetary impact statements and a legal sufficiency review, are completed prior to a major JTR policy change’s approval. Further, DTMO officials acknowledged the existence of issues with the process, in light of our review. In October 2016 DTMO officials told us that for future changes it was their intent to require a signature from legal counsel prior to the Committee’s approval of a major JTR policy change as a means to document that this process was completed. Without establishing procedures to track what processes related to a major JTR change have been completed, the Committee may lack the full range of information and data necessary to understand how the policy may affect diverse workforces, such as depots, prior to its approval. DTMO conducted a cost-savings (i.e., benefits) assessment to estimate the savings resulting from the flat rate per diem policy, but that assessment was not comprehensive and did not assess other potential costs or benefits that may result from the policy. For example, according to DTMO officials, they performed their cost-savings assessment in October 2012 using fiscal year 2011 voucher travel data from the Defense Travel System. However, as previously noted, the Defense Travel System contains only 70 percent of department-wide travel data. Because DTMO’s cost-savings assessment includes only Defense Travel System data, officials said they believe their reported estimates of cost- savings are lower than the actual cost-savings being realized. Further, DTMO’s assessment did not assess other potential costs that would be incurred as a result of the flat rate per diem policy. Specifically, DTMO did not assess the costs that DOD would incur in administering or in monitoring and enforcing the new policy, such as the cost to update the Defense Travel System with the functionality to support long-term travelers, which, according to DTMO officials, is estimated to cost more than $650,000. DTMO also did not factor approvals for full lodging into their cost-savings assessment. DTMO officials told us that they knew that in some instances the full lodging would be necessary, but they did not account for them in their cost-savings assessment. According to Army, Navy, and Air Force depot officials, the travel office has authorized the full lodging amount to depot workers who are scheduled for, as well as depot workers who are on, long-term TDY. This factor could reduce DTMO’s estimate of cost-savings, but 7 of the 16 depots reported that they did not track when a traveler was authorized full lodging. DOD Instruction 7041.03, Economic Analysis for Decision-making, which applies to all DOD components, establishes their responsibility for following OMB Circular A-94 guidelines concerning benefit-cost analysis of federal programs. OMB Circular A-94 states that agencies should follow the guidelines provided when preparing analyses in support of federal activities, and that a comprehensive enumeration of the different types of benefits and costs, monetized or not, can be helpful in identifying the full range of program effects when conducting a benefit-cost analysis of a policy. Such analyses should also include an evaluation of alternatives and studies, among other things, to determine whether anticipated benefits and costs have been realized. Other potential costs, such as potential effects on travelers’ willingness to volunteer and on work force morale, were also not assessed in DTMO’s cost-savings assessment. According to DTMO officials, they did not anticipate, based on their previous experience with the flat rate per diem policy for military personnel, that the policy would have a negative effect on morale or that travelers would refuse to take long-term TDY assignments. DTMO officials told us that they did not conduct any analysis concerning the effects of the policy on civilian employees because they assumed that the 55 percent per diem would work for civilians as it had worked for military personnel. However, guidance in the October 1, 2014, version of the JTR stated that a flat rate per diem rate of 55 percent may be authorized for military personnel in a TDY contingency operation for more than 180 consecutive days at one location, and this guidance did not apply to civilian employees. Further, a March 2011 report concerning long-term lodging options for DOD travelers—the results of a study conducted by a private contractor with whom DTMO had contracted—found that DOD travelers would be unable to secure long-term travel at 55 percent of the total General Services Administration per diem rate without a formal negotiated rate program in place. DTMO does have a pilot program (the Integrated Lodging Pilot Program) for providing lodging at a reduced rate, but the pilot program is eligible only for TDY travel up to 30 days. According to DTMO officials, they plan to include long-term TDYs in the pilot program, but they did not provide a plan or firm timeframes for this effort. In assessing the potential effects that might ensue from the change in its per diem policy, we found that DTMO considered only one alternative per diem rate for each long-term travel period. DTMO assessed only the cost- savings that would result from changing the policy from one that allowed travelers the full per diem rate to one that allowed them a fixed percentage (75 or 55 percent, depending on the length of travel) of that rate. DTMO did not analyze the potential benefits and costs that might ensue from other alternatives for reducing travel expenditures, such as the option of leveraging the General Services Administration’s program to negotiate minimum discounts with corporate apartment vendors for long- term TDYs, which was provided as an example in the March 2011 report conducted by the contractor. OMB Circular A-94 guidelines for benefit- cost analysis state that agencies should consider alternative means of achieving program objectives. Specifically, different alternatives may have different benefits and costs, and agencies should identify the alternative that is the most cost-beneficial. Further, the March 2011 report helped to inform DTMO’s decision regarding the flat rate per diem rates (75 and 55 percent). However, that report has some limitations, including that it was based on a limited number of site locations. Other locations may have actual costs that are higher or lower than those assumed in the contractor’s study upon which DTMO’s 75 and 55 percent rates were based. For example, the contractor that did the study for DTMO focused its analysis on DOD’s top 64 travel destinations in the United States by selecting locations that covered 80 percent of DOD’s long-term travel volume. According to DTMO officials, the location data were obtained from the Defense Travel System, which, as previously noted, contains only 70 percent of department-wide travel data. Further, no overseas locations were considered in the report, and the contractor was able to match its data on extended stay locations to only 30 of DOD’s top 64 locations in the United States. Based on responses of depot officials to our questionnaire, we found 10 out of 16 depots identified an overseas location as the location to which depot workers traveled most frequently for 31 days or more from August 2015 through July 2016. DTMO officials said that they chose the 75 percent rate instead of the 69 percent rate recommended by the contractor because they wanted to be conservative and not harm the traveler. However, DTMO officials acknowledged that they did not conduct any analysis to assess whether this alternative rate would be cost-beneficial. DTMO has stated, through its travel newsletter, that it employs three guiding principles when considering new polices, programs, and solutions: do no harm, fair compensation, and evidence- based decision making. DTMO’s studies also did not assess all costs and benefits resulting from the flat rate per diem policy. Specifically, DTMO officials provided us with a copy of the draft Performance Measurement Plan, which officials described as the first step toward formalizing and more clearly documenting their cost-savings methodology, and is part of a larger effort to track and report savings from the flat rate per diem policy. However, our review of that draft plan, which according to DTMO officials was drafted in July 2016, found that it does not include an approach to capture other potential costs and benefits from the policy beyond the cost-savings of the policy. According to OMB Circular A-94, retrospective studies to determine whether anticipated benefits and costs have been realized are potentially valuable. Such studies can be used to determine necessary corrections in existing programs, and to improve future estimates of benefits and costs in these programs or related ones. Specifically, the draft plan does not include an approach for identifying potential effects that may be difficult to quantify or monetize, such as the negative effect of the policy on morale or travelers’ willingness to go on long-term travel assignments. Currently the draft plan includes only cost-savings (i.e., benefits) resulting from the policy and data from the Defense Travel System. The draft plan states that data from other DOD travel systems were possible future data sources. However, the draft Performance Measurement Plan does not provide a timeframe or plan for when data from these other sources would be included, and it does not include an approach to capture the other potential benefits resulting from the policy beyond the cost-savings. While DTMO officials indicated that other metrics (to include cost-savings) might be included in the draft plan, the plan does not include information about these other metrics. Further, we found that DTMO’s site visit to assess the adequacy of the flat rate per diem policy for long-term TDYs did not include a full assessment of the policy’s per diem rates. According to DTMO officials, they conducted site visits at two locations (Bremerton, Washington, and San Diego, California) to assess the adequacy of the flat rate per diem at these locations. However, the site visits (summarized in e-mail) assessed only the adequacy of the 75 percent flat rate per diem for long-term travel between 31 and 180 days; they did not assess the adequacy of the 55 percent flat rate per diem for long-term travel greater than 180 days. Lastly, DTMO officials told us that they anticipated only savings to result from the flat rate per diem policy, not potential costs. According to DTMO officials, they did not perform an assessment of the indirect costs to implement the policy because implementation is a service and agency responsibility. However, as previously noted, the military services did not provide any cost data related to the implementation of the policy. Without having conducted a comprehensive assessment that incorporated principles from OMB Circular A-94 and without having a Performance Measurement Plan that considers other potential costs and benefits resulting from the flat rate per diem policy, the Committee and DTMO may not be well positioned to understand whether the policy is cost- beneficial and is meeting set objectives to reduce travel costs without negatively affecting the traveler and mission. Depot officials have identified various benefits, such as cost savings, as well as challenges, such as difficulties in finding lodging accommodations that will accept the flat rate per diem, resulting from DOD’s JTR flat rate per diem policy. However, certain aspects of DOD’s flat rate per diem guidance remain unclear to depot officials. Without clear guidance in the JTR related to the flat rate per diem policy concerning what is meant by proof of lodging, and concerning at what point in the travel process the M&IE for actual expenses should be requested and approved, the Committee and DTMO may not have assurance that the policy is meeting stated objectives, such as the simplification of the travel reimbursement process for long-term TDYs. Further, the Committee did not ensure that certain required processes were completed prior to the flat rate per diem policy’s approval, and as a result was not fully informed concerning potential effects on civilian employees as well as certain costs when it considered the 2014 flat rate per diem policy change. Without establishing procedures to track which processes related to a major JTR change have been completed, the Committee may lack the full range of information and data necessary to understand how the policy may affect diverse workforces, such as depots, prior to the change’s approval. Finally, although DTMO—the office that serves as the Committee’s staff and assists in establishing and administering commercial travel policy within DOD—conducted a cost-savings assessment to estimate savings that could result from the flat rate per diem policy, the assessment was not comprehensive and did not consider other potential costs and benefits that could result from the policy. Without having conducted a comprehensive assessment that incorporated principles from OMB Circular A-94 and without having a Performance Measurement Plan that considers other potential costs and benefits resulting from the flat rate per diem policy, the Committee and DTMO may not be well positioned to understand whether the policy is cost-beneficial and is meeting set objectives to reduce travel costs without negatively affecting the traveler and mission. We recommend that the Secretary of Defense direct the Per Diem, Travel and Transportation Allowance Committee, in coordination with the Military and Civilian Advisory Panels, to take the following four actions to clarify the flat rate per diem policy and ensure that the department has the full range of information needed by decision-makers when considering a major Joint Travel Regulations change: Revise the Joint Travel Regulations policy related to the flat rate per diem to provide clear language concerning (1) what is meant by proof of lodging, and (2) at what point in the travel process the meals and incidental expenses waiver for actual expenses should be requested and approved; Establish procedures to ensure that required processes to inform major Joint Travel Regulations policy changes are completed prior to the approval of those changes; Incorporate principles from Office of Management and Budget Circular A-94, including the costs and benefits of effects that may be difficult to quantify or monetize, into future assessments related to major Joint Travel Regulations changes; and Incorporate principles from Office of Management and Budget Circular A-94, including the costs and benefits of effects that may be difficult to quantify or monetize, into future assessments related to the flat rate per diem policy, such as the draft Performance Measurement Plan. We provided a draft of this report to the Department of Defense (DOD) for review and comment. In written comments reproduced in appendix IV, DOD concurred with all four recommendations and highlighted the actions it was taking to address each recommendation. These actions include initiating—through the Per Diem, Travel and Transportation Allowance Committee—changes to the Joint Travel Regulations (JTR) to clarify the flat rate per diem policy; establishing procedures to ensure that processes are completed prior to the approval of a major JTR change; and incorporating principles from Office of Management and Budget Circular A-94 into future assessments related to major JTR changes and the flat rate per diem policy. DOD also indicated that in some instances it may be challenging to assess actual benefits, which may be difficult to quantify or monetize, prior to approving a major JTR change. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Secretaries of the Army, the Navy and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 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 members who made key contributions to this report are listed in appendix V. To determine the extent to which depot officials identified benefits and challenges resulting from the flat rate per diem policy, including any effects on civilian employees and operations at the selected depots, we focused on the policy’s effects on Department of Defense (DOD) civilian employees at DOD’s 17 depot maintenance industrial sites. We selected the depot maintenance industrial sites because they reflect diversity in their mix of depots across the military services. We also selected these sites because although DOD has other depots—such as depot-level software maintenance activities—the 17 depot maintenance industrial sites accounted for a majority of the department’s depot-level workload in fiscal year 2014, for example, according to an Office of the Assistant Secretary of Defense for Logistics and Materiel Readiness maintenance overview. We sent a questionnaire to the 17 depots to obtain the commanders’ perspectives and documentation on the policy’s benefits and challenges on civilian employees and operations. We received responses from all 17 depots, and we then analyzed the results. For questions that elicited closed-ended and quantitative responses, we used the software system SAS to produce summary output. For questions that elicited open-ended and qualitative responses, we conducted a content analysis in which two analysts independently categorized each depot’s responses. The pair of analysts discussed any discrepancies in their categorizations until they reached a consensus. When we sent out our questionnaire, the flat rate per diem policy was in effect at 13 of the 17 depots for bargaining unit employees and was in effect at all depots for non-bargaining unit employees. Therefore, we believed that the depots could provide knowledgeable perspectives on the benefits and challenges of the policy. Subsequently, Marine Corps officials indicated that civilian employees at the Production Plant in Barstow, California, never travel on long-term TDY, and consequently we excluded their questionnaire responses from our analysis related to the benefits and challenges of the policy. As part of the questionnaire’s development, a survey specialist and two independent analysts with expertise in depot maintenance reviewed the questionnaire. The expert review phase was intended to ensure that content necessary to understand the questions was included and that technical terminology included in the questionnaire was correct. To minimize errors that might occur from respondents interpreting our questions differently than we intended, we pre-tested our questionnaire with staff from the budget, travel, and other relevant offices of five depots. During the pre-tests, conducted in person or by phone, we asked the officials to read the instructions and each question aloud and to tell us how they interpreted the question. We then discussed the instructions and questions with officials to determine whether (1) the instructions and questions were clear and unambiguous, (2) the terms we used were accurate, (3) the questionnaire was unbiased, and (4) the questionnaire did not place an undue burden on the officials completing it, and (5) to identify potential solutions to any problems identified. We noted any potential problems and modified the questionnaire based on the feedback received from the reviewers and pre-tests as appropriate. We sent email notifications to each depot beginning on September 6, 2016. We sent the Microsoft Word form questionnaire and a cover email and asked recipients to fill out the questionnaire and email it back to us within 2 weeks. We closed the questionnaire on November 1, 2016. Overall we received 17 completed questionnaires, for a response rate of 100 percent. Because we collected data from every depot we selected and we are not generalizing results to other depots, there was no sampling error. However, the practical difficulties of conducting any survey may introduce errors, commonly referred to as non-sampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents, how the responses were processed and analyzed, or the types of people who do not respond can influence the accuracy of the survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize these non-sampling errors and help ensure the accuracy of the answers that were obtained. For example, a social science survey specialist designed the questionnaire, in collaboration with analysts having subject matter expertise. Then, as noted earlier, the draft questionnaire was pre- tested to ensure that questions were relevant, clearly stated, and easy to comprehend. The questionnaire was also reviewed by internal subject matter experts and an additional survey specialist, as mentioned above. Data were electronically extracted from the Word questionnaires into a comma-delimited file that was then imported into a statistical program for quantitative analysis and Excel for qualitative analysis. Only one variable was manually entered (the name of the depot), and that data entry accuracy was verified. We examined the questionnaire results and performed computer analyses to identify inconsistencies and other indications of error, and we addressed such issues as necessary. Quantitative data analyses were conducted by a survey specialist using statistical software. An independent data analyst checked the statistical computer programs for accuracy. Content analyses of open-ended responses were conducted by two analysts with subject matter expertise. A standard coding scheme was developed, and the two analysts independently coded each depot’s response. The pair of analysts then discussed any discrepancies in their coding until they reached consensus. The verbatim wording of key questions from our questionnaire whose results are discussed in this report is located in appendix III. To obtain the perspectives of civilian employees affected by the flat rate per diem policy, we conducted four discussion groups at Puget Sound Naval Shipyard—two discussion groups with bargaining unit employees, and two discussion groups with managers and supervisors of bargaining unit employees. We selected Puget Sound Naval Shipyard because, of the 17 depot maintenance industrial sites, it has the most civilian employees, and because it had implemented the flat rate per diem policy for non-bargaining and bargaining unit employees shortly after the policy became effective. We also held interviews with officials from Anniston Army Depot, Portsmouth Naval Shipyard, and Puget Sound Naval Shipyard regarding the benefits and challenges of the flat rate per diem policy. These results were not generalizable but provided important insights. To determine the extent to which DOD established clear guidance regarding the policy, we reviewed and analyzed the flat rate per diem policy in the Joint Travel Regulations (JTR) and compared it with Federal Standards for Internal Controls related to information and communications to identify areas of the policy that could be clarified to assist DOD in meeting set objectives to simplify travel. We also interviewed relevant agency officials from the Defense Travel Management Office (DTMO); the Per Diem, Travel and Transportation Allowance Committee's (hereinafter the Committee) Chair (i.e., the Deputy Assistant Secretary of Defense for Military Personnel Policy); and Department of the Navy, Office of Civilian Human Resources, regarding the guidance related to the flat rate per diem policy. We also included questions in the questionnaire sent to the 17 depots concerning the flat rate per diem policy’s guidance regarding proof of lodging costs and the May 2016 meals and incidental expenses waiver, as well as contacted depot officials from the Army, Navy, Air Force, and Marine Corps. To determine the extent to which DOD followed its processes for considering the flat rate per diem policy change and included an assessment of benefits and costs prior to making the change, we analyzed and reviewed the Per Diem, Travel and Transportation Allowance Committee Organization and Functions Manual and other relevant documents related to the process, such as memorandums. We compared the Committee’s documents and actions with its manual and relevant guidance included in the Committee’s memorandums to identify gaps, if any, in the process used. We also reviewed DOD Instruction 7041.03, Economic Analysis for Decision-making, which establishes responsibilities for the DOD components in following Office of Management and Budget (OMB) Circular A-94 guidelines for benefit-cost analysis of federal programs. Further, we compared DTMO’s cost savings assessment to selected elements in OMB Circular A-94 guidelines for benefit-cost analysis of federal programs to identify gaps, if any, in the assessment. Specifically, we focused on key elements of OMB Circular A-94 for conducting a benefit-cost analysis, such as whether DTMO conducted a benefit-cost or cost-effectiveness analysis when considering the flat rate per diem policy; a comprehensive enumeration of the different types of benefits and costs, monetized or not; an evaluation of alternatives; and retrospective studies, which are potentially valuable, to determine whether anticipated benefits and costs have been realized. We focused on these key elements because the stated purpose of OMB Circular A-94 is to promote efficient resource allocation through well- informed decision-making by the federal government. Further, the guidance states that it serves as a checklist of whether an agency has considered and properly dealt with all the elements for sound benefit-cost analyses. We also reviewed a March 2011 report concerning long-term lodging options for DOD travelers, which DTMO contracted with a private contractor to conduct. We interviewed officials from DTMO and various members of the Military and Civilian Advisory Panels from across the military services to gain further information and clarification regarding the Committee’s processes, as well as perspectives regarding the costs and benefits of the policy. To obtain information about the source data that the DTMO used to inform its cost-savings assessments resulting from the flat rate per diem policy we interviewed officials from the Defense Travel System Program Management Office, who provided us with specific information concerning the system’s capabilities and the quality of travel data, such as data related to lodging and meals and incidental expenses. We conducted this performance audit from February 2016 to May 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 flat rate per diem policy went into effect at the various depot maintenance industrial sites at different times. Table 1 below provides a list of the depot maintenance industrial sites and the dates when the policy went into effect at each depot, for bargaining and for non- bargaining employees. In addition to the contact named above, key contributors to this report were Marilyn Wasleski, Assistant Director; and David Ballard, Vincent Buquicchio, Rebecca Guerrero, Timothy Guinane, Kelly Turner, Amie Lesser, Michael Silver, Natalie Swabb, and Cheryl Weissman. | In response to government-wide direction for agencies to reduce travel costs, in November 2014 DOD changed its JTR by instituting a flat rate per diem policy on long-term TDY travel. This policy reduced the locality rate payable for each full day at the location, depending on the duration of the TDY: for TDYs of between 31 and 180 days the flat rate per diem is 75 percent, and for TDYs of greater than 180 days it is 55 percent. The National Defense Authorization Act for Fiscal Year 2016 included a provision that GAO assess the impact of DOD's policy change to the JTR on shipyard and depot workers. This report assesses the extent to which (1) depot officials identified benefits and challenges resulting from the policy change, and any effects on civilian employees and operations; (2) DOD established clear guidance regarding the policy; and (3) DOD followed its processes when considering the policy change and included an assessment of benefits and costs. GAO collected and analyzed responses to a questionnaire disseminated at DOD's 17 depot maintenance industrial sites, reviewed relevant documentation, and interviewed cognizant officials. Officials at depots responding to a GAO questionnaire identified various benefits, such as cost-savings, and challenges, such as increased processing time for vouchers, resulting from the Department of Defense (DOD) Joint Travel Regulations (JTR) flat rate per diem policy change for long-term temporary duty (TDY) travel. While more than half of depot officials reported that the policy has affected civilian employees' willingness to volunteer for long-term TDYs, a majority of depot officials reported that the policy has generally not affected depot operations. GAO's review of the JTR and analysis of questionnaire responses found that certain aspects of DOD's flat rate per diem policy are not clear. For example, the requirement to provide lodging receipts for long-term travel was replaced by a requirement to provide proof that lodging costs were incurred, but according to depot officials it is not clear what constitutes proof of lodging. As a result, the majority of the depots still require long-term travelers to submit lodging receipts. Such lack of clarity may hinder DOD's ability to achieve the policy's intended objectives, such as simplifying the administrative aspects of travel. DOD did not ensure that certain required processes established in DOD guidance were completed prior to the policy's approval, and its assessment of the policy's costs and benefits was not comprehensive. Specifically, GAO found that prior to the flat rate per diem policy's approval certain required steps, such as providing cost data and budgetary impact statements and a legal sufficiency review, were not completed. This occurred because DOD has not established procedures to ensure that these required steps are completed prior to approving a major change to the JTR. Further, although DOD's Defense Travel Management Office (DTMO) estimated total savings of approximately $194 million resulting from the flat rate per diem as of January 2017, GAO found that DOD's cost-savings assessment did not comprehensively consider all potential costs and benefits of the policy change. DOD guidance, which applies to all DOD components, establishes responsibilities for following Office of Management and Budget (OMB) Circular A-94 guidelines concerning benefit-cost analysis of federal programs. OMB Circular A-94 states that a comprehensive enumeration of the different types of benefits and costs, monetized or not, can be helpful in identifying the full range of program effects when conducting a benefit-cost analysis of a policy. However, DTMO's assessment of the JTR policy change was not comprehensive and did not include the full range of potential costs and benefits. For example, it included some potential costs to implement the policy, but not others, such as the cost to update the travel system with the needed functionality to support the policy. DTMO has recently developed a draft Performance Measurement Plan, which officials described as a first step in a larger effort to track and report savings from the flat rate per diem policy. However, GAO's review of the draft plan found that it also does not include a comprehensive approach to capture costs and benefits of the policy. As a result, DOD may not be well positioned to understand whether the flat rate per diem policy is cost-beneficial and meeting its objectives to reduce travel costs without negatively affecting the traveler and the mission. DOD should clarify certain aspects of the flat rate per diem policy; establish procedures to ensure required steps are completed before major JTR policy changes are approved; and ensure that OMB benefit-cost analysis guidelines are followed in future policy assessments. DOD concurred with all four recommendations and highlighted actions it was taking to address each recommendation. |
According to international animal health authorities, disease surveillance in livestock and poultry has as its main purpose the early detection of diseases and disease outbreaks. It also plays an important role during outbreaks, such as monitoring how fast a disease is spreading through animal populations and in what direction. Disease surveillance is also critical in determining how effective efforts have been in controlling and eradicating disease from a particular area or animal population and in recognizing when that disease no longer poses an immediate threat to animal or human health. Further, surveillance supports international trade, allowing officials to certify that animals are healthy and safe to move across borders. Disease surveillance in livestock and poultry is particularly important because billions of cattle, swine, poultry, and other animals used for food are annually moved from place to place over long distances throughout the food supply chain—from wherever producers are located and then to feedlots and local, regional, and even overseas markets and slaughterhouses. Thus, to prevent the spread of contagious diseases and protect the welfare of healthy herds, animal health authorities often restrict the movement of animals. Such restrictions can lead, paradoxically, to the destruction of large numbers of uninfected animals and substantial economic losses. Federal, state, tribal, and industry entities share responsibility for carrying out disease surveillance in livestock and poultry (see app. I). Under the national animal health reporting system, APHIS typically works with states to monitor, control, and eradicate certain animal diseases. According to APHIS documents and state veterinary officials, such activities include, for example, issuing guidance on how to identify and report particular diseases of national concern, developing vaccination programs, and providing additional staff to work alongside state investigators tracking outbreaks of infectious diseases. To manage these reportable diseases, APHIS has worked closely with the states and industry over the past decades to eradicate them by, for example, providing states funding and guidance. According to APHIS documents, the agency has made significant gains in eradicating reportable diseases such as tuberculosis and brucellosis, which have historically plagued American livestock. State animal health officials work closely with industry and with state-operated veterinary diagnostic laboratories to monitor and protect the health of livestock and poultry within state boundaries, including regulating the entry of livestock and poultry into their states. Veterinarians accredited under APHIS’s National Veterinary Accreditation Program are directed to report to APHIS the suspected presence of selected domestic and foreign animal diseases that can cause significant economic, trade, or public health consequences (see app. II for a list of such diseases in swine). Some states also require veterinarians to directly report to state animal health authorities the incidence of diseases that are not reportable nationally. Industry is an important source of health data on livestock and poultry, privately maintaining that information and reporting it to state and federal officials when a reportable disease is suspected. Veterinarians working for livestock and poultry producers collect tissue and blood samples from animals and send them to a veterinary laboratory for diagnosis; these veterinarians are the first line of defense in disease surveillance, whether for detecting diseases or monitoring a disease during an outbreak. The laboratory returns test results confidentially to the veterinarian or person submitting the sample, unless the test results indicate the presence of a federal or state reportable disease, in which case those test results are reported to appropriate federal or state authorities. When a veterinarian suspects the presence of a foreign animal disease in a herd, the veterinarian contacts state and federal animal health authorities to take a sample and send it to APHIS’s National Veterinary Services Laboratories to confirm the diagnosis (see fig. 1). If state and federal animal health officials approve, a National Animal Health Laboratory Network laboratory may conduct initial screening for certain foreign animal diseases. But a sample is also sent to APHIS’s National Veterinary Services Laboratories to confirm the diagnosis. Contagious diseases with the potential to harm the economy and human health may spread among livestock and poultry, and in some cases be transmitted to humans, through various methods. For example, classical swine fever may be transmitted from an infected swine to another directly through nose-to-nose and sexual contact or indirectly through a person or object, such as a farmhand’s clothing. Swine may also contract the disease through exposure to or consumption of contaminated pork products, which typically occurs when swine are fed uncooked garbage or meat products from a source outside the United States. The classical swine fever virus is known to survive in pork meat for up to 180 days. Although this disease affects only swine, other diseases in swine have the capacity to affect humans. For example, swine can become infected not only with swine influenza viruses but with human and avian viruses as well. According to recent influenza research, evidence exists that influenza viruses can be transmitted through the air between swine and humans and that either host can be contagious before showing symptoms of illness. When a swine is infected with more than one influenza virus at the same time, the viruses can exchange genetic material, thereby creating a new influenza virus, which may vary in its virulence and transmissibility between and within species (see app. III). To better adapt to the changing landscape of human and animal diseases (including the rapid global movement of humans, animals, and food products), APHIS has begun to shift its disease-specific surveillance approach to (1) monitor the overall health of livestock and poultry and (2) improve its ability to analyze health information about livestock and poultry. APHIS faces several challenges in carrying out this new approach, including obtaining new data from current and additional sources and determining how best to deploy declining resources, given increasing fiscal constraints. As funding for disease eradication programs changes, and the global landscape of animal and human diseases produces new threats, APHIS has since fiscal year 2012 begun broadening its previous disease-by- disease approach to one in which the agency monitors the overall health of certain livestock and poultry species. APHIS’s intention is to examine the nation’s livestock herds and poultry flocks in detail, using diverse sources of data, to better detect, monitor, and control diseases that may be new or reemerging, including domestic diseases of economic importance. Before its new approach, APHIS directed its programs for disease surveillance in livestock and poultry toward preventing the introduction of certain foreign animal diseases and to monitoring, detecting, and eradicating other reportable diseases already present in domestic herds. Information about nonreportable diseases, including diseases that were new or reemerging, was not always captured by the agency’s disease surveillance efforts. According to APHIS documentation, beginning in fiscal year 2010, the agency proposed its first effort to broaden disease surveillance in livestock and poultry: monitoring the health of the nation’s hog, or swine, herds. This program—called Comprehensive and Integrated Swine Surveillance—identifies new sources and types of data on diseases in swine, among other things. Since fiscal year 2012, the agency has been receiving funding on a species, or commodity, basis, rather than on a disease-specific basis; thus, the agency’s swine health activities, including surveillance, were provided dedicated funding for the first time that year at $23 million. To begin addressing multiple and evolving information needs about swine health under the program, the agency plans to draw new data from sites where swine typically converge in large numbers or where information on swine health can be easily collected. In planning documents, APHIS officials said that they plan to collect data from farms where swine are raised, markets where they are sold, slaughter facilities, and veterinary diagnostic laboratories, among other sites (see fig. 2). They also plan to collect data from feral swine, which may harbor diseases transmissible to domestic herds. Many of these sites are already monitored to some extent, but APHIS officials said they intend to expand how the sites are used in the future under the program. For example, APHIS has been monitoring for the presence of pseudorabies at slaughter facilities, but it has proposed monitoring these facilities for a range of other diseases as well, including classical swine fever. According to agency officials, APHIS is also considering potential new information sources, such as data that states collect on diseases of regional concern, some of which fall outside the category of reportable diseases. APHIS has begun to take some of its planned actions under this program, but many of the planned actions require further coordination and concurrence from industry and states before they can be implemented. In addition to making better use of existing data sources and identifying new ones, APHIS and the Department of Homeland Security launched a 9-month pilot program designed to use volunteer veterinarians to assist in detecting diseases early, including new and emerging diseases. Scheduled to conclude in May 2013, according to Homeland Security officials, this pilot program involves a number of participating private veterinarians, working in a small area of West Texas and New Mexico, who are using electronic tablets to record and submit to APHIS data on syndromes they observe in livestock herds, that is, data on the collective signs and symptoms of sickness that animals exhibit. According to a statement of work for this program, such information has not been systematically collected and reported before, and this pilot offers the opportunity to gauge the usefulness of such information. Under this new approach, APHIS also plans to improve its ability to analyze information—collected from numerous sources for different purposes and in different formats—on the overall health of livestock and poultry, by standardizing how the information is reported and improving how the data are linked electronically. Because data standards vary greatly among APHIS’s numerous information systems, and within individual systems, APHIS has limited ability to analyze and aggregate information to generate a complete national picture of livestock and poultry health. To address these limitations, APHIS in 2009 developed a multiyear information technology plan to restructure and modernize how the agency collects and manages information for detecting and monitoring diseases in livestock and poultry, including new and emerging disease threats. The technology plan’s ultimate goal is to develop a centralized information repository containing health information about livestock and poultry from the most relevant internal and external databases and employing standardized data entry protocols. The initial phase of this effort to improve efficiency and data analysis is already under way. APHIS in January 2013 replaced its outdated Generic Disease Database, which contained information on outbreaks of domestic diseases, with a new database management system, called Surveillance Collaboration Services, which establishes standardized data fields and codes. APHIS also plans to electronically link this new database system with, among others, its existing Emergency Management Response System, which contains information derived from investigations of suspected foreign animal diseases, and Laboratory Messaging Services, which receives and records diagnostic test results for selected diseases of national concern. Estimated at $5.4 million, the first phase of APHIS’s technology modernization effort—the deployment of the Surveillance Collaboration Services system—is scheduled to be completed 1 year ahead of its original 2014 target date, APHIS officials said. APHIS faces key challenges in carrying out this new approach to disease surveillance in livestock and poultry, in particular, gathering data from current and additional sources, such as from industry and from state animal health authorities, and determining how best to deploy declining resources. Obtaining new data on livestock and poultry health from current and additional sources is likely to be a challenge for various reasons, including (1) industry concerns over the confidentiality of animal health data and (2) the sufficiency of collected data. APHIS’s ability to gather new data will likely be hindered by industry concerns that some health information on livestock and poultry should be kept confidential and not shared. For example, industry representatives and state animal health authorities we spoke with said they would not be willing to share information about the health of their herds beyond what is required by federal regulation because the information, including information on the incidence of influenza in swine, might be made public and affect sales. These officials cited as an example a 2009 H1N1 influenza outbreak in humans, which was genetically linked to an influenza virus found in swine and led to millions of dollars in lost sales to the pork industry because people mistakenly believed they could become ill from eating pork. Moreover, state animal health officials from one state reported that their state laws prohibit them from releasing information they collect on the health of their state’s livestock and poultry unless the information is required to be reported by federal law to control an immediate threat to overall animal or public health. Moreover, APHIS may have difficulty obtaining complete data identifying individual livestock and poultry and their locations. Generally, the states, not the federal government, maintain animal identification and location data, in part because of industry data confidentiality concerns, according to APHIS documents. APHIS officials told us that most states will share this information during animal disease outbreaks, but some do not routinely share the information for surveillance purposes. This reluctance to routinely share could affect the agency’s ability to generate a national picture of diseased and at-risk animals and their locations—information essential to effectively monitor and control livestock and poultry diseases, including new and emerging diseases. In July 2007, we reported that, for a number of reasons, APHIS faced serious challenges implementing a comprehensive national animal identification system. In January 2013, APHIS published a rule establishing national standards for identifying animals and documenting their movement that, with some exceptions, made it mandatory for livestock and poultry under federal regulation that are moved across state lines to have official identification and documentation. The new rule addresses some limitations of the old system, giving states some discretion in administering the program, including managing information required and maintained on animals entering their borders. The flexibility given to states with regard to how they maintain animal identification information under the new rule also poses challenges for APHIS to obtain information effectively and in a standardized manner. For example, states may use APHIS’s approved types of animal identification, including animal identification numbers, and approved official documentation, such as the interstate certificate of veterinary inspection, but they can also use alternative systems. An APHIS document on animal disease traceability says that although states can use a number of animal identification systems, they must follow certain standards, but states need not abide by APHIS’s suggested standards for documentation. In addition, states may track data in APHIS’s animal identification and movement information systems or may maintain their own databases instead, and these databases may not be compatible with APHIS’s systems. According to APHIS officials, standards are being developed to ensure future compatibility. APHIS will likely face the challenge of gathering sufficient data to monitor diseases, because agency officials and pork producers differ in their views on how much collected information is enough to successfully identify potential disease threats. For example, APHIS officials reported that commercial producers voluntarily and anonymously shared nearly 9,400 swine samples with APHIS’s National Swine Influenza Virus Surveillance Program in 2012, a 72 percent increase over the 5,460 samples submitted in 2011. But agency officials and pork producers disagree somewhat about whether collected data are sufficient to allow the program to successfully identify potential disease threats. About 66 million swine are raised on 68,300 U.S. farms. Agency animal and human health researchers have questioned whether enough swine samples and information are being submitted to APHIS’s influenza surveillance program. Influenza researchers also explained to us that because the data are submitted anonymously and cannot be linked with a particular farm or herd, they cannot be sure that the samples commercial producers provide to APHIS are representative of the viruses currently circulating domestically. Several pork producers, in contrast, told us they believe that the data APHIS has collected have been sufficient. APHIS also faces the challenge of obtaining sufficient data to monitor serious diseases that could spread to domestic herds and people from the nation’s sizable and widespread feral swine population. Federal and state animal health officials and pork producers told us that feral swine pose a significant risk because they carry diseases that have been eradicated in domestic herds, such as brucellosis and pseudorabies, which, if reintroduced, could hinder hog movement and trade. According to APHIS documents, feral swine are also susceptible to contracting and transmitting foreign animal diseases because they are highly mobile, at times crossing the border with Mexico and eating out of landfills, where they might encounter contaminated garbage. The introduction of a foreign animal disease like classical swine fever could close export markets. Feral swine are also carriers of zoonotic diseases, such as brucellosis and influenza, which can infect humans and other species. Feral swine are most likely to affect small backyard farms with little security, but they may also attempt to infiltrate larger, more secure operations. Unlike domestic herds, feral swine are not easily accessible to veterinarians and wildlife biologists responsible for managing populations and monitoring diseases, and, according to federal and state officials, even when feral swine are located, they can be very difficult to capture. In addition, the population is growing rapidly. According to APHIS data, feral swine were present in 36 states as of 2010, their population distribution and range having increased from 28 states in 2004 and 17 states in 1982 (see fig. 3). Officials from APHIS’s Wildlife Services told us that they have been sampling approximately 3,000 feral swine per year and testing for various diseases, including influenza, pseudorabies, brucellosis, and classical swine fever. Nevertheless, given an estimated nationwide population of 5 million feral swine, officials said that they would need to test significantly more animals per year to accurately portray the extent of diseases in this population. Declining resources—funding constraints and a shortage of veterinarians—also pose a challenge to broadening disease surveillance and improving analysis of livestock and poultry health data, according to APHIS officials. Federal and state animal health officials told us that decreased funding to USDA is a challenge to APHIS’s disease surveillance efforts in livestock and poultry. According to agency documentation, the budget for APHIS recently decreased by about 14 percent for fiscal years 2008 through 2013. As a result, APHIS has seen funding for key components of its disease surveillance efforts decline as well, according to agency officials. For example, funding for federal-state cooperative agreements for monitoring animal health has decreased by 44 percent, from $46 million in 2009 to $25 million in 2012. We previously reported that state officials in agriculture and wildlife departments said that they depend largely or completely on federal funds to support biosurveillance efforts and that their capabilities to carry out disease surveillance and other biosurveillance activities would be limited without funding from federal grants and cooperative agreements. Funding for APHIS’s National Wildlife Disease Surveillance and Emergency Response System, responsible for disease surveillance in feral swine, has been reduced by 71 percent, or $16 million, from fiscal year 2006 to fiscal year 2012. Additionally, funding for other disease surveillance programs has declined or remains uncertain. For example, the Department of Health and Human Services provided a one-time $25.75 million in funding to APHIS in 2009 to extend the agency’s prevention and surveillance capabilities for influenza virus in swine. Because of a recent increase in the number of submitted samples from swine, however, APHIS officials project that funding will run out by fiscal year 2015 or earlier. As a result, APHIS officials said, the agency might not be able to continue to offer stakeholders viral diagnostic testing or genetic sequencing services using this funding. USDA officials told us they are uncertain whether future funding will exist for these activities. In addition, state officials participating in USDA’s National Animal Health Laboratory Network have reported that insufficient and declining funding is reducing their ability to effectively and rapidly identify, report, and respond to an outbreak of a serious disease, such as foot-and-mouth disease. For example, officials from member laboratories have reported difficulties maintaining essential diagnostic personnel and expertise. The network receives funding from APHIS for operational support, including testing, equipment maintenance, training assays, and travel. APHIS and USDA’s National Institute of Food and Agriculture also provide support for infrastructure, including personnel and maintaining and developing information technology. According to APHIS officials, funding from APHIS to pay for testing for certain diseases has decreased even though overall funding has increased somewhat since 2007. In addition, funding for laboratory infrastructure provided by the National Institute for Food and Agriculture has declined by 40 percent. Laboratory officials told us that this drop forced some laboratories to cut their staffing levels, reducing the number of highly trained personnel who can perform the biological tests needed to rapidly identify, report, and respond to diseases. Member laboratory officials also told us that working with an outdated National Animal Health Laboratory Network information system limited the efficiency with which data generated from laboratory testing can be transmitted to APHIS. According to federal and state officials, a decrease in the number of APHIS field veterinarians has also reduced the agency’s ability to carry out critical disease surveillance activities effectively. At the time of our review, officials in each of the four states we visited reported a reduced number of field veterinarians as a primary challenge to effective collection of health data from livestock and poultry. Some officials explained that, in particular, too few veterinarians affected veterinarians’ ability to stay in frequent contact with farms, such as small farms having little biosecurity and a high risk of their animals’ contracting serious diseases. For example, officials in one state reported a vacant position for the state’s primary APHIS field veterinarian. Another state official reported that even as livestock and poultry imports have increased—with the number of swine entering the state increasing on average by about 1 million per year from 2002 to 2011—the number of field veterinarians responsible for coordinating disease surveillance across 99 counties decreased from 11 in 2001 to 7 in 2012. Such declines are symptomatic of a more general decline in the number of veterinarians, particularly livestock and poultry veterinarians. In 2009, for example, we reported that four of the five key agencies that employ veterinarians—USDA’s APHIS, Food Safety and Inspection Service, and Agricultural Research Service and the Army— identified existing or potential shortages in the federal veterinary workforce, which agencies have begun to address, including by participating in the Office of Personnel Management’s veterinary medical officer advisory council to address the shortage. APHIS has a vision for its new approach but has not integrated that vision into an overall strategy with associated goals and performance measures aligned with the nation’s larger biosurveillance efforts. None of APHIS’s planning documents clearly define (1) the goals the agency wants to achieve in the long term with its new disease surveillance approach, (2) how the agency intends to measure results, or (3) how APHIS’s disease surveillance efforts support national biosurveillance efforts. APHIS has a number of planning documents that describe a new strategic vision and mission for the primary division responsible for the agency’s new disease surveillance approach. Nevertheless, the agency has not integrated that vision into an overall strategy with associated goals and measures supporting the nation’s larger biosurveillance efforts. The Government Performance and Results Act, as amended, requires federal agencies to develop performance plans that include measurable We have previously reported that these requirements can also goals.serve as leading practices for planning at lower levels within agencies, such as individual divisions, programs, or initiatives.and performance measures helps an organization balance competing priorities, particularly if resources are constrained, and helps an agency assess progress toward intended results. Long-term strategic goals unify an agency’s many efforts in a coordinated framework for achieving results. Goals should correspond to the purposes set forth in the agency’s mission statement, they should cover the major functions and operations of an agency, and they should be measurable. Developing goals and performance measures helps an organization address important dimensions of program performance, balances competing priorities— especially if resources are declining or constrained—and shows progress or contributions to intended results. Performance measures, which typically have numerical targets, are important management tools that help an agency identify the activities that work well and those that do not. Without such performance measures, agencies cannot determine whether the activities and programs they are carrying out are accomplishing the goals they intend to achieve. A number of APHIS planning documents (see app. IV for a list of selected planning documents) describe a new strategic vision and mission for APHIS’s Veterinary Services organization—the primary division responsible for implementing the new disease surveillance approach. Veterinary Services’ planning documents acknowledge that in preventing and detecting diseases in livestock and poultry and protecting animal health, the agency plays an important role in safeguarding public and environmental health as well. The goals APHIS has identified in these planning documents focus primarily on processes or activities but do not specifically address outcomes the agency seeks to accomplish or have associated performance measures. For example, the principal planning document explaining the agency’s future vision and mission includes the following goals: transforming the culture of the organization, investing in These technical infrastructure, and supporting readiness and response.goals describe what actions the agency intends to undertake but not what outcomes these actions are intended to achieve or how the agency will measure intended results. Agency officials said that in the past, when APHIS focused its activities primarily on selected reportable diseases, measuring success was relatively straightforward: a primary performance measure of program success was the extent to which specific diseases had been eradicated and prevented from entering the United States or—in the case of eradicated diseases—prevented from reemerging. For example, APHIS’s animal disease programs have largely eradicated brucellosis in cattle and brucellosis and pseudorabies in domestic commercial U.S. swine; in addition, reentry of foot-and-mouth disease has been prevented: the nation has been free of foot-and-mouth disease since 1929. Officials we interviewed expressed concern, however, that traditional outcome measures like these may no longer be valid when applied to newly emerging diseases. For example, new influenza viruses, which may affect human health, are already circulating in domestic livestock and mutate so effectively that eradication is not considered possible. The principal planning document for Veterinary Services establishes a goal to enhance the health of the nation’s animals by “anticipating and responding to new or emerging threats” but also states that the agency must still develop an effective mechanism for evaluating such threats and determining an appropriate response. Other, more-detailed Veterinary Services planning documents primarily communicate the key steps and obstacles to implementing a new approach to disease surveillance. They define issues—such as the need to develop better relationships with stakeholders—and identify potential ways of addressing these issues, but they do not tie the issues to an outcome-based goal or offer performance measures for gauging progress. In sum, none of these planning documents provide APHIS with a clear road map or overall strategy, with associated performance measures, for managing its new approach to animal disease surveillance. Without performance measures, APHIS cannot construct the necessary relevant indicators of performance that ultimately reveal if the activities or initiatives the agency is pursuing—such as the collection of influenza data from swine—are the right ones and being carried out effectively. Given that influenza researchers are unsure to what extent the data collected from swine are sufficient or representative of the viruses circulating domestically, measurable goals could better enable the agency to demonstrate progress or success with the data they have already collected or intend to collect. But without specific measures of the outcomes APHIS intends to accomplish in following the behavior of novel diseases, the agency cannot, among other things, assess the utility of the data it is collecting or determine if it needs data sources other than those it has already identified. Neither can APHIS weigh its activities against one another to give higher priority to funding activities with the greatest potential to benefit animal and human health. APHIS, state animal health authorities, and publicly funded veterinary diagnostic laboratories all face increasing constraints on resources, which has, according to agency officials, impeded efforts to modernize information technology systems; monitor herd health; and efficiently and effectively test samples for animal diseases. APHIS officials said that they recognize a need for adequate goals and reliable performance measures focused on outcomes. Indeed, officials said they have plans to develop goals and performance measures for their new approach but that under increasing fiscal pressure—APHIS’s budget decreased about 14 percent from fiscal year 2008 through fiscal year 2013—they have focused first on streamlining operations, improving efficiencies, and carrying out already-funded pilot disease surveillance programs. For example, APHIS has proposed restructuring how business units within Veterinary Services are organized across the services’ field offices and headquarters and to modernize information technology systems. According to veterinary officials, their proposed actions achieve cost efficiencies over time, as well as support a broader approach to monitoring the health of livestock and poultry. In addition, the deputy administrator of Veterinary Services said, several new disease surveillance initiatives—including the pilot program to collect animal health data remotely in the field on mobile electronic devices and another to collect and test samples submitted voluntarily by producers and samples taken from swine at slaughter—can help determine both the quality of, and ease of access to, new sources of disease surveillance data. Once these initiatives and pilots have been implemented and evaluated, he said, he believes APHIS will be better situated to develop the goals and performance measures needed to determine the success of their new and broader approach to animal disease surveillance. APHIS officials did not provide a time frame for developing goals and measures. These efforts would certainly help inform APHIS’s development of meaningful goals and performance measures, but resource constraints— and the risk that the introduction of a new or reemerging disease may substantially harm animal and human health—suggest it would be prudent for APHIS to move forward quickly to develop performance measures focused on outcomes to guide their disease surveillance efforts. As the results of APHIS’s surveillance initiatives become clearer, the agency can adjust its approach accordingly. None of APHIS’s various plans indicate how they individually or collectively support national homeland security efforts called for in Homeland Security Presidential Directive 9, or additional biosurveillance efforts that together make up a national policy to defend the nation’s food and agricultural systems against terrorist attacks, major disasters, and other emergencies. The goals cited in these APHIS planning documents do not mention homeland security or tie an APHIS goal to a national biosurveillance effort. On the one hand, APHIS, in collaboration with the Department of Homeland Security’s National Center for Foreign Animal and Zoonotic Disease Defense, has developed an Emergency Response Support System (or “information dashboard”). This system aims to bring together multiple potential sources of disease information on livestock and poultry—from federal and state governments, producers, and current research—into a single coordinated and integrated system to complement the Department of Homeland Security’s broader effort to support a national biosurveillance system. The Emergency Response Support System was developed by the Foreign Animal and Zoonotic Disease Center at Texas A&M University and funded with help from the department. According to Disease Center officials, this information dashboard is intended to provide APHIS and its stakeholders the ability to quickly call up and display relevant sources of animal disease information and to nationally map producers’ farms, disease outbreaks, and animal movement, among other patterns, onto a computer monitor. On the other hand, however, none of the planning documents we reviewed indicates how this information dashboard is to align with or support broader national-level biosurveillance efforts. Similarly, the planning documents make no mention of coordinating with other homeland security efforts to enhance disease surveillance in livestock and poultry. For example, the Department of Homeland Security has provided funding to develop tools for disease surveillance, such as an assay that tests swine saliva for foreign animal diseases, which can test samples from more than one animal at a time and may be faster and easier than collecting tissue or other biological samples. Officials involved in developing such diagnostic tools, however, told us that responsibilities shared between APHIS and the department have sometimes complicated development and use of such tools. As we have previously reported, federal agencies can use their strategic and annual performance plans as tools to drive collaboration with other agencies and partners and establish complementary goals and strategies for achieving results. Thus, an absence of shared measurable goals between APHIS and the Department of Homeland Security may be compromising both agencies’ understanding of how their monitoring of animal health—coupled with disease surveillance, control, and eradication efforts—complement broader national biosurveillance goals. APHIS officials agreed that it is important for the agency’s planning documents to show how the agency’s efforts support national homeland security efforts to enhance the detection of biological threats. APHIS has long carried out important work to protect the nation’s livestock and poultry against economically devastating infectious diseases and against the potential deadly effects of such diseases on people. Foot-and-mouth disease has not infected cattle or swine in the United States since 1929, and pseudorabies and brucellosis have been virtually eradicated in commercial swine and cattle. The near elimination of tuberculosis is considered one of the greatest animal and public health achievements in the United States. Moreover, given the changing disease landscape, APHIS has begun to craft a more comprehensive approach to monitoring animal health—one no longer restricted to eradicating only certain diseases. We commend the agency for its efforts (1) to develop a vision for its new approach and planning documents for undertaking it and (2) to collect better data from new and different sources and better synthesize and analyze information to identify potentially harmful new pathogens earlier. Nevertheless, APHIS has not to date developed goals or performance measures for its new approach; agency officials said they have plans to do so, but they did not provide a time frame. Even with its efforts to date, however, without integrating the vision in its planning documents into an overall strategy with associated goals and measures that are aligned with broader national homeland security efforts to detect biological threats, APHIS may not be ideally positioned to support national efforts to address the next threat to animal and human health. As APHIS develops goals and measures for its new approach to disease surveillance in livestock and poultry, we recommend that the Secretary of Agriculture direct the APHIS Administrator to integrate the agency’s vision into an overall strategy, with associated goals and measures, that guides how APHIS’s new approach will support national homeland security efforts to enhance the detection of biological threats. We provided a draft of this report for review and comment to the Departments of Agriculture, Health and Human Services, and Homeland Security. USDA and the Department of Homeland Security provided written comments, which are reproduced in appendixes VI and VII, respectively; these agencies also provided technical comments, which we incorporated as appropriate. The Department of Health and Human Services had no comments. In its written comments, USDA concurred with our recommendation that APHIS integrate the agency’s vision into an overall strategy that guides how APHIS’s new approach will support national homeland security efforts. USDA stated that APHIS will include better performance metrics in its planning efforts and develop more explicit linkages between its swine surveillance activities and other national homeland security efforts. In its letter, the Department of Homeland Security thanked us for the opportunity to review the draft report and noted that the department supports developments at APHIS to advance disease surveillance in animal and plant populations. The Department of Homeland Security also stated that it remains committed to working with its many partners, including those in the federal government, to better mitigate and defend against dynamic threats and maximize the ability to respond to and recover from attacks and disasters of all kinds. We are sending copies of this report to the Secretaries of Agriculture, Health and Human Services, and Homeland Security; 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 regarding this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. Table 1 lists the primary federal, state, and private-sector organizations or groups that have a key role or stake in the surveillance of diseases in livestock and poultry. The list includes animal health organizations, human health organizations concerned with zoonotic diseases that might be transmitted between livestock and poultry and humans, and those organizations interested in monitoring diseases in livestock and poultry as part of broader national biosurveillance efforts. Table 2 shows the status in the United States of swine diseases that are to be reported to the Department of Agriculture’s (USDA) Animal and Plant Health Inspection Service (APHIS) when they are confirmed to be present in swine. When influenza viruses reproduce, they can exchange gene segments in a process known as reassortment—a genetic shuffling—that can create new influenza viruses containing gene segments that may have originated in different host animals. In 2011, the Centers for Disease Control and Prevention (CDC) confirmed 12 cases of a novel influenza virus called an H3N2 variant virus, and in 2012, 309 cases of this virus were reported. The genetic makeup of this virus showed that it was derived from (1) a virus that had been circulating in swine and (2) the human H1N1 virus that caused the 2009 influenza pandemic. Thanks to still earlier genetic shuffling, the gene segments in this novel 2011 influenza virus came from humans, birds, and swine, as illustrated in figure 4. Daniel Garcia-Diaz, (202) 512-3841 or [email protected]. In addition to the contact named above, Mary Denigan-Macauley (Assistant Director), Kevin Bray, Ellen W. Chu, Kirsten Lauber, Dan Royer, Kiki Theodoropoulos, Ginny Vanderlinde, and Karen Villafana made key contributions to this report. | International animal health authorities have stated that disease surveillance in livestock and poultry has as its main purpose the early detection of diseases and disease outbreaks. APHIS has worked closely with states and industry over the past decades to eradicate diseases by, for example, providing states with funding and guidance. But the disease landscape has changed, with rapid global movement of humans and animals, creating new threats. GAO was asked to review federal animal disease surveillance efforts. This report examines (1) USDAs new approach to disease surveillance in light of a changing disease landscape and challenges, if any, the agency faces with this approach and (2) the extent to which this approach is guided by a strategy with measurable goals and supports broader national biosurveillance efforts. GAO reviewed relevant presidential directives, laws, regulations, guidance, policies, documents, and strategic plans related to disease surveillance in animals; visited swine facilities; and interviewed federal, state, and industry veterinarians and other officials. Under a new approach, the U.S. Department of Agriculture's (USDA) Animal and Plant Health Inspection Service (APHIS) has begun broadening its previous disease-by-disease approach to disease surveillance to one in which the agency monitors the overall health of livestock and poultry and uses additional sources and types of data to better detect and control new or reemerging diseases. APHIS's first effort under its new approach is to monitor the health of the nation's swine herds and identify new sources and types of data on diseases in swine, among other things. In planning documents, APHIS officials have proposed collecting data from farms where swine are raised, markets where they are sold, slaughter facilities, and veterinary diagnostic laboratories, among other sites. For example, APHIS has been monitoring for the presence of pseudorabies--a viral disease of swine that may cause respiratory illness and death--at slaughter facilities, but under the new approach, it has proposed monitoring these facilities for a range of other diseases as well. Key challenges to carrying out this new approach are how best to obtain data from producers, who are concerned that health information about their herds and flocks be kept confidential, and how to obtain health data in sufficient quantity from some animals like feral swine. Resource constraints also present a challenge, according to agency and state officials, given the recent decrease in APHIS's budget of about 14 percent for fiscal years 2008 through 2013. APHIS has a vision for its new approach but has not integrated that vision into an overall strategy with associated goals and performance measures that are aligned with the nation's larger biosurveillance efforts. The Government Performance and Results Act, as amended, requires federal agencies to develop performance plans that include goals and performance measures. GAO has previously reported that these requirements can also serve as leading practices for planning at lower levels within agencies, such as individual divisions or programs. Developing goals and measures helps an organization balance competing priorities, particularly if resources are constrained, and helps an agency assess progress toward intended results. APHIS has developed a number of planning documents related to the agency's capabilities in disease surveillance in livestock and poultry, which acknowledge that the agency plays an important role in safeguarding public and environmental health. Goals APHIS has identified in these documents, however, focus primarily on processes or activities and do not specifically address outcomes the agency seeks to accomplish or have associated performance measures. Moreover, none of the planning documents indicate how they individually or collectively support national homeland security efforts called for in Homeland Security Presidential Directive 9, which assigns several federal agencies, including USDA, responsibility for establishing a comprehensive and coordinated surveillance system to support early detection of biological threats, including infectious diseases. Agency officials said they plan to develop goals and measures for the new approach. Without integrating its vision into an overall strategy with goals and measures aligned with broader national homeland security efforts to detect biological threats, APHIS may not be ideally positioned to support national efforts to address the next threat to animal and human health. GAO recommends that as APHIS develops goals and measures for its new approach, it integrate the agency's vision into an overall strategy guiding how this approach supports national homeland security efforts to enhance the detection of biological threats. In their comments, USDA concurred with GAO's recommendation, and the Department of Homeland Security described its commitment to disease surveillance efforts. |
The public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, flights grounded, power lost, and national defense affected. Moreover, America’s infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. These many interdependencies among governments and within key economic sectors could cause a single failure to have adverse repercussions. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant include information and telecommunications; banking and finance; health, safety, and emergency services; transportation; power and water; and manufacturing and small business. The information and telecommunications sector is especially important. In testimony in June, we reported that the Year 2000 readiness of the telecommunications sector is one of the most crucial concerns to our nation because telecommunications are critical to the operations of nearly every public-sector and private-sector organization. For example, the information and telecommunications sector (1) enables the electronic transfer of funds, the distribution of electrical power, and the control of gas and oil pipeline systems, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Reliable telecommunications services are made possible by a complex web of highly interconnected networks supported by national and local carriers and service providers, equipment manufacturers and suppliers, and customers. In addition to the risks associated with the nation’s key economic sectors, one of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. For example, a June 1998 informal World Bank survey of foreign readiness found that only 18 of 127 countries (14 percent) had a national Year 2000 program, 28 countries (22 percent) reported working on the problem, and 16 countries (13 percent) reported only awareness of the problem. No conclusive data were received from the remaining 65 countries surveyed (51 percent). In addition, a survey of 15,000 companies in 87 countries by the Gartner Group found that the United States, Canada, the Netherlands, Belgium, Australia, and Sweden were the Year 2000 leaders, while nations including Germany, India, Japan, and Russia were 12 months or more behind the United States. The Gartner Group’s survey also found that 23 percent of all companies (80 percent of which were small companies) had not started a Year 2000 effort. Moreover, according to the Gartner Group, the “insurance, investment services and banking are industries furthest ahead. Healthcare, education, semiconductor, chemical processing, agriculture, food processing, medical and law practices, construction and government agencies are furthest behind. Telecom, power, gas and water, software, shipbuilding and transportation are laggards barely ahead of furthest-behind efforts.” The following are examples of some of the major disruptions the public and private sectors could experience if the Year 2000 problem is not corrected. Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Aircraft and other military equipment could be grounded because the computer systems used to schedule maintenance and track supplies may not work. Further, the Department of Defense (DOD) could incur shortages of vital items needed to sustain military operations and readiness. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. According to the Basle Committee on Banking Supervision—an international committee of banking supervisory authorities—failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Recognizing the seriousness of the Year 2000 problem, on February 4, 1998, the President signed an executive order that established the President’s Council on Year 2000 Conversion led by an Assistant to the President and composed of one representative from each of the executive departments and from other federal agencies as may be determined by the Chair. The Chair of the Council was tasked with the following Year 2000 roles: (1) overseeing the activities of agencies, (2) acting as chief spokesperson in national and international forums, (3) providing policy coordination of executive branch activities with state, local, and tribal governments, and (4) promoting appropriate federal roles with respect to private-sector activities. Addressing the Year 2000 problem in time will be a tremendous challenge for the federal government. Many of the federal government’s computer systems were originally designed and developed 20 to 25 years ago, are poorly documented, and use a wide variety of computer languages, many of which are obsolete. Some applications include thousands, tens of thousands, or even millions of lines of code, each of which must be examined for date-format problems. The federal government also depends on the telecommunications infrastructure to deliver a wide range of services. For example, the route of an electronic Medicare payment may traverse several networks—those operated by the Department of Health and Human Services, the Department of the Treasury’s computer systems and networks, and the Federal Reserve’s Fedwire electronic funds transfer system. In addition, the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, building security systems, elevators, and air conditioning and heating equipment could malfunction or cease to operate. Agencies cannot afford to neglect any of these issues. If they do, the impact of Year 2000 failures could be widespread, costly, and potentially disruptive to vital government operations worldwide. Nevertheless, overall, the government’s 24 major departments and agencies are making slow progress in fixing their systems. In May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems (1,598 of 7,649) for these departments and agencies were Year 2000 compliant. A year later, in May 1998, these departments and agencies reported that 2,914 of the 7,336 mission-critical systems in their current inventories, or about 40 percent, were compliant. However, unless agency progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time. In addition to slow governmentwide progress in fixing systems, our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks continue and a great deal of work remains. The following are examples of the results of some of our recent reviews. Last month, we testified about FAA’s progress in implementing a series of recommendations we had made earlier this year to assist FAA in completing overdue awareness and assessment activities. These recommendations included assessing how the major FAA components and the aviation industry would be affected if Year 2000 problems were not corrected in time and completing inventories of all information systems, including data interfaces. Officials at both FAA and the Department of Transportation agreed with these recommendations, and the agency has made progress in implementing them. In our August testimony, we reported that FAA had made progress in managing its Year 2000 problem and had completed critical steps in defining which systems needed to be corrected and how to accomplish this. However, with less than 17 months to go, FAA must still correct, test, and implement many of its mission-critical systems. It is doubtful that FAA can adequately do all of this in the time remaining. Accordingly, FAA must determine how to ensure continuity of critical operations in the likely event of some systems’ failures. In October 1997, we reported that while the Social Security Administration (SSA) had made significant progress in assessing and renovating mission-critical mainframe software, certain areas of risk in its Year 2000 program remained. Accordingly, we made several recommendations to address these risk areas, which included the Year 2000 compliance of the systems used by the 54 state Disability Determination Services that help administer the disability programs. SSA agreed with these recommendations and, in July 1998, we reported that actions to implement these recommendations had either been taken or were underway.Further, we found that SSA has maintained its place as a federal leader in addressing Year 2000 issues and has made significant progress in achieving systems compliance. However, essential tasks remain. For example, many of the states’ Disability Determination Service systems still had to be renovated, tested, and deemed Year 2000 compliant. Our work has shown that much likewise remains to be done in DOD and the military services. For example, our recent report on the Navy found that while positive actions have been taken, remediation progress had been slow and the Navy was behind schedule in completing the early phases of its Year 2000 program. Further, the Navy had not been effectively overseeing and managing its Year 2000 efforts and lacked complete and reliable information on its systems and on the status and cost of its remediation activities. We have recommended improvements to DOD’s and the military services’ Year 2000 programs with which they have concurred. In addition to these examples, our reviews have shown that many agencies had not adequately acted to establish priorities, solidify data exchange agreements, or develop contingency plans. Likewise, more attention needs to be devoted to (1) ensuring that the government has a complete and accurate picture of Year 2000 progress, (2) setting governmentwide priorities, (3) ensuring that the government’s critical core business processes are adequately tested, (4) recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work, and (5) assessing the nation’s Year 2000 risks, including those posed by key economic sectors. I would like to highlight some of these vulnerabilities, and our recommendations made in April 1998 for addressing them. First, governmentwide priorities in fixing systems have not yet been established. These governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences. Further, while individual agencies have been identifying mission-critical systems, this has not always been done on the basis of a determination of the agency’s most critical operations. If priorities are not clearly set, the government may well end up wasting limited time and resources in fixing systems that have little bearing on the most vital government operations. Other entities have recognized the need to set priorities. For example, Canada has established 48 national priorities covering areas such as national defense, food production, safety, and income security. Second, business continuity and contingency planning across the government has been inadequate. In their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes. Without such plans, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test alternatives. Federal agencies depend on data provided by their business partners as well as services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our recently issued guidance aims to help agencies ensure such continuity of operations through contingency planning. Third, OMB’s assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified. Without independent reviews, OMB and the President’s Council on Year 2000 Conversion have little assurance that they are receiving accurate information. In fact, we have found cases in which agencies’ systems compliance status as reported to OMB has been inaccurate. For example, the DOD Inspector General estimated that almost three quarters of DOD’s mission-critical systems reported as compliant in November 1997 had not been certified as compliant by DOD components.In May 1998, the Department of Agriculture (USDA) reported 15 systems as compliant, even though these were replacement systems that were still under development or were planned for development. (The department removed these systems from compliant status in its August 1998 quarterly report.) Fourth, end-to-end testing responsibilities have not yet been defined. To ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing for their critical core business processes. The purpose of end-to-end testing is to verify that a defined set of interrelated systems, which collectively support an organizational core business area or function, will work as intended in an operational environment. In the case of the year 2000, many systems in the end-to-end chain will have been modified or replaced. As a result, the scope and complexity of testing—and its importance—is dramatically increased, as is the difficulty of isolating, identifying, and correcting problems. Consequently, agencies must work early and continually with their data exchange partners to plan and execute effective end-to-end tests. So far, lead agencies have not been designated to take responsibility for ensuring that end-to-end testing of processes and supporting systems is performed across boundaries, and that independent verification and validation of such testing is ensured. We have set forth a structured approach to testing in our recently released exposure draft. In our April 1998 report on governmentwide Year 2000 progress, we made a number of recommendations to the Chair of the President’s Council on Year 2000 Conversion aimed at addressing these problems. These included establishing governmentwide priorities and ensuring that agencies set developing a comprehensive picture of the nation’s Year 2000 readiness, requiring agencies to develop contingency plans for all critical core requiring agencies to develop an independent verification strategy to involve inspectors general or other independent organizations in reviewing Year 2000 progress, and designating lead agencies responsible for ensuring that end-to-end operational testing of processes and supporting systems is performed. We are encouraged by actions the Council is taking in response to some of our recommendations. For example, OMB and the Chief Information Officers Council adopted our guide providing information on business continuity and contingency planning issues common to most large enterprises as a model for federal agencies. However, as we recently testified before this Subcommittee, some actions have not been fully addressed—principally with respect to setting national priorities and end-to-end testing. State and local governments also face a major risk of Year 2000-induced failures to the many vital services—such as benefits payments, transportation, and public safety—that they provide. For example, food stamps and other types of payments may not be made or could be made for incorrect amounts; date-dependent signal timing patterns could be incorrectly implemented at highway intersections, and safety severely compromised, if traffic signal systems run by state and local governments do not process four-digit years correctly; and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected by the Year 2000 problem. Recent surveys of state Year 2000 efforts have indicated that much remains to be completed. For example, a July 1998 survey of state Year 2000 readiness conducted by the National Association of State Information Resource Executives, Inc., found that only about one-third of the states reported that 50 percent or more of their critical systems had been completely assessed, remediated, and tested. In a June 1998 survey conducted by USDA’s Food and Nutrition Service, only 3 and 14 states, respectively, reported that the software, hardware, and telecommunications that support the Food Stamp Program, and the Women, Infants, and Children program, were Year 2000 compliant. Although all but one of the states reported that they would be Year 2000 compliant by January 1, 2000, many of the states reported that their systems are not due to be compliant until after March 1999 (the federal government’s Year 2000 implementation goal). Indeed, 4 and 5 states, respectively, reported that the software, hardware, and telecommunications supporting the Food Stamp Program, and the Women, Infants, and Children program would not be Year 2000 compliant until the last quarter of calendar year 1999, which puts them at high risk of failure due to the need for extensive testing. State audit organizations have identified other significant Year 2000 concerns. For example, (1) Illinois’ Office of the Auditor General reported that significant future efforts were needed to ensure that the year 2000 would not adversely affect state government operations, (2) Vermont’s Office of Auditor of Accounts reported that the state faces the risk that critical portions of its Year 2000 compliance efforts could fail, (3) Texas’ Office of the State Auditor reported that many state entities had not finished their embedded systems inventories and, therefore, it is not likely that they will complete their embedded systems repairs before the year 2000, and (4) Florida’s Auditor General has issued several reports detailing the need for additional Year 2000 planning at various district school boards and community colleges. State audit offices have also made recommendations, including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. In the course of these field hearings, states and municipalities have testified about Year 2000 practices that could be adopted by others. For example: New York established a “top 40” list of priority systems having a direct impact on public health, safety, and welfare, such as systems that support child welfare, state aid to schools, criminal history, inmate population management, and tax processing. According to New York, “the Top 40 systems must be compliant, no matter what.” The city of Lubbock, Texas, is planning a Year 2000 “drill” this month. To prepare for the drill, Lubbock is developing scenarios of possible Year 2000-induced failures, as well as more normal problems (such as inclement weather) that could occur at the change of century. Louisiana established a $5 million Year 2000 funding pool to assist agencies experiencing emergency circumstances in mission-critical applications and that are unable to correct the problems with existing resources. To fully address the Year 2000 risks that states and the federal government face, data exchanges must also be confronted—a monumental issue. As computers play an ever-increasing role in our society, exchanging data electronically has become a common method of transferring information among federal, state, and local governments. For example, SSA exchanges data files with the states to determine the eligibility of disabled persons for disability benefits. In another example, the National Highway Traffic Safety Administration provides states with information needed for driver registrations. As computer systems are converted to process Year 2000 dates, the associated data exchanges must also be made Year 2000 compliant. If the data exchanges are not Year 2000 compliant, data will not be exchanged or invalid data could cause the receiving computer systems to malfunction or produce inaccurate computations. Our recent report on actions that have been taken to address Year 2000 issues for electronic data exchanges revealed that federal agencies and the states use thousands of such exchanges to communicate with each other and other entities. For example, federal agencies reported that their mission-critical systems have almost 500,000 data exchanges with other federal agencies, states, local governments, and the private sector. To successfully remediate their data exchanges, federal agencies and the states must (1) assess information systems to identify data exchanges that are not Year 2000 compliant, (2) contact exchange partners and reach agreement on the date format to be used in the exchange, (3) determine if data bridges and filters are needed and, if so, reach agreement on their development, (4) develop and test such bridges and filters, (5) test and implement new exchange formats, and (6) develop contingency plans and procedures for data exchanges. At the time of our review, much work remained to ensure that federal and state data exchanges will be Year 2000 compliant. About half of the federal agencies reported during the first quarter of 1998 that they had not yet finished assessing their data exchanges. Moreover, almost half of the federal agencies reported that they had reached agreements on 10 percent or fewer of their exchanges, few federal agencies reported having installed bridges or filters, and only 38 percent of the agencies reported that they had developed contingency plans for data exchanges. Further, the status of the data exchange efforts of 15 of the 39 state-level organizations that responded to our survey was not discernable because they were not able to provide us with information on their total number of exchanges and the number assessed. Of the 24 state-level organizations that provided actual or estimated data, they reported, on average, that 47 percent of the exchanges had not been assessed. In addition, similar to the federal agencies, state-level organizations reported having made limited progress in reaching agreements with exchange partners, installing bridges and filters, and developing contingency plans. However, we could draw only limited conclusions on the status of the states’ actions because data were provided on only a small portion of states’ data exchanges. To strengthen efforts to address data exchanges, we made several recommendations to OMB. In response, OMB agreed that it needed to increase its efforts in this area. For example, OMB noted that federal agencies had provided the General Services Administration with a list of their data exchanges with the states. In addition, as a result of an agreement reached at an April 1998 federal/state data exchange meeting,the states were supposed to verify the accuracy of these initial lists by June 1, 1998. OMB also noted that the General Services Administration is planning to collect and post information on its Internet World Wide Web site on the progress of federal agencies and states in implementing Year 2000 compliant data exchanges. In summary, federal, state, and local efforts must increase substantially to ensure that major service disruptions do not occur. Greater leadership and partnerships are essential if government programs are to meet the needs of the public at the turn of the century. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS’ Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS’ Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS’ Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed the year 2000 computer system risks facing the nation, focusing on: (1) GAO's major concerns with the federal government's progress in correcting its systems; (2) state and local government year 2000 issues; and (3) critical year 2000 data exchange issues. GAO noted that: (1) the public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the year 2000 computing crisis; (2) the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations; (3) overall, the government's 24 major departments and agencies are making slow progress in fixing their systems; (4) in May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems for these departments and agencies were year 2000 compliant; (5) in May 1998, these departments reported that 40 percent of the mission-critical systems were year 2000 compliant; (6) unless progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time; (7) in addition to slow governmentwide progress in fixing systems, GAO's reviews of federal agency year 2000 programs have found uneven progress; (8) some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time; (9) other agencies have made progress, although risks continue and a great deal of work remains; (10) governmentwide priorities in fixing systems have not yet been established; (11) these governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences; (12) business continuity and contingency planning across the government has been inadequate; (13) in their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes; (14) OMB's assessment of the status of federal year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified; (15) GAO found cases in which agencies' systems' compliance status as reported to OMB had been inaccurate; (16) end-to-end testing responsibilities have not yet been defined; (17) state and local governments also face a major risk of year 2000-induced failures to the many vital services that they provide; (18) recent surveys of state year 2000 efforts have indicated that much remains to be completed; and (19) at the time of GAO's review, much work remained to ensure that federal and state data exchanges will be year 2000 compliant. |
Examining the information security risks of certain active medical devices, especially with respect to intentional threats, is a relatively new field for federal regulators and information security researchers. However, information security risks have long been previously considered in other contexts, such as federal information systems and the nation’s critical infrastructure. Two commonly used active medical devices that incorporate electronics and wireless communications are defibrillators, including the wands and programmers used to set and adjust the defibrillators, and insulin pumps. A defibrillator is an active medical device that is implanted in a person’s chest or abdomen. The defibrillator monitors a person’s heart rhythm and delivers an electric pulse to the heart muscle to reestablish a normal heart rhythm when an abnormal heart rhythm is detected. A wand is an external device that connects to a programmer—a specialized computer used to transmit data and to check the defibrillator’s functionality and usage. The wand, also called a programmer head, is held within inches of the defibrillator. The wand facilitates the wireless communication between the programmer and the defibrillator to, for example, make adjustments to the device (see fig. 1). An insulin pump is an active medical device used in the treatment of diabetes. It replaces the need for periodic injections by delivering rapid-acting insulin using tubing that is partially implanted into the body, such as in the abdomen. Certain types of insulin pumps can work in tandem with a continuous glucose monitoring system, which regularly measures glucose levels in the blood. This monitoring system consists of a sensor inserted under the skin and an external monitor, which can be carried or attached to a person’s belt. For insulin pumps working with a monitoring system, glucose measurements are wirelessly transmitted from the sensor to the monitor or from the sensor to the insulin pump (see fig. 2). Addressing information security involves the consideration of threats, vulnerabilities, and the resulting risks. Information security threats are any circumstances or events with the potential to adversely affect operations, assets, or individuals by means of unauthorized access, destruction, disclosure, modification of information, denial of service, or a combination of these. These threats can be either unintentional, such as interference from energy generated by other devices or from the surrounding environment, or intentional, as recently demonstrated by information security researchers. Vulnerabilities are weaknesses in security procedures, internal controls, or implementation that could be exploited or triggered by a threat. Risk is a measure of the extent to which an entity is threatened by a potential circumstance or event, and is typically a function of the adverse effects that would arise if the circumstance or event occurs and the likelihood of occurrence. Medical devices that use electronics, wireless communications, and other features are exposed to a greater number of threats, vulnerabilities, and resulting information security risks. FDA is the federal agency primarily responsible for evaluating the safety and effectiveness of medical devices through its premarket and postmarket efforts. FDA’s regulation of medical devices is intended to provide the public with reasonable assurance that medical devices are safe and effective and do not pose a threat to the public’s health. FDA reviews thousands of submissions for new devices filed each year, a small subset of which are subject to FDA’s PMA review process.PMA review process is the most stringent type of FDA device review and The requires manufacturers to submit evidence providing reasonable assurance that a new device is safe and effective. A PMA submission should contain administrative, scientific, and technical elements including, among other things, a description of the device model and components, documentation of clinical and nonclinical studies, and a reference to performance standards. If FDA approves a PMA submission, the manufacturer receives a PMA approval order. A multidisciplinary team of FDA officials, which includes relevant subject-matter experts, reviews these submissions. Additionally, FDA officials can consult with staff from its Office of Science and Engineering Laboratories who specialize in electronics, software engineering, and systems engineering. FDA can also consult with external experts, such as relevant advisory committees, which include experts in engineering and physical sciences and industry representatives. As relevant to the wireless medical devices discussed in this report, FDA may contact FCC, as needed, on certain specific, scientific or technical issues. FCC reviews certain medical devices sold in the United States to ensure that these devices meet its regulations for safe human exposure to radiofrequency energy and to ensure that requirements intended to avoid harmful interference between devices using radio waves are met. The defibrillator and insulin pump we included in our evaluation were reviewed under FDA’s PMA review process. FDA’s postmarket responsibilities include monitoring the safety of thousands of medical devices already on the market and identifying, analyzing, and acting on potential risks the devices might pose to the public. One of FDA’s postmarket efforts is its adverse event reporting system, called the Manufacturer and User Facility Device Experience Database (MAUDE). FDA requires user facilities (e.g., hospitals) and medical device manufacturers to submit reports to the agency for serious injuries or deaths that were caused or contributed to by their devices. In addition, FDA may require that a manufacturer conduct a study on its device to gather and report additional information on the device’s performance after it is available on the market.additional information on FDA’s adverse event reporting systems. DHS and NIST also have responsibilities related to mitigating information security risks, which could include those affecting medical devices. DHS’s responsibilities include collaborating with public and private entities to analyze and reduce information security threats and vulnerabilities. DHS also coordinates preparedness activities across 18 critical- infrastructure sectors—one of which is health care—and the response efforts to information security incidents. It does this through several activities, including a reporting and alerting system of information security risks, which can include medical devices, and research and forensic activities. For example, DHS has a program where an individual or organization that becomes aware of a vulnerability can share this potentially sensitive information with the agency, which will then coordinate a response in a protected manner with vendors, customers, and other interested parties. For vulnerability information that is publicly released, DHS also supports the efforts of NIST to maintain a National Vulnerability Database that allows users to search for information security vulnerabilities pertaining to specific products or technologies. NIST is a nonregulatory, federal agency within the Department of Commerce. Under the Federal Information Security Management Act, NIST is responsible for developing standards and guidelines to assist federal agencies in providing adequate information security for federal information and information systems. These guidelines, while targeted at federal agencies, can also be used to assess and mitigate security risks for other types of information systems and electronic devices. In addition to NIST, other organizations, such as the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC), have developed and published Similar to NIST various standards related to information security.guidelines, these standards describe information security control areas and related criteria that could be applied to certain types of medical devices to assess and mitigate information security risks. Additionally, for the past 30 years, FDA has issued guidance documents related to information security risks to medical devices resulting from unintentional threats, such as electromagnetic interference. More recently, FDA has issued draft guidance documents on using wireless technology and software in medical devices, which reference for example, the integrity and availability aspects of information security. recommends that manufacturers consult its guidance documents when designing and developing medical devices and preparing their submissions for review. FDA’s guidance documents also reference national guidelines and international standards developed by external organizations. FDA recommends, though does not require, that manufacturers consult these other guidelines and standards that might be relevant to the design and development of their medical devices. For example, FDA’s guidance document on general principles of software validation cites several NIST special publications on information technology as references for both staff and manufacturers. FDA, Draft Guidance for Industry and FDA Staff: Radio Frequency Wireless Technology in Medical Devices (Rockville, Md.: Jan. 3, 2007), Guidance for Industry and FDA Staff: Guidance for the Content of Premarket Submissions for Software Contained in Medical Devices (Rockville, Md.: May 11, 2005), and Draft Guidance for Industry and FDA Staff: Total Product Life Cycle: Infusion Pump – Premarket Notification Submissions (Rockville, Md.: Apr. 23, 2010). National guidelines and international standards identify information security control areas to consider when identifying, assessing, and mitigating information security risks. Full implementation of all information security controls may not be necessary or appropriate for the mitigation of information security risks. Rather, control areas should be considered to determine what benefits should be implemented to obtain an acceptable level of information security risk. Table 1 includes a list of key information security control areas we determined were important to consider for medical devices. Within each information security control area, multiple controls, safeguards, or countermeasures can be selected to protect a system. Implementation of a risk-based approach to information security involves selecting, implementing, and monitoring appropriate controls within each control area. In cases where it is not feasible to implement a particular control, an organization can either implement compensating controls in other areas or accept a certain level of uncertainty regarding the risk as part of a formal authorization process that balances identified risks with the operational needs of a system. Several information security threats have the potential to exploit different vulnerabilities in active implantable medical devices. These threats could be unintentional or intentional in nature. Vulnerabilities can include those related to, for example, the design of the device, such as limited battery capacity. The information security risks resulting from these threats and vulnerabilities could compromise the safety and effectiveness of medical devices. However, federal officials and information security researchers said efforts to mitigate these risks could adversely affect devices’ performance. Information security threats with the potential to exploit vulnerabilities can result from unintentional sources. Table 2 identifies and describes key unintentional threats to active implantable medical devices that could affect their functionality. Threats can also result from intentional sources such as those identified and described below in table 3. These key threats could also affect the functionality of active implantable medical devices. Several of the experts we consulted noted that certain intentional information security threats were of greater concern than other threats. For example, approximately half of the nine experts expressed greater concern regarding the threats of unauthorized access or denial-of-service attacks, with two experts citing their own research related to unauthorized access in controlled settings. Additionally, experts made distinctions among intentional threats and the likelihood of their occurring. For example, one expert cited malware as one of the greatest threats to active implantable medical devices because his work demonstrated the device could accept unauthentic firmware updates. However, other experts considered malware as less of a concern because, according to these experts, certain devices are currently designed so that it would be difficult to install and propagate malware. Experts expressed less concern with unintentional threats to medical devices. For example, some of the experts that commented on our list of key threats considered unintentional interference, such as from electromagnetic signals in the environment, as less of a concern than other threats, in part, because FCC regulates radio use so as to avoid harmful interference. Additionally, FDA regulates the potential effects such interference could have on medical devices’ performance, and manufacturers have focused on this type of unintentional threat for over 10 years. Various potential vulnerabilities in active implantable medical devices are susceptible to exploitation by the unintentional and intentional threats described above. Table 4 below identifies and describes key potential vulnerabilities in these medical devices. The experts we consulted also noted that addressing these vulnerabilities in active implantable devices could create additional challenges. For example, several of the experts with whom we spoke noted that one way in which medical devices are vulnerable is that they have limited or nonexistent authorization and authentication capabilities; that is, the devices do not distinguish between communications from authorized and unauthorized users. However, several experts also noted that implementing typical protocols to ensure appropriate authorization creates potential access and safety challenges. These challenges could arise if enhanced authorization procedures hindered health professionals’ ability to provide care to patients in emergency situations. For example, a physician in the emergency room might not be able to make life-saving modifications to a patient’s pacemaker if the physician does not have the appropriate authorization to access the device. Information security risks resulting from the exploitation of vulnerabilities by threats could adversely affect the safety and effectiveness of active implantable medical devices. As technology evolves and medical devices become more complex in design and functionality, the potential for these risks occurring is also likely to increase. According to DHS, in order for medical devices to be considered safe, they must also be secure. Key information security risks to these medical devices and related examples are described in table 5. Several federal officials and information security researchers noted that some information security risks to active implantable medical devices have long been considered by FDA and manufacturers, such as device failures resulting from different sources of unintentional interference. For example, in the late 1960s, concerns were raised regarding the interference of electromagnetic energy on implanted pacemakers, potentially resulting in the device not working properly. These concerns prompted FDA to release guidance on electromagnetic energy and medical devices. In the late 1990s, FDA became aware of interference between electromagnetic energy generated from antitheft systems and metal detectors with other implanted devices, such as neurostimulators, potentially resulting in an inappropriate jolt or shock (see fig. 3). FDA and manufacturers now recommend that those with neurostimulators avoid lingering near or leaning against such systems and metal detectors. In contrast, federal officials and information security researchers noted that, to date, there have been no documented information security incidents resulting from the exploitation of vulnerabilities in these types of medical devices by intentional threats in real-world settings. However, there have been four separate demonstrations in controlled settings, showing that the intentional exploitation of vulnerabilities in certain medical devices is possible. Each of these demonstrations involved laboratory tests and did not result in patient harm or death. The first demonstration occurred in 2008, when a team of academic researchers, working in a controlled setting, showed that they could remotely exploit a defibrillator by delivering a command, using the associated wand and programmer. A second demonstration occurred in 2010, when a team of academic researchers remotely exploited an insulin pump, preventing it from operating properly. Two additional demonstrations occurred in 2011, when two security experts, also working in controlled settings, showed on separate occasions that they could also remotely exploit an insulin pump. Both of these experts demonstrated they could manipulate the amount of insulin dispensed by the device. These demonstrations occurred at varying distances. For example, one demonstration occurred at a distance of 100 feet, while another occurred at approximately 300 feet. Figure 4 below depicts an example of a demonstration of the exploitation of a medical device’s vulnerability. According to manufacturer officials, medical devices undergo testing for vulnerabilities that could be exploited. The identified vulnerabilities are then addressed. However, these officials acknowledged that recent incidents have increased their awareness of potential information security risks resulting from intentional threats and have resulted in changes in testing procedures. For example, according to officials from one manufacturer, information security risks resulting from malicious intent are now being considered, and officials are incorporating enhanced security procedures into the design of their medical devices. These officials also stressed that these demonstrations by information security researchers, while informative, should not overshadow the clinical benefits offered by medical devices. Federal officials and information security researchers we spoke with noted that some mitigation strategies could adversely affect certain medical devices’ performance. For example, a pacemaker cannot be immune to all electrical signals because the device needs to be able to detect the electrical signals naturally generated by the patient’s heart to determine if the pulses are irregular. Similarly, for the information security risk associated with using older versions of software, a potential mitigation strategy would be to have these medical devices operate using newer versions. However, according to FDA officials, software in implanted medical devices, such as pacemakers, typically is not frequently updated; rather, the software is updated on an as-needed basis. As with any device that uses software, such updates or other modifications could introduce unanticipated software problems that could adversely affect the functionality of a device, particularly if the software had not been properly tested prior to being used. According to FDA, the majority of software-related medical device problems occur because devices are using software that has been revised since the medical device was reviewed by FDA. FDA officials explained that manufacturers choose to rely on older software because its vulnerabilities are better understood by both manufacturers and regulators. Federal officials and other experts also noted that addressing information security risks for certain medical devices involves additional safety considerations that are not typically necessary for other types of products. For example, incorporating encryption into the medical device could mitigate the information security risk of unauthorized changes to the settings of the device. However, experts we spoke with said adding encryption to a device could drain its battery more quickly, making it necessary to change the battery more frequently. Changing the battery for active implantable devices, such as a pacemaker, involves undergoing a surgical procedure, which has its own potential health risks. In contrast, two information security researchers we spoke with said that, in their opinion, technology has advanced such that encryption can be added to a medical device without using as much energy as before. However, manufacturers have chosen not to take advantage of this newer technology, in part, because of the potential for increased costs in producing the device, according to other experts. FDA officials and other experts also noted that information security risks could vary for different devices because each device has unique vulnerabilities and a device’s susceptibility to threats is based on factors such as its design. For example, FDA officials noted that the wireless capabilities between a defibrillator and the associated wand and programmer are different than those used by certain insulin pumps. These differences not only affect how these respective devices operate, but also the susceptibility to information security threats. An increasing awareness of intentional and unintentional information security threats, vulnerabilities, and resulting risks to medical devices now exists. Addressing these risks requires a comprehensive approach that balances mitigating potential information security risks and maintaining a device’s safety and effectiveness. For the two medical devices that have known vulnerabilities, FDA considered information security risks from unintentional threats, but not risks from intentional threats during its premarket review of the related supplements. FDA stated that it did not generally consider intentional information security threats in its review process at the time these devices were reviewed. FDA officials also told us the agency intends to enhance its information security efforts by reviewing how it approaches the evaluation of software used in medical devices. However, the agency has not yet defined specific, information security-related areas it will examine as part of this review, nor has it established specific milestones for completing it. In the reviews of two PMA supplements for medical devices with known vulnerabilities conducted in 2001 and 2006, FDA officials considered information security risks resulting from unintentional threats, but not from intentional threats. Specifically, FDA considered information security risks in four of the eight information security control areas we selected— software testing, verification, and validation; risk assessments; access control; and contingency planning (see table 6 below and app. IV for more details on our evaluation). We reviewed the PMA supplements and supporting documentation for a defibrillator and its associated wand and programmer, and for a specific wireless insulin pump system that incorporates a continuous glucose monitor. For example, FDA reviewed the manufacturer’s strategy to mitigate information security risks associated with software testing, verification, and validation resulting from unintentional threats to the wand and insulin pump from radio frequency and electromagnetic energy. Additionally, FDA officials told us that the manufacturer addressed access control for the defibrillator, wand, and programmer by requiring that they be used collectively in order to make adjustments. In order to have its settings changed, the defibrillator must communicate with the programmer. The wand, which facilitates the communication between the defibrillator and the programmer, is designed to be used within inches of the defibrillator. All three of these devices are designed to be used together in a health care setting. However, FDA did not consider risks from unintentional threats for the four remaining information security control areas—risk management, patch and vulnerability management, technical audit and accountability, and security-incident response. Additionally, FDA did not consider information security risks resulting from intentional threats for any of the eight information security control areas. Specifically, on the basis of the support the agency provided for these two PMA supplements, FDA did not demonstrate that it had considered the potential benefits of mitigation strategies to protect devices against information security risks from certain unintentional or intentional threats in light of the appropriate level of acceptable risk for medical devices with known vulnerabilities. FDA officials told us that since the agency reviewed these PMA supplements in 2001 and 2006, respectively, their consideration of information security has changed. To support this, FDA provided additional examples from an original PMA application for a defibrillator reviewed in 2012. This additional evidence showed that the agency had generally enhanced its consideration of information security during its PMA review for those four information security control areas previously identified—software testing, verification, and validation; risk assessments; access control; and contingency planning. For example, FDA conducted a more comprehensive review of the manufacturer’s software verification and validation documentation, and included software-testing documentation, electromagnetic-compatibility testing, electromagnetic- interference testing, and frequency testing. FDA also provided evidence of its consideration of a fifth information security control area—risk management—in this newer PMA application. However, FDA did not provide any evidence showing its consideration of security-specific tests. For example, FDA did not provide evidence showing testing of attempts to enter incorrect or invalid data in the device or the use of fuzzing, an information security-related testing technique that uses random data to discover software errors and security flaws. FDA also did not demonstrate its consideration of information security risks resulting from unintentional threats related to the remaining three information security controls we selected, including patch and vulnerability management, despite guidelines from NIST and other sources on the importance of these issues. Additionally, when reviewing the manufacturer’s risk management plan, FDA did not consider information security risks resulting from intentional threats. Thus, while it continues to consider some information security risks resulting from unintentional threats, such as interference, FDA has not begun to consider risks resulting from intentional threats. FDA officials acknowledged the limitations of their review process for information security issues. They explained that, as part of the agency’s PMA review process, they consider various risks with a focus on the most relevant risks that could result in harm to patients. According to officials, they tend to consider the most relevant risks to be clinical risks, such as an increased risk of heart failure from having an implanted defibrillator, and not information security risks, such as the reprogramming of a device by a malicious actor. FDA officials said they also consider the intended use of the device and the type of setting in which the device will be used, both of which are determined by the manufacturer. For example, FDA officials would review a scalpel for potential clinical risks resulting from its intended use in a clinical setting. However, the agency cannot control how devices are used in other settings, or if devices are misused. They noted that a scalpel could become a dangerous weapon if misused by a malicious actor. FDA officials also noted that they consider information security risks in the context of a clinical situation. For example, officials said they have long considered information security risks resulting from unintentional threats, such as from interference or from defective software. However, they acknowledged they have only recently considered information security risks resulting from intentional threats because they did not previously consider such threats as reasonable and likely at the time of their earlier reviews in 2001 and 2006. They noted that, although conducted in controlled settings, researchers’ recent demonstrations of vulnerabilities in two medical devices support the possibility that incidents caused by information security risks resulting from intentional threats could occur. FDA officials said that in the future the agency intends to enhance its efforts related to information security. For example, officials said the agency will consider information security risks resulting from intentional threats when reviewing manufacturers’ submissions for new devices. Officials said that they will consider whether the manufacturer identified the appropriate information security risks resulting from intentional threats and, if applicable, what proposed mitigation strategies the manufacturer included. FDA officials also told us that the agency is currently planning to review its approach to evaluating software used in medical devices. Officials said the review of its approach will be conducted by a contractor and will involve an analysis of how the agency considers software in medical devices during premarket reviews. This review is to include an examination of FDA’s resources and evaluative tools. It will also include a comparison of FDA’s approach to reviewing software in medical devices to the approaches of other sectors that also make or use high-risk and complex software products, such as the aviation and nuclear industries. According to officials, this effort is also intended to identify external resources the agency can draw upon for evaluating information security risks, such as those supported by other federal agencies. For example, FDA officials said they currently do not utilize information security resources available from DHS and NIST, such as the National Vulnerability Database, but acknowledged that such a database could be a useful tool in identifying vulnerabilities relevant to medical devices. According to the agency’s preliminary planning information, the FDA review does not explicitly mention information security issues such as malware, patching and vulnerability management, or the use of security- related testing techniques. Additionally, in commenting on a draft of this report, HHS noted that FDA anticipates completing the review on the agency’s approach to evaluating software in medical devices in calendar year 2012. HHS also noted that FDA will include an assessment of information security risks for medical devices. However, HHS did not provide any milestones, including for when any changes might be implemented, or any description for how this review would address specific aspects of information security. By not identifying which specific aspects of information security the agency intends to consider in its review or establishing a specific schedule to demonstrate that it is addressing the emerging issue of intentional threats, FDA may miss an opportunity to more fully consider information security issues in its medical device review process. FDA has various postmarket efforts in place to identify problems with medical devices, including those related to information security. Despite having postmarket efforts in place, FDA faces challenges in using them to identify information security problems. FDA has various postmarket efforts in place to identify problems with medical devices once they have been approved for marketing, including any problems related to information security. One of these efforts is its adverse event reporting system, MAUDE. MAUDE stores adverse event reports submitted by reporters, which include manufacturers, user facilities (e.g., hospitals), and voluntary reporters. FDA requires manufacturers and user facilities to submit information regarding adverse events involving medical devices and submit reports on these events to FDA. However, FDA does not have these same requirements for other medical device users, including consumers and health care providers. Regardless of whether reporters are required to submit adverse event reports, FDA must wait for reporters to recognize and submit information on suspected adverse events before the agency can become aware of and identify device problems through this system. For those adverse events that are reported, FDA stated that it is able to conduct systematic reviews and searches of these reports. According to FDA, it systematically reviews all information that it receives in the MAUDE database and follows up with reporters when the agency believes that such follow-up is necessary or would provide additional, useful information. Additionally, FDA can search within MAUDE to determine if any of the reporters cited information security issues when submitting details about the adverse events. Searches can be conducted using categories of codes that FDA has developed. These codes are used by reporters to describe types of adverse events. These codes include device-problem codes that are used to describe details such as the reason behind a device’s failure. According to FDA officials, there are 10 codes in MAUDE that reporters primarily could select when reporting an adverse event to indicate—and allow FDA to subsequently identify—that an information security problem had occurred. For example, 3 of these codes are used to describe adverse events that resulted from (1) an application issue, (2) the unauthorized access to a computer system, or (3) a computer-security issue. Using these 10 codes, FDA had not identified any information security problems involving active implantable medical devices, as of April 2012. In addition to these 10 codes, we identified additional codes that could indicate an information security problem had occurred due to an unintentional threat. Using these additional codes, FDA has identified potential information security problems involving active implantable medical devices. For example, one adverse event involved a pacemaker and a computer-software issue. Specifically, the pacemaker’s programmer was slow to start and experienced some errors, but no patient involvement or complications were reported and the programmer was returned for repair. Thus, although FDA does not categorize its codes as specifically related to information security problems, it has codes in place that could potentially identify information security problems resulting from both unintentional and intentional threats. A second postmarket effort that FDA has in place to identify problems is its process for requiring manufacturers to conduct postmarket surveillance studies. Manufacturers may be required to conduct postmarket surveillance studies to continue to systematically evaluate device performance while the device is in commercial distribution. For example, FDA officials could order a postmarket surveillance study for a defibrillator because its failure would have serious adverse health effects for a patient. It is possible these studies could identify vulnerabilities or unintentional threats that might adversely affect medical devices, but postmarket surveillance studies typically focus on clinical outcomes that might affect patients. At the time of our review, FDA officials said that, while they could require manufacturers to conduct postmarket studies to focus on information security risks, they did not currently have plans to request that any manufacturers do so. FDA officials explained that these studies are intended to address residual questions from clinical trials for a medical device. These lingering questions typically relate to the medical device’s clinical risks to patients, such as whether the use of a particular device is appropriate for a specific patient population, rather than to its information security risks. A third postmarket effort is FDA’s requirement for manufacturers to prepare annual PMA postapproval reports (annual reports). Among the issues manufacturers must include in these reports are the rationales for any changes they made to the medical device during the preceding year, including changes made because of an adverse event. For example, these annual reports could potentially include information related to a problem due to an information security risk if the problem led the manufacturer to change the device, such as a modification to the device’s software. Manufacturers are also required to include any information about defects related to their medical devices that have been identified in scientific literature—including published reports on clinical studies of similar devices or unpublished reports of data from clinical investigations involving their devices—that are known or that reasonably should be known to them. We reviewed the annual reports for the two active medical devices with known vulnerabilities to determine if the manufacturer had noted the research conducted by information security researchers demonstrating the devices’ susceptibility to intentional threats. For the defibrillator, we found references to other published reports discussing adverse events resulting from unintentional threats, such as from the adverse effect electromagnetic interference had on the defibrillator’s functionality. However, no potential information security problems due to intentional information security threats were included in these reports, including any references to the 2008 exploitation by researchers. Additionally, no potential information security problems were included in the annual reports we reviewed for the insulin pump exploited by researchers in 2010. Despite having postmarket efforts in place, FDA faces challenges with identifying information security problems, should they occur. We have previously reported on some challenges associated with adverse event reporting, such as the inherent weaknesses associated with passive surveillance systems. For example, MAUDE is a passive system and FDA relies upon reporters to recognize and submit information on suspected adverse events. According to FDA, because of this dependence upon reporters, significant underreporting occurs. This underreporting affects FDA’s ability to estimate the magnitude of a problem because the number of reports submitted might not be representative of the total number of patients that experienced the adverse event. Underreporting can also occur because individuals are either unfamiliar with reporting requirements for devices or because reporting can be time- consuming. Additionally, FDA and other experts told us that underreporting of information security problems in medical devices could result from a lack of understanding or awareness among adverse event reporters about how information security problems apply to these devices. They noted that information security is a relatively new issue area with respect to its applicability to medical devices, which could make it a difficult type of problem to understand and report to FDA. Some health care providers might not fully understand, and therefore may not report, information security problems whether resulting from unintentional or intentional threats, as providers have instead been trained to focus on clinical problems associated with medical devices. FDA officials said that they were uncertain if reporters would recognize that an information security problem was relevant or even had occurred. For example, an adverse event report could note that a patient complained of chest pains and experienced an increase in heart rate, but the report might not include any indication that a possible information security issue was a factor; that is, the reporter might not note that the patient’s device had recently been programmed because the health care provider did not consider this information relevant or necessary. Besides underreporting, another weakness inherent in MAUDE is FDA’s inability to establish causality because reporters might submit insufficient or inadequate information about an adverse event. For example, a reporter might fail to include specific details about an adverse event— such as that the event occurred while a medical device was being reprogrammed. Because the manufacturer generally conducts any follow- up investigation, if FDA wanted more information about an adverse event, FDA could notify manufacturers in writing that the agency required additional information about manufacturers’ reports. However, FDA officials told us that the more time passes from the time an adverse event occurred to the actual investigation, the more difficult it is to obtain detailed information. Also, officials request additional information from manufacturers on a case-by-case basis. In addition to the challenge of establishing causality, FDA officials told us it would also be difficult to determine the motivation behind an adverse event, such as if it was caused by a malicious actor. Without such details and contextual information related to the cause of and motivation behind an adverse event, FDA would be limited in its ability to later identify the problem as related to information security and determine if it resulted from an intentional threat. Because of these inherent weaknesses associated with MAUDE as a passive surveillance system, it is possible that information security problems involving medical devices could have occurred but not have been reported to FDA or have not been identified as information security problems by the agency. FDA has two planned initiatives that are intended to improve its postmarket efforts in order to more accurately identify and analyze problems associated with medical devices. According to FDA, these initiatives are not specifically intended to improve FDA’s ability to identify information security problems; however, these initiatives might strengthen FDA’s ability to do so by providing the agency with additional information. One initiative is the Unique Device Identification effort for the postmarket surveillance of devices, which, according to FDA, will allow the agency to aggregate adverse event reports in order to more accurately analyze them when conducting signal analyses. The initiative will also allow FDA to identify specific devices included in adverse event reports, allowing for more rapid and effective corrective actions that can focus on specific devices, according to one agency official.us that although this effort was not specifically designed to help FDA identify information security problems involving medical devices, it will help FDA identify specific device models that could encounter information security problems. Once operational, this new system will replace MAUDE as FDA’s passive surveillance system for devices and will be compatible with FDA’s drug and vaccine adverse event reporting systems to allow for cross-center communication within the agency. Such communication may be useful in handling drug-device or biologic-device issues that may be found in combination products. the capacity or complexity of medical device adverse event information that exists today. FDA expects the new system—the FDA Adverse Event Reporting System—to perform similar functions as MAUDE but also allow for greater capacity for storing adverse events and enhanced search capability compared to MAUDE. However, according to FDA, transitioning from MAUDE to this new system will not automatically make it easier to identify information security problems because, like MAUDE, the system is designed to collect information that indicates that a medical device has caused or contributed to a serious injury or death, which is more closely associated with clinical risks than information security risks. Because this new system will also be a passive surveillance system, FDA will still rely on reporters to recognize and submit information on information security problems involving medical devices before the agency can search for and subsequently identify them. Still, FDA officials told us that this new system will also include the 10 codes that reporters currently can use to indicate that an information security problem has occurred. If FDA is able to conduct more complex searches under this new system, the search results might strengthen the agency’s ability to identify information security problems involving medical devices. As active implantable medical devices increasingly use newer technologies, such as wireless capabilities, their susceptibility to various information security risks also increases. Although the risks resulting from unintentional threats have long been known, information security risks resulting from intentional threats have only recently been confirmed. While FDA has considered some information security risks associated with unintentional threats during its PMA review process, such as interference, it has not considered others, such as patch and vulnerability management. Additionally, FDA has not considered information security risks resulting from intentional threats. FDA has also not utilized available resources, such as the National Vulnerabilities Database sponsored and maintained by DHS and NIST. Also, FDA’s postmarket efforts have several limitations, and it is unclear if the agency could successfully identify information security problems with active implantable medical devices were they to occur. Although FDA intends to review its evaluation of software used in medical devices, according to the agency’s preliminary planning information, the review does not explicitly mention information security issues such as malware, patching and vulnerability management, or the use of security-related testing techniques. Furthermore FDA has not established specific milestones, including for when it will implement any changes, for the review. To better ensure the safety and effectiveness of active implantable medical devices, we are recommending that the Secretary of Health and Human Services direct the Commissioner of FDA to develop and implement a more comprehensive plan to assist the agency in enhancing its review and surveillance of medical devices as technology evolves, and that will incorporate the multiple aspects of information security. This plan should include, at a minimum, four actions, such as determining how FDA can increase its focus on manufacturers’ identification of potential unintentional and intentional threats, vulnerabilities, the resulting information security risks, and strategies to mitigate these risks during its PMA review process; utilize available resources, including those from other entities, such as leverage its postmarket efforts to identify and investigate information security problems; and establish specific milestones for completing this review and implementing these changes. HHS, FCC, NIST (within the Department of Commerce), DHS, and the Departments of Defense and of Veterans Affairs reviewed a draft of this report. HHS provided written comments, which we have reprinted in Appendix V. HHS, FCC, NIST, and the Department of Veterans Affairs provided technical comments, which we have incorporated as appropriate. DHS and the Department of Defense did not provide comments on a draft of this report. A third party also reviewed relevant sections of this report and provided technical comments, which we have incorporated as appropriate. In its comments, HHS concurred with our recommendation and described relevant efforts FDA has initiated. HHS described FDA’s efforts to identify and address information security concerns to ensure the safety of medical devices. For example, HHS noted that FDA is establishing collaborative relationships with DHS, NIST, and the Department of Defense, and is engaging other stakeholders to consider the potential applicability of standards from other sectors, such as industrial control, to medical devices. HHS also noted FDA’s postmarket efforts to address information security, including evaluating and enhancing surveillance tools to identify and investigate information security problems. For example, HHS said FDA is in the process of releasing its “National Postmarket Surveillance Plan” designed to enhance national coordination of information sharing for adverse events related to medical devices. 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 Chairman of the FCC and the Secretaries of Commerce, Defense, Health and Human Services, Homeland Security, and Veterans Affairs and to other interested parties. The report will also 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 Marcia Crosse at (202) 512-7114 or [email protected] or Gregory Wilshusen at (202) 512-6244 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 our review were to (1) identify the threats, vulnerabilities, and resulting information security risks associated with active implantable medical devices; (2) determine the extent to which the Food and Drug Administration (FDA) considered information security risks in its premarket approval (PMA) review process for certain active medical devices with known vulnerabilities; and (3) determine what postmarket efforts FDA has in place to identify information security problems involving active implantable medical devices. To identify the threats, vulnerabilities, and resulting information security risks associated with active implantable medical devices, we reviewed available publications, such as white papers published by information security researchers and peer-reviewed journal articles. We reviewed these publications to identify an initial list of threats, vulnerabilities, and resulting information security risks associated with these types of medical devices. These publications also included information related to the two devices that researchers have demonstrated are susceptible to intentional threats—an implantable cardioverter defibrillator (defibrillator) and an insulin pump. We also obtained relevant information through interviews with officials from federal agencies, including from FDA, the Department of Health and Human Services (HHS), the National Institute of Standards and Technology (NIST) within the Department of Commerce, the Department of Defense, the Department of Homeland Security (DHS), the Department of Veterans Affairs, and the Federal Communications Commission (FCC). We also interviewed manufacturer officials and subject-matter experts, including information security researchers and authors of standards related to information security. After developing these initial lists of threats, vulnerabilities, and information security risks, we sent them to experts to obtain their concurrence and comments. We selected these experts on the basis of their knowledge and familiarity with the information security of medical devices. Of the 15 experts to whom we sent our tables, 9 provided us with responses. We then analyzed these responses to validate our identified threats, vulnerabilities, and resulting information security risks associated with these medical devices. We did not include implantable medical devices lacking active components, such as hip implants. We limited our identification of threats, vulnerabilities, and information security risks to those associated with medical devices that deliver medicine, monitor body functions, or provide support to organs and tissues. Additionally, we limited our scope to the integrity and availability aspects of information security—which generally relate to the safety and effectiveness of medical devices—and not confidentiality, which generally relates to privacy. We focused on the potential effect that information security risks could have on the functionality of FDA-regulated devices and not on their ability to store or exchange personally identifiable information. NIST, Creating a Patch and Vulnerability Management Program, SP 800-40 Version 2.0 (Gaithersburg, Md.: November 2005). IEC 62304: 2006, Medical Device Software—Software Life Cycle Processes; IEC 60601-1: 2005, Medical Electrical Equipment—Part 1: General Requirements for Basic Safety and Essential Performance; IEC Standard 80001-1: 2010, Application of Risk Management for IT Networks Incorporating Medical Devices—Part 1: Roles, Responsibilities and Activities; ISO, International Standard 14971: 2007, Medical Devices— Application of Risk Management to Medical Devices; DHS, Recommended Practice for Patch Management of Control PCI Security Standards Council, Payment Card Industry Data Security various FDA guidance documents. These documents varied in detail from providing general rules at a high level to specific activities related to information security. From these documents, we determined the key information security controls and associated criteria that could be used to assess and mitigate information security risks for certain active medical devices. We did not conduct an extensive analysis of all information security controls that could be used in the evaluation of information security issues for these medical devices. Instead, we focused on eight key information security control areas that included a range of criteria that would be applicable when evaluating FDA’s review of information security risks in its PMA review process. The specific areas we selected were (1) software testing, verification, and validation; (2) risk assessments; (3) risk management; (4) access control; (5) patch and vulnerability management; (6) security-incident response; (7) contingency planning; and (8) technical audit and accountability. For each of these information security control areas, we selected the criteria that illustrated the range of activities that could be considered by FDA during its PMA review process. We then used these key information security control areas and associated criteria to develop a questionnaire for FDA to complete on the basis of its prior review of two PMA supplement applications (supplements). that have recently identified vulnerabilities, such as those devices that information security researchers have exploited in controlled settings, and discussions with FDA. We reviewed the PMA supplements rather than the original PMA applications in order to capture the most recent information related to these two devices. After an original PMA application is approved, a manufacturer can submit a supplement to the original PMA application to FDA for approval of changes, such as changes to the device or the manufacturing process used in its production. In general, subsequent changes that affect the safety or effectiveness of the device must undergo FDA’s PMA review process and manufacturers must submit a supplement to their original application for approval. We evaluated FDA’s responses to this questionnaire and supporting documentation, such as FDA’s review memorandums and other documents submitted by the manufacturer. FDA provided responses for one supplement related to the defibrillator exploited by information security researchers and responses and documentation for the programming wand (wand) and the programmer used with the defibrillator. FDA also provided responses and documentation for a second supplement related to the exploited insulin pump. The particular defibrillator and insulin pump we considered in our evaluation are the only two devices we identified that have been intentionally exploited by researchers. Although the defibrillator-related supplement was reviewed in 2001 and the insulin pump supplement was reviewed in 2006, FDA identified these supplements as being the most recent ones related to the devices involving potential information security issues and the most appropriate for our evaluation. We also evaluated additional documentation for another defibrillator reviewed by FDA in 2012 that has not been intentionally exploited by researchers to obtain a more current perspective on FDA’s review process for information security issues. Because we evaluated documentation for only three devices, our results are not generalizable. We also interviewed FDA officials about the agency’s current efforts to address information security risks in medical devices during its premarket review. To determine what postmarket efforts FDA has in place to identify information security problems involving active implantable medical devices, we obtained and reviewed FDA guidance documents related to different postmarket efforts, including Medical Device Reporting for Manufacturers, Draft Guidance for Industry and FDA Staff: Annual Reports for Approved Premarket Approval Applications (PMA), and Guidance for Industry and FDA Staff: Procedures for Handling Post- Approval Studies Imposed by PMA Order.information related to its adverse event reporting system, including the different codes FDA uses to characterize different types of adverse events. We requested that FDA search its adverse event reporting system for any potential information security problems involving these medical devices using 10 codes that FDA had stated could potentially indicate an information security problem had occurred. We then reviewed FDA’s other codes on its website to determine whether there were any additional codes that could be used to identify information security problems. We identified these codes using key words or phrases that we considered possibly related to information security. We then asked FDA to search its adverse event reporting system using the additional codes that we identified as possibly related to information security. We did not independently verify FDA’s results for any of its searches. We obtained and reviewed the manufacturer’s annual reports for the defibrillator for the years 2008 through 2011, after researchers demonstrated the intentional exploitation of the device in controlled settings in 2008. We also reviewed manufacturer’s annual reports for the insulin pump for 2010 and 2011, after researchers demonstrated the intentional exploitation of the device in controlled settings in 2010. We reviewed these reports to determine whether they included any indication of these demonstrations. Additionally, we interviewed FDA officials in its Office of Surveillance and Biometrics and Office of Device Evaluation, among others, on the agency’s different postmarket efforts, including its adverse event reporting system and postmarket studies, to determine how FDA has identified or might identify information security problems through these and other efforts. We also interviewed officials from relevant industry associations, including the Medical Device Manufacturers Association and Advanced Medical Technology Association, and officials from other agencies, including DHS and FCC, about challenges associated with identifying information security problems, including those specific to the issue of information security and those inherent to FDA and its adverse event reporting system. We also reviewed FDA We conducted this performance audit from August 2011 to August 2012, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The submission of adverse event reports is intended to enable the Food and Drug Administration (FDA) to collect information regarding reportable issues with medical devices. FDA seeks to use reports submitted by manufacturers and user facilities, among others, to assess the underlying cause and seriousness of an adverse event. FDA also uses adverse event data to identify issues with medical devices that may require additional investigation. According to FDA, adverse event reports are best used for two purposes. First, they are used to capture qualitative snapshots of adverse events for a particular device or device type, such as the types of malfunctions or clinical events or both associated with the device. Second, they are used in signal detection, such as for identifying unexpected events associated with a particular device or device type. Adverse event reports are to be submitted to FDA through mandatory and voluntary sources. Mandatory adverse event reporting by manufacturers and user facilities enables FDA to obtain specific safety data related to medical devices from these reporters. Since 1984, the Medical Device Reporting regulations have required manufacturers and user facilities who have received complaints of device-related deaths, serious injuries, and malfunctions, such as instances where patients required admission to the (See table 7 for hospital or became permanently disabled, to notify FDA. summaries of these reporting requirements.) These mandatory adverse event reports are entered into FDA’s Manufacturer and User Facility Device Experience Database (MAUDE). FDA also collects data obtained through voluntary adverse event reporting. 21 C.F.R. pt. 803. Also, serious injuries are defined as life-threatening events, events that result in permanent impairment of a body function or permanent damage to a body structure, and events that require medical or surgical intervention to preclude permanent impairment or damage. Malfunctions are defined as the failure of a device to meet its performance specifications or otherwise not perform as intended. Device-related means that the event was or may have been attributable to a medical device, or that a device was, or may have been, a factor in an event including those occurring as a result of device failure, malfunction, improper or inadequate design, poor manufacture, inadequate labeling, or use-related error. A user facility is a hospital, ambulatory surgical facility, nursing home, outpatient diagnostic facility, or outpatient treatment facility that is not a physician’s office. Serious injuries are defined as life-threatening events, events that result in permanent impairment of a body function or permanent damage to a body structure, and events that require medical or surgical intervention to preclude permanent impairment or damage. Malfunctions are defined as the failure of a device to meet its performance specifications or otherwise not perform as intended. User facilities are required to file annual reports that summarize their adverse event reports. 21 C.F.R. pt. 803, Subpart C. In addition to MAUDE, FDA has other adverse event reporting systems in place to capture adverse events associated with medical devices. One of these is the Medical Product Safety Network (MedSun) system. MedSun collects voluntary report information from a limited number of hospitals and user facilities. All reports received through MedSun are entered into the MAUDE system. Launched in 2002, the primary goal of MedSun is to enable FDA to work collaboratively with specific device-user facilities in the clinical community to identify, understand, and solve problems with the use of devices. MedSun user facilities are required to report device problems that result in serious illness, injury, or death. MedSun user facilities are also encouraged to voluntarily report other types of problems with devices, such as “close-calls,” potential for harm, and other safety concerns. Once a problem has been identified, FDA works with the MedSun user facilities’ representatives to clarify and understand the problem. Subsequent reports and lessons learned from these collaborations are then shared with the greater clinical community so that all clinicians may take necessary preventative actions to address device problems. Currently, 350 user facilities participate in the MedSun network. Participants are recruited from all regions of the country using the American Hospital Association Membership Listing. FDA’s voluntary adverse event reporting system, MedWatch, was created in 1993 to encourage voluntary reporting by interested parties, such as consumers of medical devices, and health care professionals, such as physicians. These parties can use MedWatch to report serious adverse reactions, product quality problems, therapeutic failure, and product-use errors associated with human medical products, including drugs, biologic products, and medical devices, among other things. Consumers can submit information about their experiences either online or by fax, mail, or phone. Consumers can also request that their physicians either complete the MedWatch form for them or help them complete the form, given that these providers have test results and other clinical information that will help FDA better evaluate the MedWatch reports. Adverse event reports submitted to FDA through MedSun or MedWatch are eventually entered into MAUDE. MAUDE data consist of voluntary reports since June 1993, user-facility reports since 1991, distributor reports since 1993, and manufacturer reports since 1996. MAUDE may not include reports made according to exemptions, variances, or alternative reporting forms authorized by regulation. FDA is in the process of developing a new system to replace MAUDE, the FDA Adverse Event Reporting System, which the agency plans to implement by September 2013. According to FDA, this new system will perform similar functions as MAUDE, but will also allow for (1) greater capacity for storing adverse event data, and (2) greater search capability than MAUDE. Two federal entities that have specific responsibilities related to developing and implementing policies with respect to the confidentiality aspect of information security in terms of protected health information. These entities are the Office for Civil Rights (OCR) and the Office of the National Coordinator for Health Information Technology (ONC), both within the Department of Health and Human Services (HHS). OCR is responsible for developing, interpreting, and enforcing the Privacy and Security Rules called for in the Health Insurance Portability and Accountability Act of 1996 (HIPAA). OCR enforces the Privacy and Security Rules by investigating complaints that individuals have filed with the Office in instances where they believe a covered entity violated health information privacy rights or committed another violation of the rules. OCR may also conduct periodic audits to ensure that covered entities are in compliance with Privacy and Security Rules. In calendar year 2011, OCR conducted a total of 3,898 investigations. Of these investigations, OCR determined no violation had occurred in 33 percent of them (1,303 investigations) and, for the remaining 67 percent (2,595 investigations), obtained corrective action. OCR has also issued guidance documents for covered entities on how to comply with the HIPAA Privacy and Security Rules. ONC was formally established by the Health Information Technology for Economics and Clinical Health Act of 2009 (HITECH Act). It is charged with promoting the development of a nationwide health information technology (IT) infrastructure that allows the secure exchange of health information. For example, ONC has developed a federal health IT strategic plan for working with the private and public sectors to implement different health IT efforts. In this plan ONC addresses, among other things, privacy and security issues related to health IT. The plan also includes strategies related to identifying health IT system security vulnerabilities as well as health IT privacy and security requirements and best practices. ONC has also developed the Nationwide Privacy and Security Framework for Electronic Exchange of Individually Identifiable Health Information in order to establish a policy framework for electronic health information exchange to help guide nationwide adoption of health IT and help improve the availability of health information and health care quality. ONC also assesses gaps and weaknesses in current privacy and security policies in light of evolving technology, and works with federal entities to address these issues. Additionally, ONC incorporates privacy and security in its programs, which are designed to implement HITECH initiatives, including certification of electronic health records, as well as supporting the efforts of several related initiatives to facilitate nationwide adoption of health IT. For example, one initiative relates to developing information security and best practices for safeguarding protected health information in electronic health records, while another initiative relates to identifying standards, protocols, legal agreements, specifications, and services, to enable secure health information exchanges. Table 8 includes the results of our evaluation of the evidence provided by the Food and Drug Administration (FDA) regarding its consideration of information security in its review of two premarket approval (PMA) supplements reviewed in 2001 and 2006 related to active medical devices with known vulnerabilities. Specifically, the supplements and supporting materials were for a defibrillator and its associated programming wand (wand) and programmer, and a specific insulin pump with wireless capabilities. This evidence was provided to FDA in the respective PMA supplements to the original applications by the manufacturer. Although the defibrillator-related supplement was reviewed in 2001 and the insulin pump supplement was reviewed in 2006, FDA officials identified these supplements as being the most recent ones related to the devices involving potential information security issues and the most appropriate for our evaluation. In addition to the contacts named above, Tom Conahan, Assistant Director; Vijay D’Souza, Assistant Director; Kaitlin Coffey; West Coile; Neil Doherty; Lynn Espedido; Nancy Glover; Rosanna Guerrero; Cathleen Hamann; Gay Hee Lee; Lee McCracken; and Monica Perez-Nelson made key contributions to this report. | Certain medical devices have become increasingly complex, and the growing use of wireless technology in these devices has raised concerns about how protected they are against information security risks that could affect their safety and effectiveness. FDA, an agency within the Department of Health and Human Services (HHS), is responsible for ensuring the safety and effectiveness of medical devices in the United States. FDA reviews manufacturers applications to market medical devices during its premarket review process and monitors devices, once it has approved them, through its postmarket efforts. In this report, GAO (1) identifies the threats, vulnerabilities, and resulting information security risks associated with active implantable medical devices, (2) determines the extent to which FDA considered information security during its premarket review of certain devices with known vulnerabilities, and (3) determines what postmarket efforts FDA has in place to identify information security problems. To address these objectives, GAO reviewed relevant documents and interviewed officials from agencies, such as FDA, HHS, the Federal Communications Commission, and the Department of Homeland Security. GAO also interviewed subject-matter experts in information security. Several information security threats exist that can exploit vulnerabilities in active implantable medical devices, but experts caution that efforts to mitigate information security risks may adversely affect device performance. Threats to active devicesthat is, devices that rely on a power source to operatethat also have wireless capability can be unintentional, such as interference from electromagnetic energy in the environment, or intentional, such as the unauthorized accessing of a device. Several experts consider certain threats to be of greater concern than others; for example, experts noted less concern about interference from electromagnetic energy than other threats. Incidents resulting from unintentional threats have occurred, such as a malfunction resulting from electromagnetic interference, but have since been addressed. Although researchers have recently demonstrated the potential for incidents resulting from intentional threats in two devicesan implantable cardioverter defibrillator and an insulin pumpno such actual incidents are known to have occurred, according to the Food and Drug Administration (FDA). Medical devices may have several such vulnerabilities that make them susceptible to unintentional and intentional threats, including untested software and firmware and limited battery life. Information security risks resulting from certain threats and vulnerabilities could affect the safety and effectiveness of medical devices. These risks include unauthorized changes of device settings resulting from a lack of appropriate access controls. Federal officials and experts noted that efforts to mitigate information security risks need to be balanced with the potential adverse effects such efforts could have on devices performance, including limiting battery life. FDA considered information security risks from unintentional threats, but not risks from intentional threats, during its 2001 and 2006 premarket review of two medical devices that have known vulnerabilities. Specifically, FDA considered risks from unintentional threats for four of the eight information security control areas GAO selected for its evaluationsoftware testing, verification, and validation; risk assessments; access control; and contingency planning. However, the agency did not consider risks from intentional threats for these areas, nor did the agency provide evidence of its review for risks from either unintentional or intentional threats for the remaining four information security control areasrisk management, patch and vulnerability management, technical audit and accountability, and security-incident-response activities. According to FDA, it did not consider information security risks from intentional threats as a realistic possibility until recently. In commenting on a draft of this report, FDA said it intends to reassess its approach for evaluating software used in medical devices, including an assessment of information security risks. FDA has postmarket efforts, such as its adverse event reporting system, in place to identify problems with medical devices, including those related to information security. However, FDA faces challenges in using them to identify information security problems. For example, the agencys adverse event reporting system relies upon reports submitted by entities, such as manufacturers, that are more closely related to clinical risks than to information security risks. Because information security in active implantable medical devices is a relatively new issue, those reporting might not understand the relevance of information security risks. GAO recommends that FDA develop and implement a plan expanding its focus on information security risks. In comments on a draft of this report, HHS concurred with GAOs recommendation and described relevant efforts FDA has initiated. |
In 2007, we evaluated retrospective review activities conducted between 2001 and 2006 by nine agencies covering health, safety, environmental, financial, and economic regulations. Agencies reported that the main purpose of most of their reviews was to examine the effectiveness of the implementation of regulations. We found that the agencies had conducted more retrospective reviews, and a greater variety of these reviews (such as ones examining the efficiency and effectiveness of regulations and others identifying opportunities to reduce regulatory burdens) than was readily apparent, especially to the public. Reviews mandated by requirements in statutes or executive orders and related OMB memorandums were sometimes the impetus for reviews, but agencies more often exercised their own discretionary authorities to review regulations. As a result of these reviews, agencies amended regulations, changed guidance and related documents, decided to conduct additional studies, and confirmed that existing rules achieved the intended results. Agencies noted that discretionary reviews generated additional action more often than mandatory reviews, which most often resulted in no changes. We also found that agencies, to varying extents, were developing written procedures, processes, and standards to guide how they select which rules to review, analyze those rules, and report the results. Multiple factors helped or impeded the conduct and usefulness of retrospective reviews. Agencies identified time and resources as the most critical barriers, but also cited factors such as data limitations and overlapping or duplicative review requirements. Nonfederal parties also identified a lack of transparency in agency review processes as a barrier and said they were rarely aware of the agencies’ reviews. We made seven recommendations for executive action in the 2007 report to improve the effectiveness and transparency of retrospective regulatory reviews. Among the elements that we recommended incorporating in policies, procedures, or guidance were: minimum standards for documenting and reporting completed review results; inclusion of public input as a factor in regulatory review decisions; and consideration of how agencies will measure the performance of new regulations. OMB took actions that addressed our recommendations which, if effectively implemented, will improve the transparency, credibility, and effectiveness of agencies’ retrospective review efforts. For example, in 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations, among other subjects, that addressed each of our prior recommendations. Collectively, they directed executive agencies and encouraged independent regulatory agencies to develop and implement plans to periodically review existing significant regulations. OMB’s guidance on the 2011 and 2012 executive orders advised agencies to identify in their final plans specific reforms and initiatives that will significantly reduce existing regulatory burdens and promote economic growth and job creation. We are currently completing a report at the request of Senators Ron Johnson and Mark Warner concerning agencies’ retrospective regulatory analyses under the 2011 and 2012 executive orders. The report will identify for selected agencies (1) the results and anticipated outcomes of completed retrospective analyses included in agencies’ review plans and progress reports, (2) strategies, practices, or factors that facilitated or limited agencies’ ability to implement retrospective analyses, and (3) the extent to which agencies are incorporating retrospective analyses into their processes for measuring and achieving agency priority goals. In a series of products from 1996 through 2009 examining implementation of the OIRA regulatory review process, we consistently found that OIRA’s reviews of agencies’ draft rules often resulted in changes, but the transparency and documentation of the review process could be improved. Unfortunately, as I will detail below, to date, OIRA has implemented only 1 of our 12 most recent recommendations on this process. A brief explanation of OIRA’s review process provides helpful context for understanding why these findings and recommendations remain relevant today. Centralized presidential reviews of agency’s regulations have a long history and can be traced back to a program established by President Nixon in 1971. President Reagan’s Executive Order 12291 in 1981 expanded the scope of presidential reviews of rulemakings and delegated responsibility for this review function to OIRA. President Clinton’s issuance of Executive Order 12866 in 1993 established the current process and requirements regarding reviews of covered agencies’ draft proposed and final rules. More recently, in 2011, President Obama issued Executive Order 13563, which supplemented and reaffirmed the principles, structures, and definitions governing contemporary regulatory review established in the 1993 executive order. The basic procedures and requirements for the regulatory review process today follow the provisions of that 1993 executive order. This practice of centralized regulatory reviews is now well established as part of the rulemaking process, although it continues to attract some controversy and criticism. In essence, OIRA is responsible for the coordinated review of agencies’ draft proposed and final rules to ensure that regulations are consistent with applicable law, the President’s priorities, and the principles set forth in executive orders. OIRA is also to ensure that decisions made by one agency do not conflict with the policies or actions taken or planned by another agency. Executive agencies, except for independent regulatory agencies, are required to submit their significant regulatory actions to OIRA for review. OIRA is generally required to complete its review within 90 days after an agency formally submits a draft regulation. The review process can be summarized as follows: OIRA reviews agencies’ draft rules at both the proposed and final stages of rulemaking. In each phase, the rulemaking agency submits a regulatory review package to OIRA (consisting of the rule, any supporting materials, and a transmittal form) and OIRA initiates a review. During the review process, OIRA analyzes the draft rule in light of executive order principles and discusses the package with staff and officials at the rulemaking agency, as well as with other agencies with which interagency coordination will be necessary. In the course of that process, the draft rule that is submitted by the agency often changes. In some cases, agencies withdraw the draft rule from OIRA during the review period and the rule may or may not be subsequently resubmitted to OIRA. At the end of the review period, OIRA either concludes that the draft rule is consistent with the principles of the executive order (which occurs in the vast majority of cases) or returns the rule to the agency “for further consideration.” If a draft rule that was determined to be consistent with the executive order has been modified in the course of the review, the rule is coded in the OIRA database as “consistent with change” (regardless of the source or extent of the change). If no changes have been made to the draft rule during the review, the rule is coded as “consistent without change.” OIRA only codes rules as “consistent without change” if they are exactly the same at the end of the review period as the original submission. Even editorial changes made at the rulemaking agency’s initiative can cause a rule to be coded “consistent with change.” Executive Order 12866 also contains several transparency provisions that require both OIRA and agencies to disclose certain information about the OIRA review process. For example, the order requires OIRA to disclose information about communications between OIRA and persons not employed by the executive branch pertinent to rules under OIRA’s review and, if OIRA returns a rule to the issuing agency for reconsideration, the executive order requires OIRA to provide a written explanation for the return. If a rule is withdrawn from OIRA review, however, the order has no requirement for OIRA or the regulatory agency to provide a written explanation. After the rule has been published in the Federal Register or otherwise issued to the public, the regulatory agency publishing the rule is required to make available to the public the information provided to OIRA in accordance with the executive order; identify for the public, in a complete, clear, and simple manner, the substantive changes between the draft submitted to OIRA and the action subsequently announced; and identify for the public those changes in the regulatory action that were made at the suggestion or recommendation of OIRA. These transparency requirements and documentation are not simply a matter of administrative paperwork. Agencies’ documentation of the OIRA review process and its outcomes become part of the regulatory docket for each rulemaking. The docket publicly documents the support and basis for decisions made about the substance of the rule, thus serving as a source of information for decision makers, the general public, and for purposes of potential judicial review. Since the issuance of Executive Order 12866, Congress has periodically asked us to examine the implementation of the OIRA regulatory review process. Multiple products we issued from 1996 through 2009 consistently found that the OIRA regulatory review process often resulted in changes to agencies’ rules but the transparency and documentation of the review process could be improved. For example, in 2003, we examined 85 rules from nine health, safety, or environmental agencies that had been changed, returned or withdrawn as a result of the OIRA review process. We found that the OIRA review process had significantly affected 25 of those 85 rules. While almost all returned rules were from the Department of Transportation, the rules that were most often significantly changed were from the Environmental Protection Agency. OIRA’s suggestions appeared to have at least some effect on almost all of the 25 rules’ potential costs and benefits or the agencies’ estimates of those costs and benefits. The agencies’ docket files did not always provide clear and complete documentation of the changes made during OIRA’s review or at OIRA’s suggestion, as required by the executive order, though a few agencies exhibited exemplary transparency practices. In 2009, we again found that OIRA’s reviews of agencies’ draft rules often resulted in changes. Of our 12 case-study rules subject to OIRA review, 10 reviews resulted in changes, about half of which included changes to the regulatory text. Agencies used various methods to document OIRA’s reviews and these methods generally met disclosure requirements. However, we found that agencies could improve the transparency of this documentation. In particular, agencies did not always clearly attribute changes made at the suggestion of OIRA. Additionally, agencies’ interpretations were not necessarily consistent regarding what constitutes a substantive change that should be documented to comply with the executive order transparency requirements. Both of these issues had been identified in our earlier work. In our 2003 and 2009 reports, we made a total of 12 recommendations to OMB about the review process under Executive Order 12866 (see appendix I for a list of the recommendations). In 2003 we made 8 recommendations targeting several aspects of the OIRA review process that remained unclear and where improvements could allow the public to better understand the effects of OIRA’s review. For example, these aspects included addressing a lack of documentation requirements regarding (1) staff-level exchanges during the review process, (2) the reasons for withdrawal of a rule, or (3) the source or impetus of changes made to rules. In 2009, based on similar findings, we made 4 additional recommendations that OMB provide guidance to agencies to improve transparency and documentation of the OIRA review process. OMB generally agreed with the 4 recommendations in our 2009 report, but disagreed with 7 of the 8 recommendations in our 2003 report. OIRA to date has implemented only 1 of those 12 recommendations—to more clearly indicate in the posted information which regulatory action was being discussed and the affiliations of participants when meeting with outside parties regarding draft rules under OIRA review. We believe that our past recommendations still have merit and, if acted upon, would improve the transparency of the OIRA review process. For example, regarding our recommendation that the Administrator of OIRA should establish procedures whereby either OIRA or the agencies disclose the reasons why rules are withdrawn from OIRA review, we note that OIRA’s records on the outcomes of regulatory reviews indicate many more withdrawals, which currently require no explanation, than returns, which do require explanations. Importantly, other organizations have raised concerns about the timeliness of OIRA regulatory reviews. In particular, the Administrative Conference of the United States (ACUS) issued a report and adopted a statement in December 2013 on improving the timeliness of OIRA’s regulatory review process. ACUS noted an increase in average review times since 2011, including many reviews that extended well past the limits established in Executive Order 12866, while also acknowledging that OIRA had recently made progress in addressing the backlog. ACUS offered a set of principles for improving the timeliness of review and the transparency concerning the causes for delays, such as that OIRA should, whenever possible, adhere to the timeliness provisions of Executive Order 12866 and, if unable to complete the review of an agency’s draft rule within a reasonable time—but in no event beyond 180 days after submission—should inform the public as to the reasons for the delay or return the rule to the submitting agency. Our recent work has continued to highlight both progress made in facilitating transparency, oversight, and public participation in regulatory actions as well as room for improvement. Improvements made in transparency of the rulemaking process benefit not only the public but also congressional oversight. In 2012, we reviewed a generalizable random sample of 1,338 final rules published during calendar years 2003 through 2010 to provide information on the frequency, reasons for, and potential effects of agencies issuing final rules without a notice of proposed rulemaking (NPRM). Before issuing a final rule, agencies are generally required to publish an NPRM in the Federal Register. Agencies must then respond to public comments when issuing final rules. However, agencies may use exceptions in certain circumstances to forgo this NPRM process to expedite rulemaking. For example, agencies may use the good cause exception when they find that notice and comment procedures are “impracticable, unnecessary, or contrary to the public interest.” We found that agencies frequently cited the good cause exception and other statutory exceptions to publish final rules without NPRMs. Agencies did not publish an NPRM for about 35 percent of major rules and about 44 percent of nonmajor rules published from 2003 through 2010. We found that agencies, though not required, often requested comments on major final rules issued without an NPRM, but they did not always respond to the comments received. For example, we found that agencies requested comments on 77 of the 123 major rules issued without an NPRM in our sample. The agencies did not issue a follow-up rule or respond to comments on 26 of these 77. This is a missed opportunity, because we found that, when agencies did respond to public comments, they often made changes to improve the rules. Each of these 26 rules is economically significant and some of these rules have an effect of one billion dollars a year or more. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments that are typically part of regular notice-and-comment rulemakings, and improve the quality and transparency of rulemaking records, we recommended that OMB, in consultation with ACUS, issue guidance to encourage agencies to respond to comments on final major rules, for which the agency has discretion, that are issued without a prior notice of proposed rulemaking. OMB stated that it did not believe it necessary to issue guidance on the topic at that time and has not, to date, taken any action to implement our recommendation. We continue to believe that the recommendation has merit and urge OMB to reconsider its prior position. In our 2013 review of international regulatory cooperation we again found opportunities to better facilitate public participation in regulatory activities. In that report, we noted the growing importance of considering regulations in an international context. Agency officials stated that they cooperate with their foreign counterparts (1) because they are operating in an increasingly global environment and many products that agencies regulate originate overseas and (2) in an effort to gain efficiencies—for example, by sharing resources or avoiding duplicative work. Agencies’ efforts to cooperate on regulatory programs may also facilitate trade and support the competitiveness of U.S. business. Agency officials we interviewed said that stakeholder involvement is important and nonfederal stakeholders are uniquely positioned to identify and call attention to unnecessary differences among U.S. regulations and those of its trading partners. However, stakeholders we spoke with, such as academics, organizations representing businesses, and consumer advocacy groups, said it can be challenging for them to provide input into agencies’ international regulatory cooperation activities because of the required resources and the difficulty of becoming aware of such activities. In addition to effective collaboration with affected nonfederal stakeholders, effective international regulatory cooperation requires interagency coordination and effective collaboration with federal agency officials’ foreign counterparts. In an environment of constrained resources it is even more important for agencies to share knowledge on the effective implementation of international regulatory cooperation. We recommended that the Regulatory Working Group, a forum chaired by the OIRA Administrator to assist agencies in identifying and analyzing important regulatory issues, establish one or more mechanisms to facilitate staff level collaboration on international regulatory cooperation issues and include independent regulatory agencies. Such a mechanism could be addressed as part of forthcoming guidance on Executive Order 13609. This May 2012 executive order on promoting international regulatory cooperation was intended to provide high-level support and direction for U.S. agencies’ international regulatory cooperation efforts. The executive order directed agencies to consider addressing unnecessary differences in existing regulations and describes processes to help avoid regulatory divergence in the future. If implemented, our recommendation regarding a staff level collaboration mechanism could help ensure that U.S. agencies have the necessary tools and guidance to effectively implement international regulatory cooperation. Chairman Tester, Ranking Member Portman, and Members of the Subcommittee, 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 Michelle Sager, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Appendix I: Relevant GAO Recommendations on Regulatory Processes Recommendation Rulemaking: OMB’s Role in Reviews of Agencies’ Draft Rules and the Transparency of Those Reviews, Published: Sep. 22, 2003. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should instruct agencies to put information about changes made in a rule after submission for OIRA’s review and those made at OIRA’s suggestion or recommendation in the agencies’ public rulemaking dockets, and to do so within a reasonable period after the rules have been published. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should define the types of “substantive” changes during the OIRA review process that agencies should disclose as including not only changes made to the regulatory text but also other, noneditorial changes that could ultimately affect the rules’ application (e.g., explanations supporting the choice of one alternative over another and solicitations of comments on the estimated benefits and costs of regulatory options). The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, the Administrator should establish procedures whereby either OIRA or the agencies disclose the reasons why rules are withdrawn from OIRA review. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, OIRA should reexamine its current policy that only documents exchanged by OIRA branch chiefs and above need to be disclosed because most of the documents that are exchanged while rules are under review at OIRA are exchanged between agency staff and OIRA desk officers. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, the Administrator should more clearly indicate in the meeting log which regulatory action was being discussed and the affiliations of the participants in those meetings. The Director of the Office of Management and Budget should change OIRA’s database to clearly differentiate within the “consistent with change” outcome category which rules were substantively changed at OIRA’s suggestion or recommendation and which were changed in other ways and for other reasons. The Director of the Office of Management and Budget should define the transparency requirements applicable to the agencies and OIRA in section 6 of Executive Order 12866 in such a way that they include not only the formal review period, but also the informal review period when OIRA says it can have its most important impact on agencies’ rules. Doing so would make the trigger for the transparency requirements applicable to OIRA’s and the agencies’ interaction consistent with the trigger for the transparency requirements applicable to OIRA regarding its communications with outside parties. Executive Office of the President: Office of Management and Budget Recommendation The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should encourage agencies to use “best practice” methods of documentation that clearly describe those changes (e.g., like those used by the Food and Drug Administration, the Environmental Protection Agency’s Office of Water, or the Federal Motor Carriers Safety Administration). Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews, GAO-07-791: Published July 16, 2007. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs (OIRA), and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities consideration, during the promulgation of certain new rules, of whether and how they will measure the performance of the regulation, including how and when they will collect, analyze, and report the data needed to conduct a retrospective review. Such rules may include significant rules, regulations that the agencies know will be subject to mandatory review requirements, and any other regulations for which the agency believes retrospective reviews may be appropriate. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities prioritization of review activities based upon defined selection criteria. These criteria could take into account factors such as the impact of the rule; the length of time since its last review; whether changes to technology, science, or the market have affected the rule; and whether the agency has received substantial feedback regarding improvements to the rule, among other factors relevant to the particular mission of the agency. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities specific review factors to be applied to the conduct of agencies’ analyses that include, but are not limited to, public input to regulatory review decisions. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities minimum standards for documenting and reporting all completed review results. For reviews that included analysis, these minimal standards should include making the analysis publicly available. Recommendation The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities mechanisms to assess their current means of communicating review results to the public and identify steps that could improve this communication. Such steps could include considering whether the agency could make better use of its agency Web site to communicate reviews and results, establishing an e-mail listserve that alerts interested parties about regulatory reviews and their results, or using other Web-based technologies (such as Web forums) to solicit input from stakeholders across the country. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities steps to promote sustained management attention and support to help ensure progress in institutionalizing agency regulatory review initiatives. Executive Office of the President: Office of Management and Budget: Office of Information and Regulatory Affairs and the Small Business: Office of Advocacy In light of overlapping and duplicative review factors in statutorily mandated reviews and the difficulties identified by agencies in their ability to conduct useful reviews with predetermined time frames, the Administrator of OIRA and Chief Counsel for Advocacy should work with regulatory agencies to identify opportunities for Congress to revise the timing and scope of existing regulatory review requirements and/or consolidate existing requirements. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews, GAO-09-205: Published: Apr. 20, 2009. If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should define in guidance what types of changes made as a result of the OIRA review process are substantive and need to be publicly identified to more consistently implement the order’s requirement to provide information to the public “in a complete, clear, and simple manner.” If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should direct agencies to clearly state in final rules whether they made substantive changes as a result of the OIRA reviews to more consistently implement the order’s requirement to provide information to the public “in a complete, clear, and simple manner.” If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should standardize how agencies label documentation of these changes in public rulemaking dockets to more consistently implement the order’s requirement to provide information to the public “in a complete, clear, and simple manner.” Executive Office of the President: Office of Management and Budget Recommendation If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should instruct agencies to clearly attribute those changes “made at the suggestion or recommendation of OIRA to more consistently implement the order’s requirement to provide information to the public “in a complete, clear, and simple manner.” Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments, GAO-13-21: Published: Dec. 20, 2012. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments that are typically part of regular notice-and- comment rulemakings, and improve the quality and transparency of rulemaking records, the Director of OMB, in consultation with the Chairman of Administrative Conference of the United States (ACUS), should issue guidance to encourage agencies to respond to comments on final major rules, for which the agency has discretion, that are issued without a prior notice of proposed rulemaking. International Regulatory Cooperation: Agency Efforts Could Benefit from Increased Collaboration and Interagency Guidance, GAO-13-588: Published: Aug. 1, 2013. To ensure that U.S. agencies have the necessary tools and guidance for effectively implementing international regulatory cooperation, the Regulatory Working Group, as part of forthcoming guidance on implementing Executive Order 13609, should establish one or more mechanisms, such as a forum or working group, to facilitate staff level collaboration on international regulatory cooperation issues and include independent regulatory agencies. Agency affected Executive Office of the President: Office of Management and Budget Executive Office of the President: Office of Management and Budget Executive Office of the President: Office of Management and Budget: Regulatory Working Group Checkmarks indicate that the recommendation has been closed as implemented. International Regulatory Cooperation: Agency Efforts Could Benefit from Increased Collaboration and Interagency Guidance. GAO-13-588. Washington, D.C.: August 1, 2013. Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments. GAO-13-21. Washington, D.C.: December 20, 2012. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews. GAO-09-205. Washington, D.C.: April 20, 2009. Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews. GAO-07-791. Washington, D.C.: July 16, 2007. Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues That Merit Congressional Attention. GAO-06-228T. Washington, D.C.: November 1, 2005. Rulemaking: OMB’s Role in Reviews of Agencies’ Draft Rules and the Transparency of Those Reviews. GAO-03-929. Washington, D.C.: September 22, 2003. Regulatory Reform: Procedural and Analytical Requirements in Federal Rulemaking. GAO/T-GGD/OGC-00-157. Washington, D.C.: June 8, 2000. Regulatory Reform: Changes Made to Agencies’ Rules Are Not Always Clearly Documented. GAO/GGD-98-31. Washington, D.C.: January 8, 1998. Regulatory Reform: Agencies’ Efforts to Eliminate and Revise Rules Yield Mixed Results. GAO/GGD-98-3. Washington, D.C.: October 2, 1997. Regulatory Reform: Implementation of the Regulatory Review Executive Order. GAO/T-GGD-96-185. Washington, D.C.: September 25, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Federal regulation is a basic tool of government. Agencies issue thousands of regulations each year to achieve public policy goals such as ensuring that workplaces, air travel, foods, and drugs are safe; that the nation's air, water and land are not polluted; and that the appropriate amount of taxes is collected. Congresses and Presidents have taken a number of actions to refine and reform the regulatory process over the last several decades. Among the goals of such initiatives are enhancing oversight of rulemaking by Congress and the President, promoting greater transparency and participation in the process, and reducing regulatory burdens on affected parties. Over the past two decades Congress has often asked GAO to evaluate the implementation of procedural and analytical requirements that apply to the rulemaking process. The importance of improving the transparency of the rulemaking process emerged as a common theme throughout GAO's body of work. Based on that body of work, this testimony addresses (1) GAO's findings and recommendations regarding federal agencies' retrospective reviews, (2) GAO's findings and OIRA's progress to date on GAO recommendations to improve the transparency of the regulatory review process, and (3) other opportunities for increasing congressional oversight and public participation in the rulemaking process. GAO is not making recommendations in this testimony. In 2007, GAO found that agencies had conducted more retrospective reviews of the costs and benefits of existing regulation than was readily apparent, especially to the public. Requirements in statutes or executive directives were sometimes the impetus for reviews, but agencies more often conducted these retrospective reviews based on their own discretionary authorities. Agencies reported that discretionary reviews more often generated actions, such as amending regulations or changes to guidance. GAO also found that multiple factors, such as data limitations and lack of transparency, impeded agencies' reviews. GAO made 7 recommendations in 2007 to improve the effectiveness and transparency of retrospective regulatory reviews. Among GAO's recommendations were: minimum standards for documenting and reporting completed review results; including public input as a factor in regulatory review decisions; and consideration of how agencies will measure the performance of new regulations. In 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations that addressed each of GAO's recommendations. By executive order, the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA) reviews draft proposed and final rules from executive agencies, other than independent regulatory agencies. Among the purposes of these reviews are ensuring that regulations are consistent with applicable law and the President's priorities and that decisions made by one agency do not conflict with the policies or actions taken or planned by another. Both OIRA and executive agencies are also required to disclose certain information about the review process. In 2003 and 2009, GAO found that the OIRA regulatory review process often resulted in changes to agencies' rules, but the transparency and documentation of the review process could be improved. GAO made 12 recommendations to OMB about the review process. For example, GAO recommended that OMB provide guidance to agencies regarding documentation of the reasons for an agency's withdrawal of a draft rule from OIRA review and the source or impetus of changes made to rules. OMB to date has implemented only 1 of those 12 recommendations—to clarify information posted about the topic and participants in meetings with outside parties on rules under review. GAO believes that its past recommendations still have merit and would improve the transparency of the OIRA review process. GAO's recent work continues to highlight progress in facilitating transparency and public participation as well as room for improvement. In 2012, GAO found that agencies often requested comments when issuing major rules without a notice of proposed rulemaking but missed an opportunity to improve those rules because they did not always respond to the comments. GAO's 2013 review of international regulatory cooperation also found opportunities to better facilitate public participation in these activities. GAO also found that effective international regulatory cooperation requires interagency coordination and effective collaboration with federal agency officials' foreign counterparts. Agency officials stated that they cooperate with their foreign counterparts (1) because they are operating in an increasingly global environment and many products that agencies regulate originate overseas and (2) in an effort to gain efficiencies—for example, by sharing resources or avoiding duplicative work. |
The Federal Reserve has long had a role in the U.S. payments system. One of the major impetuses for the creation of the Federal Reserve was to reduce the potential for disruptions in payments that periodically occurred in the United States. During a financial crisis in 1907 stemming from losses arising from the San Francisco fire and the failure of the Knickerbocker Trust in New York City, payments were largely suspended throughout the country because many banks and clearinghouses, which served as centralized locations for banks to exchange checks for clearing, refused to clear checks drawn on certain banks. These refusals led to liquidity problems in the banking sector and the failure of otherwise solvent banks, which exacerbated the impact of the crisis on businesses and individuals. With the passage of the Federal Reserve Act, Congress established the Federal Reserve in 1913 in part as a response to these events. The Federal Reserve Act also directed the Federal Reserve to supply currency in the quantities demanded by the public and gave it the authority to establish a national check-clearing system. Previously, some paying banks (on which checks had been drawn) had refused to pay the full amount of checks (nonpar collection) and some had been charging other fees to the banks presenting checks to be paid. To avoid paying these presentment fees, many presenting banks routed checks to banks that were not charged presentment fees by paying banks. This circuitous routing resulted in extensive delays and inefficiencies in the check- collection system. In 1917, Congress amended the Federal Reserve Act to prohibit banks from charging the Reserve Banks presentment fees and to authorize nonmember banks as well as member banks to collect checks through the Federal Reserve System. As the nation’s central bank, the Federal Reserve manages U.S. monetary policy, supervises certain participants in the banking system, and serves as the lender of last resort. The Federal Reserve System consists of the Board of Governors in Washington, D.C., and 12 Reserve Banks with 24 branches located in 12 districts across the nation. The Board is a federal agency, and the Reserve Banks are federally chartered and organized like private corporations each with a board of directors and with their shares owned by their member banks. The Board is responsible for maintaining the stability of financial markets, supervising banks that are members of the Federal Reserve and bank and savings and loan holding companies, and overseeing the operations of the Reserve Banks. The Board has delegated some of these responsibilities to the Reserve Banks, which also provide payment services to depository institutions and government agencies. As a result, the Federal Reserve has dual roles as both payment systems operator and as a regulator of payment system participants. The role of the Federal Reserve Banks as a provider of several payment services in the United States contrasts with that of the central banks of other countries. According to a study by the Bank for International Settlements, which provides services to other central banks, of the 13 foreign jurisdictions examined, central banks in 11 operated large value payment transfer systems—as the Reserve Banks do—but only 2 central banks (those in Belgium and Germany)—also operated check-clearing and electronic retail payment networks. To improve the functioning of check services, Congress instituted a par- value (face value) check collection service to simplify the check-clearing process in the Federal Reserve Act, and gave the Federal Reserve operational (through the Reserve Banks) and regulatory (through the Board) roles in check collection. Interbank checks are cleared and settled through a check-collection process that includes presentment and final settlement. Presentment occurs when checks are delivered by the bank that received them—which currently almost exclusively involves transmission of electronic images—to paying banks for payment. The checks may be sent either directly to the paying bank or through another entity—either another bank, a check clearinghouse, or a correspondent bank—that would ultimately deliver them to the paying banks (see fig. 1). The paying banks then decide to honor or return the checks. Settlement ultimately occurs when collecting banks are credited and paying banks debited, usually through accounts held at a Reserve Bank or at correspondent banks that provide check clearing and other services for other institutions. As part of its role in regulating check collection, the Federal Reserve Board promulgated regulations that govern various aspects of these processes, including Regulation CC (which covers how quickly banks must make funds from checks and other deposits available for withdrawal and governs aspects of interbank check collection and return), and Regulation J (which covers how institutions can collect and return checks and other items through the Reserve Banks). To facilitate electronic check processing, some banks can create an electronic image of a paper check at their branches, while others transport the paper to centralized locations where the paper is imaged. After imaging, an image cash letter is assembled and sent directly to a paying bank, an intermediary bank, or to a collecting bank (such as a Reserve Bank or a correspondent bank) or to an image exchange processor for eventual presentment to the paying bank. The Reserve Banks offer imaged check products—FedForward, FedReceipt, and FedReturn—for a fee to banks that use its check collection services to present checks for payment at other institutions. Similarly, other entities that offer check-clearing services charge fees or use other mechanisms to obtain compensation for such services, or institutions may not charge each other when directly exchanging images. The Fedwire Funds Service (Fedwire), the Federal Reserve’s wire payments service, began in 1918 as a funds transfer service and initially used Western Union’s telegraph lines to transmit payments. The current Fedwire network provides a real-time gross settlement system in which about 6,000 participants can initiate electronic funds transfers that are immediate, final, and irrevocable. Depository institutions and others that maintain an account with a Reserve Bank can use the service to send payments directly to, or receive payments from, other participants. Depository institutions also can use a correspondent relationship with a Fedwire participant to make or receive transfers indirectly through the system. Participants use Fedwire to handle time-critical payments (such as settlement of interbank purchases, sales of federal funds, securities transactions, real estate transactions, or disbursement or repayment of large loans). The U.S. Department of the Treasury, other federal agencies, and government-sponsored enterprises also use Fedwire to disburse and collect funds. A private-sector entity, The Clearing House Payments Company L.L.C. (TCH), operates a competing wire transfer service—the Clearing House Interbank Payment System (CHIPS)—that is used for similar purposes as Fedwire. Figure 2 shows how a typical wire transfer payment occurs. In response to concerns over high volumes of paper checks in the payments system, the Federal Reserve worked with the private sector in the 1970s to develop an electronic system to exchange payments known as Automated Clearing House (ACH). These payments are often used for small or recurring transactions, such as direct deposit of payrolls or payment of utility, mortgage, or other bills. The Reserve Banks’ Retail Payments Office operates an ACH payment network (called FedACH). By agreement (in the form of an operating circular), ACH transactions are conducted under rules and operating guidelines developed by a nonprofit banking trade association, NACHA (formerly the National Automated Clearing House Association). With limited exceptions, Federal Reserve staff indicated that the Reserve Banks incorporate the association’s rules by reference in their ACH operating circulars, which represents the agreement between a Reserve Bank and its customers on the terms and conditions of the FedACH services. TCH also operates its own ACH network—the Electronic Payments Network—through which its members can transmit and receive ACH payments to or from the customers of their institutions. The Federal Reserve and TCH exchange ACH payments originated by their customer institutions that are bound for institutions using the other’s ACH network. Both the sending and the receiving institutions typically are charged fees for ACH transactions. Figure 3 illustrates a typical ACH payment. In 1980, Congress enacted changes that expanded the role of the Federal Reserve in the payments system. The Monetary Control Act of 1980 (Monetary Control Act) extended the Federal Reserve’s reserve requirements to all depository institutions, not just member banks of the Federal Reserve. The act also allowed the Reserve Banks to offer payment services to all depository institutions that had previously been available at no cost to their members. Part of the legislative history of the Monetary Control Act indicates that since the act required nonmember institutions to meet reserve requirements, it was reasonable to also provide such institutions with access to Reserve Bank payment services. At this time, the act required the Federal Reserve to begin charging all institutions for such services. Because this change placed the Reserve Banks and private-sector providers of payment services in competition with each other, the act included certain requirements to encourage competition between the Reserve Banks and private-sector providers to ensure provision of payment services at an adequate level nationwide. The Monetary Control Act required the Board to establish a fee schedule for Reserve Bank payment services, under which all services are required to be priced explicitly. The act also required that over the long run, fees be established on the basis of all direct and indirect costs actually incurred in providing the priced services, including imputed costs that would have been incurred by a private-sector provider, giving due regard to competitive factors and the provision of an adequate level of such services nationwide. In describing the policies adopted to implement the requirements of the Monetary Control Act, the Board stated that the act’s legislative history indicated Congress sought to encourage competition to ensure that these services would be adequately available nationwide and at the lowest cost to society. According to these Board policies, the Reserve Banks provide payment services to promote the integrity and efficiency of the payments mechanism and ensure that payment services are provided to all depository institutions on an equitable basis and in an environment of competitive fairness. In participating in the payments system, the Federal Reserve has taken various actions to make the system more efficient. For example, in the 1950s the Federal Reserve contributed to the adoption of magnetic ink character recognition, which allowed routing and other processing information to be printed in machine-readable ink on the bottom of the check’s face, which helped automate check processing. As discussed earlier, the Federal Reserve worked with the private sector to develop the ACH system in the 1970s. Initially, ACH volumes were low with most volume growth attributed to government-initiated transactions, because high startup costs made private-sector banks reluctant to invest in and use the network. For a few years following the implementation of the Monetary Control Act, the Federal Reserve subsidized the ACH network, which helped the network obtain sufficient volume to become successful. To improve the clearing of checks, Congress passed the Check Clearing for the 21st Century Act (Check 21), which became effective October 28, 2004, which was legislation supported by the Federal Reserve. Check 21 facilitates check truncation, which is the substitution of the original physical check with a legal equivalent (called a substitute check). According to the trade association that establishes rules for exchanging check images, checks are generally processed as images. In 1998, a committee of senior Federal Reserve executives examined whether the Federal Reserve’s participation in the payments system remained justified in light of changes occurring in the financial services and technology sectors at the time. This committee’s report addressed the results of its review of the role the Federal Reserve played in the use of checks and ACH payments in the retail payments system, including considering whether any changes in its role could affect the integrity, efficiency, and accessibility of this system. After examining check- clearing activities, the committee concluded that Reserve Banks’ withdrawal from the check collection market would disrupt the system in the short-run, with little promise of substantial benefit over the longer run. The committee noted that withdrawing from check clearing could increase check collection prices to small and remote depository institutions and could disrupt the migration from paper to electronic payments. Similarly, the report concluded that having the Reserve Banks remain in the ACH market would be more conducive to the future efficiency and migration to electronic payments, including joint efforts with industry participants to spur innovation in products and increase ACH usage. In addition to the Reserve Banks, other entities offer payment system services to financial institutions. To process check payments, financial institutions can set up direct, individual connections with other financial institutions with which they can exchange check images for clearing of checks drawn on the accounts of their respective customers. Institutions also can submit their checks to clearinghouses that process and transmit check image files for clearing to the respective clearinghouse members on which the checks are drawn. For example, in addition to operating the only other ACH and wire transfer networks that compete with the offerings of the Federal Reserve, TCH also acts as a clearinghouse for check images. Other competitors that provide checking services include correspondent banks, bankers’ banks, and corporate credit unions. The financial institution customers of these entities will send or receive their checks, ACH payments, or wire transfers using these entities’ systems, which may pass them to other entities, including individual institutions, TCH, or the Reserve Banks, for processing. Some financial institutions also use nonfinancial third-party data processors that aggregate payments for these services and route them to other entities, including the Reserve Banks or their competitors, for processing. From 2000 through 2012, total noncash payments grew, and check volumes declined, as the use of other payments types increased. According to data the Federal Reserve reported in 2013, noncash payments—including those made with debit cards, credit cards, ACH, and prepaid cards (but excluding wire transfers)—grew almost 69 percent from 2000 to 2012. The fastest growing payment method was debit cards, whose use grew by more than 466 percent over this period. The number of ACH payments also grew by more than 255 percent, while the number of check payments declined by more than 56 percent. Figure 4 shows how the use of payment types changed in this period. The changes in the relative use of the various payment methods largely reflect consumers switching from check use to card-based or other payment methods. According to the Federal Reserve’s analysis, consumers wrote about 8 billion fewer checks to businesses in 2012 than they had in 2006, and businesses wrote 4 billion fewer checks in 2012 to consumers or other businesses than they had in 2006. Federal Reserve staff noted that although check volumes have declined, the dollar value of payments made by checks—estimated by the checking industry association to exceed $20 trillion in 2013—indicates that checks are still an important payment method in the United States because businesses continue to use them to make payments to other businesses. The growth in ACH payments encompassed its increased use for making various types of payments, including for payroll deposits and automatic bill payments, as well as increased use by consumers to make one-time payments over the Internet. Although it had not obtained the volume of wire transfers as part of past triennial reports, the Federal Reserve analysis estimated that more than 287 million wire transfers occurred in 2012, with a combined value of about $1,116 trillion. Consumer senders accounted for just 6 percent of total wire transfers in 2012. The Federal Reserve Banks incur various costs as part of their provision of payment services. To fully account for these costs, the Federal Reserve uses a detailed accounting system for accumulating and reporting cost, revenue, and volume data for the payment and other services Reserve Banks conduct. The Federal Reserve’s cost-accounting practices generally align with those used in the private sector and with cost-accounting standards for federal entities. As part of setting fees for its payment services, the Federal Reserve is required to also impute some additional costs that it would have incurred if it were a private entity. Although various options could be used to calculate these imputed costs, each with their own trade-offs or methodological challenges, the current methodology the Federal Reserve uses appears reasonable. However, the Federal Reserve is not currently including certain costs that its private-sector competitors may incur, including costs related to integrated planning for recovery and orderly wind down of operations. According to Federal Reserve data from 1996 through 2015, the Federal Reserve Banks generally recovered the identified costs of providing payment services, as required by the act. Although the Federal Reserve has various internal controls to help ensure it accurately captures its payment services costs, it has not obtained a detailed, independent evaluation of the reliability of these processes in over three decades. The Federal Reserve Banks use a detailed cost accounting system that helps them meet several requirements relating to how to set the fees charged for payment services and account for and recover the costs incurred in providing them. The Monetary Control Act requires that over the long run the Federal Reserve’s fees be established on the basis of all direct and indirect costs incurred in providing payment services, and an allocation of imputed costs that would have been incurred by a private- sector provider. Because the Board must set fees based on the total of these costs, failure to account for all of its actual costs could result in the Federal Reserve underpricing its services and competing unfairly with private-sector providers. According to data provided to us by the Federal Reserve, the Federal Reserve Banks incurred over $410 million in actual costs as part of providing payment services in 2014. These costs include personnel costs, such as salaries and benefits of employees who perform payment services activities, as well as those associated with equipment, materials, supplies, shipping, and other costs for payment services activities. Additionally, costs associated with overhead and support services (activities benefitting multiple Reserve Banks, but performed under a centralized function) are allocated to the payment services. For example, expenses associated with functions such as sales and accounting are categories of support costs for payment services activities. The majority of the actual costs the Federal Reserve incurs in providing payment services—78 percent in 2014—are support costs related to activities such as developing software applications, implementing information security, and providing help desk services. The Planning and Control System (PACS) Manual for the Federal Reserve Banks establishes cost-accounting policies and provides a uniform reporting structure for accumulating and reporting cost, revenue, and volume data for the payment and other services conducted by the Reserve Banks. This system establishes a set of rules and procedures used to determine the full cost of these services. Costs are accounted for at the individual Reserve Bank level and subsequently aggregated to reflect costs for all payment services throughout the Federal Reserve System. Federal Reserve staff told us that the cost-accounting practices in the PACS manual generally align with practices used in the private sector. Additionally, based on our analysis, these practices align with cost- accounting standards developed for federal entities. While generally accepted accounting standards exist for the preparation of financial statements, no single set of authoritative or uniform standards have been developed that apply to the cost accounting practices used in the private sector. In the private sector, systems like PACS typically are used to provide management with internal information for making decisions on cost efficiency and capability. Although no single or uniform set of standards apply to cost accounting practices in the private sector, Federal Reserve staff acknowledged that information from PACS helps them manage their operations similar to the way in which other organizations use cost accounting information. However, they noted that their cost accounting system is detailed and granular to ensure that they account for all costs when pricing their payment services as required. The Board engaged an independent public accounting firm to conduct an evaluation of its payment services pricing methodology in 1984. This accounting firm’s evaluation included testing whether costs incurred by the Reserve Banks were adequately captured and whether support and overhead costs were appropriately allocated. This auditor’s report concluded that the Federal Reserve’s accounting and reporting systems that captured its payment services revenues and costs were operating effectively. In addition, the accounting firm noted that its testing confirmed that PACS had adequate controls that were being followed and ensured that costs were being accurately captured. Furthermore, representatives of the independent public accounting firm that conducted the 2014 financial audit of the financial statements of the Federal Reserve System told us that the Reserve Banks have thorough and redundant internal controls for financial reporting even in comparison to many commercial organizations. The representatives of this firm told us that their audits of the expense categories that appear in the Federal Reserve’s financial statements had not identified significant problems. They noted that this likely reflected the Federal Reserve’s thorough system of controls. However, the representatives of this firm told us that they had not audited the expenses allocated to the payment services specifically. In addition, our analysis indicated that the Federal Reserve’s cost accounting practices aligned with broad cost accounting standards for federal entities. The Federal Accounting Standards Advisory Board developed the Statement of Federal Financial Accounting Standards 4: Managerial Cost Accounting Standards and Concepts (SFFAS 4) to help federal entities provide reliable and timely information on the full cost of federal programs. Reserve Banks are not required to comply with these accounting standards because they are not a government agency but rather federally chartered corporations. However, to provide one measure of the quality of the Federal Reserve’s practices, we compared PACS with the requirements of the cost accounting standard for federal entities. SFFAS 4 directs government entities to meet five standards for their cost accounting, and our analysis indicated that the Federal Reserve’s PACS addressed each of these. For example, as prescribed in SFFAS 4, PACS defines specific responsibility segments and provides the Reserve Bank a process for accounting for the full costs of their services. Based on this analysis, we concluded that the design of the Federal Reserve’s system generally aligned with the elements recommended by the standard. See appendix II for further details on the Reserve Banks’ cost accounting practices. Based on our analysis and discussions with market participants and financial experts, the methodology the Federal Reserve uses to calculate imputed payment services costs appears reasonable, but some market participants noted that alternate methodologies might be more appropriate. As previously discussed, the Monetary Control Act requires the Federal Reserve to establish fees on the basis of direct and indirect costs, including an allocation of imputed costs which takes into account the taxes that would have been paid and the return on capital that would have been provided if a private firm had provided the services. The total of the imputed costs and return on capital is referred to as the private- sector adjustment factor (PSAF). The Board approves the PSAF annually as part of its annual process for approving fees for the Reserve Banks’ priced services. The PSAF methodology calculates four additional costs that a typical private-sector payment services provider would incur: debt financing costs, equity financing costs (or return on equity), taxes, and payment services’ share of Federal Reserve Board expenses. See appendix III for further details on the PSAF methodology. Over the years, the PSAF has declined significantly, following similar trends in declining transactions, revenues, and assets associated with the Federal Reserve Banks’ payment service activities. Following declining payment services revenues and assets, as well as changes in practices among payment services customers, the total imputed costs arising from the Federal Reserve’s PSAF calculations declined from $150 million in 2002 (or an inflation-adjusted basis of nearly $194 million using 2015 dollars) to $13 million in 2016. However, as a percentage of total payment services assets, the PSAF increased slightly from 1.3 percent to 1.5 percent during this period. Federal Reserve staff said that they use publicly available information to calculate the imputed elements of their PSAF methodology and publish the methodology and its results annually in the Federal Register. Additionally, all proposed and finalized changes to the PSAF methodology, as well as a summary of the public comments on these changes, are published in the Federal Register and posted to the Federal Reserve’s website. Federal Reserve staff indicated that they follow this approach to help ensure that the PSAF methodology is transparent and that its results can be more easily verified by the private sector. As part of its attempts to improve its accuracy and conform the PSAF to changes in the payment system market, Federal Reserve staff noted that the Board has made numerous changes to the methodology over the years. The Federal Reserve staff said that they consider changes to the PSAF methodology when conditions in the marketplace or industry suggest that practices in the markets or other changes have occurred that should be considered in the methodology for imputing costs. They said that in those situations they evaluate different options to improve the methodology and request public comments on the strongest options before adopting a new approach. We reviewed the changes made between 1980 and 2014 and found that the Federal Reserve had publicly sought comment on significant changes to its PSAF methodology 10 times during this period. These include changes to how the return on equity is calculated and to the peer group used to approximate the levels of debt and equity in the model. See appendix III for further details on changes to the PSAF methodology over time. Private-sector market participants have criticized the Federal Reserve for not accounting for or imputing into the PSAF certain regulatory compliance costs that private-sector providers incur. These costs include those associated with federal antimoney-laundering requirements, increased audit and risk management, overseeing the risks posed by service vendors, and integrated planning for recovery and wind down of operations. The Federal Reserve has said that it accounts for some of these costs as actual expenses incurred by the Reserve Banks, and that it has been considering how the other costs might be incorporated into the PSAF. In May 2015, the Electronic Check Clearing House Organization (ECCHO) submitted a letter to the Board expressing concerns over the Federal Reserve’s failure to account for certain costs being borne by private-sector check services providers and urged it to conduct a complete (de novo) competitive impact analysis of the Reserve Banks’ check image services. ECCHO specifically noted that many of its members that provide check processing services to other institutions incur costs associated with compliance with federal antimoney-laundering requirements. In a written response sent in December 2015, the Chair of the Federal Reserve Board’s Committee on Federal Reserve Bank Affairs said that if private-sector banks incur material antimoney-laundering compliance costs related to their check collection services that the Reserve Banks do not, it might be appropriate for Reserve Banks to impute such costs as part of the PSAF. However, Federal Reserve staff said that correspondent banks have informed them that determining the proportion of antimoney-laundering costs that relate to check services specifically would be difficult, because they do not allocate compliance costs directly to this service. Federal Reserve officials said in their response to ECCHO that, while they did not see the need for the complete competitive impact analysis that ECCHO requested, they continue to consider how they could identify ways to incorporate these costs into the PSAF methodology if they are material. However, until the Federal Reserve determines and implements such costs into the PSAF, the imputed costs will not reflect these actual expenses incurred by many of the Federal Reserve’s competitors. Additionally, enhanced regulatory standards, including those that apply to entities designated as systemically important financial market utilities, have raised regulatory compliance costs for the Federal Reserve’s key competitor. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, entities engaged in payment, clearing, or settlement activity must be designated as systemically important by the Financial Stability Oversight Council if the Council determines that the failure of or a disruption to the functioning of the entity could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system. Such entities then become subject to heightened prudential and supervisory provisions intended to promote robust risk management and safety and soundness. The act required the Federal Reserve to issue rules to prescribe risk-management standards for those financial market utilities designated as systemically significant for which the Board is the supervisory agency. In November 2014, the Board issued amendments to Regulation HH, based on the international risk- management standards for payment services that are systemically important developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO). Regulation HH requires designated financial market utilities to implement rules, procedures, or operations designed to ensure that the financial market utility meets or exceeds various standards, including, among others, those relating to its governance, risk management and credit risk. For example, the entity must have an integrated plan for its recovery and orderly wind down, maintain unencumbered liquid financial assets sufficient to cover the greater of the cost to implement its recovery and orderly wind-down plans and 6 months of current operating expenses, and hold equity greater than or equal to the amount of unencumbered liquid financial assets required. Representatives from TCH told us that complying with these standards has increased their regulatory compliance costs and that they question the extent to which the Federal Reserve has appropriately incorporated these costs into the PSAF. TCH estimated that their efforts to comply with these requirements have increased their operating costs by 10 percent, including additional costs associated with their Risk Office that conducts activities related to information technology security, risk management, liquidity risk and orderly recovery and wind-down planning, among other things. They also said that they incur greater costs associated with responding to their customers’ due diligence reviews regarding vendor management, an element of the federal bank examination process in which federal bank examiners evaluate a financial institution’s third-party relationships as a component of their overall risk- management processes. The Federal Reserve has incorporated some, but not all, of these expenses into the imputed costs it calculates as part of the PSAF. Federal Reserve staff have said that although the Reserve Banks’ payment services are not always subject to the same regulatory regime as similar services provided by the private sector, the Reserve Banks are subject to Board supervision and that these oversight costs are already included in the PSAF as Board expenses and are being recovered through revenue from the services. Additionally, Federal Reserve staff told us that the Reserve Banks have devoted increased resources to audit and risk management functions and that costs associated with these functions—including additional personnel—are captured in PACS as internal audit costs at the product line level. Federal Reserve staff said that the amount of these costs had increased in recent years as they hired additional staff to perform expanded oversight activities. Additionally, in order to foster competition with private-sector financial market utilities that are required to hold liquid net assets funded by equity to manage general business risk, the Federal Reserve Board requires the Fedwire Funds service to impute equity held as liquid financial assets equal to 6 months of estimated current operating expenses. To meet this requirement the Fedwire Funds service imputed an additional $2.7 million in equity above the $51.1 million it imputed to meet other capital requirements. This additional imputed equity, at the equity financing rate in the 2016 PSAF, resulted in the Federal Reserve having to recover additional imputed financing costs of $265,000. Federal Reserve staff also clarified that, as a service provider of last resort, the Fedwire Funds Service is subject to unique requirements that do not apply to CHIPS. For example, the staff noted, Reserve Banks have incurred (and continue to incur) substantial expenses in recent years to develop, implement, and test manual procedures for settling systemically important transactions in the unlikely event that the Fedwire Funds Service automated systems are not available. Additionally, Federal Reserve staff told us that they also receive inquiries from customers conducting vendor management due diligence. Federal bank examiners told us that they have not noticed any differences in how either the Reserve Banks or TCH respond to questions from financial institutions on their vendor relationship and that in the course of an examination they would look at an institution’s relationship with the Federal Reserve the same way as they would view an institution’s relationship with TCH. However, the Federal Reserve has not incurred or imputed costs related to a plan for recovery and orderly wind down that is required of CHIPS. In a 2014 request for comment on revisions to its Policy on Payment System Risk, the Board noted that Fedwire services do not face business risk that would cause the service to wind down in a disorderly manner and disrupt the stability of the financial system because the Federal Reserve, as the central bank, would support a recovery or orderly wind down of the service, as appropriate, to meet public policy objectives. As a result, Federal Reserve staff said, the Board currently does not require the Fedwire service to develop recovery or orderly wind-down plans or to estimate or impute the costs of developing those plans. However, estimating what these costs would be for its own operations if it were a private firm and including them in its PSAF methodology would enable the Federal Reserve to more completely impute costs that it would have incurred as a private firm in order to meet its cost recovery goals. As previously noted, the Monetary Control Act states that the Federal Reserve must impute certain costs for its payment services that would have been incurred if a private firm had provided them. Additionally, the act states that the Federal Reserve’s pricing principles shall give due regard to competitive factors and the provision of an adequate level of services nationwide. However, the act does not specify exactly how the Federal Reserve should impute these costs and various ways could reasonably exist to do so. The Federal Reserve has stated that there is no perfect private-sector proxy for imputing these costs and that the PSAF methodology represents a reasonable approximation of the costs, though some market participants have criticized the methodology. Nevertheless, some market participants have questioned the appropriateness of the Federal Reserve’s current PSAF methodology. Representatives from TCH said that the PSAF should be calculated using a peer group comprising payments-processing companies. They noted that in 2015 their company’s equity capital was materially larger than the imputed equity levels calculated by the Federal Reserve. However, neither the Board’s rule on risk management standards for systemically important financial market utilities that it regulates nor the international framework for addressing risks of financial market utilities on which it was based dictates any specific equity requirements other than to hold at least 6 months of current operating expenses funded by equity for liquidity reasons and equity greater than or equal to the amount of liquid net assets required. Some have argued that the Federal Reserve’s current approach for imputing debt and equity into the PSAF—in which it uses financial data from all U.S. publicly traded firms in Standard and Poor’s Compustat database—does not sufficiently reflect the financial activities that its payment services represent. Furthermore, the U.S. publicly traded firm market includes many firms that are engaged in industries outside of payment services that may be even less similar to the Federal Reserve than is TCH. However, Federal Reserve staff said that basing the imputed debt and equity levels on a peer group consisting of firms providing payment services, such as large bank holding companies, is not optimal because such firms engage in many different lines of business and have risk profiles dissimilar to the payment services provided by the Reserve Banks. Additionally, the Federal Reserve has noted that a methodology based on all publicly traded firms decreases the risk of price volatility that could result from changes in the characteristics or financial results of a limited peer group. If the Federal Reserve’s product pricing had to vary widely each year because of large variability in the PSAF, such volatility could be disruptive to its customers and the payment systems market. Furthermore, the PSAF methodology uses data in the public domain to help ensure that the PSAF calculation is replicable and transparent. Federal Reserve staff noted that the Monetary Control Act states that all Reserve Bank services shall be priced explicitly, which the Board interprets as being fully transparent in their pricing. Many private-sector payment services providers, including TCH, are not publicly traded and do not provide publicly available financial information, which, if used to calculate the PSAF, could hamper the Federal Reserve’s goal of maintaining the transparency and replicability of its methodology. Transparency can be an important goal, and our 2000 report included recommendations that the Federal Reserve implemented to increase the transparency and involvement of market participants in its pricing activities. As noted, the Federal Reserve has attempted to use different methodologies for calculating the PSAF, including previously using the financial data from a peer group of bank holding companies to calculate the PSAF’s target return on equity. Although the Federal Reserve no longer bases the PSAF methodology’s peer group on the top 50 bank holding companies, the resulting equity financing rates have remained similar. We reviewed the return on equities for the top 50 bank holding companies from 2006 through 2015, and found that the average pre-tax return on equity was 10.5 percent for these bank holding companies, which is similar to the 10.1 percent pre-tax return on equity used in the Federal Reserve’s 2015 PSAF calculation. Because the PSAF is a proxy for private-sector costs and profit dependent on a range of variables, and because of the Reserve Banks’ unique structure and operation and the lack of perfectly comparable private-sector competitors, the calculation of the PSAF amount involves trade-offs and assumptions that could be reasonably debated. For example, assumptions on how to impute the return on equity in the methodology can dramatically affect the overall figure. However, as previously noted, changing the way the equity is imputed to include nonpublic financial information might come at the cost of transparency and replicability of the methodology. While the Federal Reserve’s approach seems reasonable, any single PSAF figure calculation could be reasonably criticized based on the assumptions made and trade-offs chosen. Likewise, different trade-offs and assumptions could result in higher or lower PSAF figures. We asked three finance experts to review the Federal Reserve’s PSAF methodology. All three experts said that the methodology and the assumptions used to make the calculations seemed reasonable. One finance professor said that specific assumptions on rates that the Federal Reserve uses were standard assumptions to use, though there may be some disagreement within each one, which could be expected. Another finance professor said that the Federal Reserve’s approach appears to be reasonable without being unnecessarily complex, and added that any alternative models might add more complexity for little benefit. We also reviewed the methodology and the changes made from 2005 through 2014 and determined that many of the assumptions used rely on professional judgments and involve trade-offs between precision and ease of calculation. For example, the Federal Reserve simplified its calculation for computing the methodology’s equity financing rate in 2005. Previously, the methodology averaged the results of three separate financing models based on (1) the return on equity investors would demand based on the risk in the market, (2) the average 5-year ratio of net income-to-book value of equity among a peer group of bank holding companies, and (3) a forward-looking approach estimating the discounted present value of all future cash flows. Ultimately, the Board changed the methodology to use only the model based on the expected rate of return on equity that investors would demand based on the risk in the market, because they considered this approach to be a well-known, generally accepted, and theoretically sound model that is simpler and more transparent than other approaches. In 2005, this change reduced the PSAF from the $161 million it would have been under the three-model approach, to $90.8 million under the simplified one-model approach. However, annual fluctuations in peer group earnings or in projected cash flows could have made the PSAF lower under the three-model approach than under the one-model approach in a given year. According to Federal Reserve reporting on cost recovery rates from 1996 through 2015, the Reserve Banks have recovered or come close to recovering all actual and imputed costs for all of their payment services. As noted previously, the Monetary Control Act requires fees to be established, over the long run, on the basis of the costs actually incurred, and an allocation of the imputed costs that would have been incurred by a private-sector provider. To meet this mandate, the Board has developed an internal goal of recovering 100 percent of its costs for all its explicitly priced payment services over a 10-year period. Federal Reserve staff told us that the Monetary Control Act did not provide a specific definition of “over the long run,” but they used 10 years for their targeted recovery time frame. The Federal Reserve annually reports how well it has met its 100 percent recovery goal over 10-year periods. As shown in figure 5, in the rolling 10- year periods that cover 1996-2015, the Federal Reserve achieved at least a 97.9 percent recovery for every 10-year period during this span. However, a relatively low-cost recovery rate of 85.1 percent in 2003 lowered the 10-year rates for eight of the periods. In 2003, the Federal Reserve’s check services had a net loss of more than $65 million that the Federal Reserve attributed to significant one-time costs related to consolidation activities, a decline in volumes, and greater use of products with lower margins. The significant loss in that one year resulted in the Federal Reserve falling short in achieving its 100-percent cost recovery goal in each of the ten periods that included 2003 in the calculations. The Federal Reserve’s cost recovery rates in the three most recent periods— none of which include the 2003 cost recovery figures—exceeded 100 percent. Although the Federal Reserve Banks generally have come close to recovering all of their actual and imputed costs for their payment services in aggregate, the extent to which individual payment services recovered their costs varied more widely from year to year (see table 1). Cost recovery variations between products in a given year may be due to circumstances specific to those products. For example, in 2014, the Federal Reserve Banks’ ACH service recovered 86.7 percent of its costs. The lower rate was due to a nearly $32 million charge incurred that year associated with a multiyear technology initiative that was to have modernized a processing platform but had been suspended that year. In contrast, in the same year, greater-than-expected check volume resulted in cost recoveries of more than 115 percent for that product line, which helped the Federal Reserve Banks achieve their overall cost recovery goals for that year and in the 10-year periods that included 2013 and 2014. From 2005 to 2014, annual revenues and expenses across the Federal Reserve Banks’ payment service products varied. Since 2005, the total revenue the Federal Reserve Banks earned from providing check, ACH, and wire transfer services declined by nearly 54 percent, from about $881 million in 2005 to $409 million in 2014 (a decline of nearly $1.1 billion to $414 million, almost 61 percent in 2015 dollars). This decline was largely due to a steep reduction in the expenses and imputed costs related to the Federal Reserve Banks’ check services, which corresponded with the transition to digital check images and the decline in commercial check transactions. From 2005 to 2014, the number of checks the Federal Reserve Banks processed fell from 12.2 billion to 5.7 billion. The decline in expenses correspondingly reduced the need for the Federal Reserve Banks to obtain as much revenue from this product line (that is, to achieve cost recovery). Check service revenue fell from over $740 million in 2005 to almost $175 million in 2014, which was a decline from $888 million to nearly $177 million in 2015 dollars (see fig. 6). In contrast, total revenues for ACH and Fedwire increased from a combined total of about $140 million in 2005 to over $234 million in 2014. In inflation-adjusted 2015 dollars, this equals an increase of almost $69 million. Federal Reserve staff said that the cost structures for each of the check, ACH, and wire payment services have significant differences. For example, check clearing is more labor-intensive than the other services and consequently incurs more personnel costs as a share of its expenses. In 2015, personnel costs for check services represented more than 15 percent of that service’s operational costs, while personnel costs represented less than 3 percent of operational costs for Fedwire. Federal Reserve staff identified personnel, information technology services, and software application development as key cost drivers for the payment services. Although the Federal Reserve appears to have a sound system for capturing its payment services costs, it has not obtained an independent review involving detailed testing of the accuracy of its cost accounting process in more than 30 years. As previously noted, in 1984, shortly after it was mandated to capture and recover these costs, the Board had an external review by an independent public accounting firm of its pricing methodology, including evaluations of its cost accounting PACS process and the PSAF. At that time, the accounting firm’s report concluded that the processes the Federal Reserve had implemented to capture its costs were sound and that the overall PSAF methodology was logical and complied with the Monetary Control Act. The Federal Reserve obtains some assurance that cost accounting practices for its payment services continue to be adequate from a unit within the staff of the Board that conducts rotating reviews of the Reserve Banks’ operations. Federal Reserve staff said that this unit reviews all the Reserve Banks on a triennial basis (4 of the 12 banks each year) to evaluate each bank’s effectiveness in producing reliable expense information in compliance with PACS manual requirements. These reviews examine the processes and controls relating to the cost-allocation processes (including how expenses related to centrally provided information technology activities are allocated) and internal support charges. In these reviews, this internal unit identifies deficiencies and control weaknesses and makes recommendations for improvement. In addition, we reviewed the reviews the internal unit performed of the 12 Reserve Banks and of the Federal Reserve Information Technology group between 2012 and 2015. Although some of these reviews noted deficiencies with how the Reserve Banks were complying with the cost accounting practices prescribed in the PACS manual, these issues were characterized as “minor” or “less-significant” by the reviewers and, according to Federal Reserve staff, did not result in any material cost distortion. In addition, we reviewed a sample of nine audits that Reserve Banks’ internal auditors had completed since 2011. Of these nine audits, eight included reviews of controls relating to cost accounting practices. All of the reviews concluded that overall management controls were “effective” and one which provided a “generally effective” assessment. External audits of the financial statements of the Federal Reserve System overall and of the individual Reserve Banks are conducted annually. However, these audits do not include detailed testing of the accuracy of the processes used to capture or allocate costs associated with the payment services, and thus the Federal Reserve does not obtain specific assurance about the accuracy of these practices. Although staff from the independent public accounting firm that conducted the Federal Reserve’s financial audit in 2014 told us that the Federal Reserve Banks have thorough processes, their audits did not include steps to review payment services costs and revenues because these costs were not in the scope of the audit. The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) Internal Control-Integrated Framework—a leading framework for designing, implementing, and conducting internal control and assessing the effectiveness of internal control—states that compliance with applicable laws and regulations is a key objective for an organization establishing internal controls. Under this framework, a key means of providing such assurance can be the performance of monitoring activities, which includes the use of an independent third party to perform specific evaluations of whether aspects of an organization’s internal controls are present and functioning. The annual financial audit does not address the Federal Reserve’s payment services, representatives from the accounting firm told us, because they do not meet the materiality threshold. However, the Federal Reserve Banks must accurately capture their costs to ensure the Board is meeting the mandate in the Monetary Control Act for the Board to set fees on the basis of all direct and indirect costs. The Federal Reserve believes that the internal controls of the Reserve Banks, internal audits by the Reserve Bank audit departments, and the review process and examinations by the Board of Governors staff are adequate for reasonably ensuring the accuracy of its accounting of costs associated with payment services. Although we analyzed the processes by which the Federal Reserve accounts for actual and imputed costs, we did not include detailed testing of the Federal Reserve’s calculations or cost accounting controls related to its priced services activities. By obtaining periodic independent reviews to determine if the practices used to capture all costs directly incurred by payment service activities and the methods used to identify costs arising in other areas that should be allocated to payment services are sound and that staff are adequately complying with these practices, the Federal Reserve could attain greater assurance that it is complying with its requirements under the Monetary Control Act to set fees on the basis of all direct and indirect costs. The Reserve Banks have added new services and fee structures (including volume-based pricing) for customers to help ensure that they retain adequate revenues to maintain their presence in the market. Financial institution customers we interviewed generally were satisfied with the Reserve Banks’ services and fees; however, some competitors questioned the fairness of some Reserve Bank pricing practices such as bundling discounts and volume-based pricing. To help ensure that the Reserve Banks compete fairly, the Board has established pricing policies and processes for assessing the competitive effects of changes to the Reserve Banks’ payment fees and services. Although the Reserve Banks’ actions may be affecting some competitors’ profitability, our analysis of the Reserve Banks’ fee and volume trends suggests that their actions to compete appear to have reduced payments services costs for some users to date. In response to changes in the product market for payments, and in an effort to generate sufficient revenues to achieve full cost recovery, the Federal Reserve has added new products and pricing structures. According to Federal Reserve documents, the Reserve Banks have introduced new services and pricing structures to retain existing customers and attract volume from both existing and new customers. As noted earlier, the Reserve Banks provide payment services both to promote the efficiency of the payments mechanism and to ensure that payment services are provided to all depository institutions on an equitable basis. To achieve this, the Reserve Banks expanded the use of pricing structures that provide discounts to customers that send them higher volumes of transactions to process. In 1993, the Board approved volume-based fees for the Reserve Banks’ noncash collection service and several check products. One of the objectives of adopting volume- based fees at that time was to encourage more efficient use of payment services (by addressing differences in demand through fees). In approving these fees, the Board asked its staff to recommend guidelines on the use of volume-based fees, which were then adopted in 1997 and published in the Federal Register. At that time the Board also approved specific volume-based fees for the ACH origination service. In 2010, the Reserve Banks expanded this practice by introducing several volume- based pricing tiers for customers receiving ACH transactions. The new pricing tiers charge customers lower per-item fees as transaction volumes with the Federal Reserve increase. The Reserve Banks also introduced fixed monthly fees to retain or increase their payment services revenues. In 2009, the Board approved a new monthly participation fee for the Reserve Banks’ Fedwire service in addition to the per-item charges. Originally set at $60 per month, by 2014 this fee had increased to $90. For the ACH service, the Board approved a new monthly minimum fee in 2010, which was $25 for customers that originated payments and $15 for customers that received payments. By 2015, these fees had risen to $35 and $25, respectively. Because fixed expenses constitute much of the costs of providing these services, Federal Reserve staff said that adding fixed fees was their way of better matching pricing structures to corresponding cost structures. In addition to pricing changes, the Reserve Banks have introduced discounts to benefit customers that use them to process transactions for multiple payment products. For example, customers that transact at least 90 percent of their ACH payments a month through the Reserve Banks and enable electronic receipt of checks from the Reserve Banks for all of their routing numbers can receive a per-item fee discount on certain check-clearing transactions. According to Federal Reserve staff, this allows them to reward customers that use multiple services with a discount in one of those services, which increases the likelihood that these customers will continue to use the Federal Reserve. Reserve Bank customers with whom we spoke generally were satisfied with the services and pricing they received, but some competitors raised concerns about the fairness of a number of pricing practices. Representatives of Reserve Bank customers—12 banks and credit unions that were selected, in part, using random selection across three asset size groupings—with whom we spoke generally were satisfied with the Reserve Banks’ service offerings and prices. Representatives of seven institutions said that they thought the Reserve Banks’ pricing of payment services was reasonable and competitive. For example, representatives from one large credit union said that the Federal Reserve’s prices are low and that they also provided a good service. Representatives from two other institutions said that they valued the Reserve Banks above private-sector providers for other reasons. For example, the representative of one small community bank said that, while private-sector payment service pricing generally may be lower or even significantly cheaper, the bank will continue to use the Reserve Banks’ services because doing so allows it to remain independent and provide top-quality service to its customers without depending on a private-sector provider. A representative of a large credit union said that, while the credit union might be able to get more favorable pricing from private-sector providers, the difference would not be enough to warrant switching from the Reserve Banks. The representative added that the credit union had confidence in the Reserve Banks’ services and felt that the Reserve Banks were looking out for its interests. For the remaining three institutions, representatives from two said that, while they did not have much insight into the pricing of providers they do not use, they generally believe that pricing was comparable or competitive between the Federal Reserve and the private sector. A representative of one of the three institutions told us that the institution switched to the Federal Reserve in 2007 because of unhappiness with the fees and service of its private-sector provider. Representatives from one institution said that the Federal Reserve and private-sector pricing was similar for checks and wire payments, but not for ACH payments, where they said the Federal Reserve had better prices. However, some private-sector competitors with whom we met expressed concerns with the fairness of some of the Federal Reserve’s pricing practices, specifically in the following areas: bundling discounts, volume- based pricing, the competitive environment for check clearing, the ACH interoperator fee, cost effectiveness, and the Federal Reserve’s ability to innovate. TCH—the Reserve Banks’ largest competitor in general and their sole competitor in ACH and wire payment services—stated that a bundling discount offered by Reserve Banks to customers that use multiple payment services unfairly take advantage of the Federal Reserve’s unique market position. Specifically, TCH staff said that the Federal Reserve’s Retail Payments Premium Receiver product, which rewards banks that transact a higher volume of ACH transactions with the Reserve Banks by offering a discount for certain check forward payments, represents an unfair bundling of services. According to TCH representatives, this discount represents a cross-subsidy between services, which they allege violates the intent of the Monetary Control Act. Federal Reserve staff noted that this product offers attractive pricing discounts to smaller financial institutions, unlike many of its other discounts that focus on larger financial institutions, and is intended to serve as a customer retention tool. Specifically, they said that the lower price allowed them to retain customer volume, which is needed to achieve economies of scale. According to its policy on the provision of financial services, the Federal Reserve maintains an operational presence in the payment system to contribute to economic efficiency. Additionally, the Federal Reserve has said that the Retail Payments Premium Receiver product is consistent with the letter and spirit of the Monetary Control Act and the Board’s pricing principles, noting that revenues from either check or ACH services do not contribute toward recovering costs for the other service and therefore do not represent a cross-subsidy. Furthermore, staff said that the Reserve Banks are not in a unique position in relation to providing “relationship pricing,” as private-sector institutions also use such pricing structures. Officials at the Department of Justice told us that product bundling is not necessarily anticompetitive and is practiced in a wide range of industries. Some private-sector competitors expressed concerns that the Reserve Banks charged customers more in markets in which the Reserve Banks face less competition to enable lower pricing in markets in which they face more competition. Competitor concerns included the following: One large bank provider with large corporate customers explained that, because the Reserve Banks have access to some smaller or more remote financial institutions, they charge other institutions a higher rate to collect checks drawn on these smaller institutions, taking advantage of their access and relatively exclusive relationships. The price for sending a check to another institution is determined, in part, by the pricing tier in which that institution is included. TCH staff said that the Reserve Banks offer steep discounts to large financial institutions in markets where they compete for business and offset these discounts by charging higher fees to smaller financial institutions that have no alternatives to the Federal Reserve. They considered this to be an anticompetitive pricing practice. They noted that TCH faces difficulty obtaining smaller financial institutions as customers because the costs in switching providers may outweigh the pricing benefits for these institutions. Federal Reserve staff said that volume-based pricing is a common practice they believe helps maintain the efficiency of payment services. Federal Reserve staff said that they follow volume-based pricing principles when establishing pricing tiers and do not price their services below marginal cost. They added that they assign items drawn on a financial institution to a tier based on the number of checks the Reserve Banks present to that financial institution, with those institutions with more volume assigned to a lower-priced tier. They also noted that the private sector similarly establishes tiers based on volume. Because private- sector competitors have similar price structures, and because any higher prices paid by lower-volume customers likely do not increase their overall costs significantly (as discussed later), this practice also appears to benefit the payment services market overall. Some private-sector competitors raised concerns that certain protections that helped ensure fair competition for processing paper checks have not been carried over into the electronic environment. The Federal Reserve has been examining this issue. Staff from TCH and ECCHO noted that, until a regulatory change in 1994, the Reserve Banks had a statutory advantage over private-sector competitors when presenting paper checks to paying banks. According to the Federal Reserve Act and Federal Reserve regulations, the Federal Reserve can obtain a same-day payment from a paying bank by debiting the paying bank’s account at a Reserve Bank without being charged a presentment fee. To address this advantage the Board adopted Regulation CC’s same-day settlement rule in 1992, effective beginning in 1994. The same-day settlement rule allowed any bank to present paper checks to any other bank by 8:00 a.m. for settlement that same day without presentment fees. According to Federal Reserve staff, this regulatory change reduced the Federal Reserve’s competitive advantage and allowed banks to compete more effectively. However, according to ECCHO staff, the transition to the exchange of check images has removed the effect of the competition-enhancing change because Regulation CC does not apply to electronic images. They explained that check image exchange, unlike the presentment of paper checks, requires institutions to have legal agreements for and electronic connections between both parties, both of which can be costly to establish. The Board attempted to address this advantage by twice requesting comment, in 2011 and in 2014, on whether to modify Regulation CC to include similar presentment provisions for the exchange of check images. Although the Board has not yet taken final action on these proposals, they did not receive significant support from commenters, with payments trade groups noting both policy and operational issues. Additionally, commenters did not provide any alternative approaches that could be used to address the perceived competitive disadvantage. In a December 2015 letter (in response to a May 2015 letter from ECCHO raising these issues), the Chair of the Federal Reserve’s Committee on Federal Reserve Bank Affairs said that Federal Reserve staff have been asked to review certain pricing practices related to electronic checks to determine whether any changes to Federal Reserve policies, procedures, products, or fee structures were warranted. This letter states that the Federal Reserve will continue to engage in dialogue with ECCHO and industry stakeholders on steps to improve the competition and efficiency of the check system, and Federal Reserve staff told us in that they continue to consider ways to address these concerns. TCH, as the only private-sector operator of ACH payments, told us that it is concerned that the Reserve Banks have been taking advantage of their market position to charge an artificially high fee for processing transactions that TCH sends to them. Representatives of TCH explained that, for ACH payments, both institutions involved have to process a transaction, regardless of which one originates or receives the payment. ACH payments generated by customers of TCH or the Federal Reserve but bound for customers of the other provider must pass between both operators, thus creating an interoperator transaction. In such cases, the party that receives the item charges the other party “interoperator fees.” However, TCH sends more items to the Reserve Banks because its large bank customers typically generate large volumes of payments on behalf of their business customers—many of which are sent to institutions that use the Reserve Banks for ACH receipt. As a result, according to TCH representatives, the interoperator fee benefits the Reserve Banks at the expense of TCH. TCH representatives believe no costs exist that would justify charging any price for these transactions. However, Federal Reserve staff said that the Reserve Banks incur the same costs when processing ACH files from a depository institution or private-sector operator. If the Federal Reserve and TCH lowered or eliminated the interoperator fee, the Federal Reserve likely would have to increase prices for ACH payments made entirely within its network to recover the lost revenue. This could effectively raise prices for its customers while lowering them for TCH’s customers. Federal Reserve staff said they established the interoperator fee below the average 2013 per-transaction cost to originate a FedACH item, not including electronic connection costs. This average origination cost is based on operating costs and imputed costs and has been fairly stable since the determination of the fee. While differences exist in cost structures between the Federal Reserve and the private sector, these differences largely reflect differences in customer bases. For example, TCH staff raised concerns over the cost- effectiveness of the services provided by the Federal Reserve, noting that they operate much more cost effectively on a per-item basis than the Reserve Banks. Specifically, TCH said that its average cost per transaction for check, ACH, and wire items was approximately 16 percent to 29 percent of the average cost per transaction for the three products offered by the Reserve Banks. However, TCH told us that they primarily serve large financial institutions. The other competitors of the Reserve Banks, including large commercial banks, a bankers’ bank, corporate credit unions, and a nonbank service provider, also tended to serve narrower ranges of customers. For example, representatives of some large banks with whom we spoke said that they tended to provide payment services mostly to larger entities. Staff from a large bank told us that they mainly provide check processing services targeted to smaller institutions in areas where their bank has support staff. In contrast, our analysis of Federal Reserve data indicated that the Reserve Banks provide payment services to thousands of institutions across a range of asset sizes, including large numbers of smaller institutions. For example, about 86 percent of the Reserve Banks’ 3,665 forward check customers and about 94 percent of their ACH receipt customers had less than $1 billion in assets. Federal Reserve staff told us that providing payment services to many of these customers is more costly because low-volume users are the largest users of customer support services, resulting in higher per-item costs for these customers. The account setup and maintenance costs also result in higher per-item costs for low-volume customers. The Federal Reserve staff also noted that they incur other expenses not borne by their private-sector competitors, such as those related to processing transactions manually in the event of a disruption. If TCH had a similar customer base and costs as the Reserve Banks, its costs would likely be higher on a per item basis and would be more similar to that of the Reserve Banks. Similarly, if the Reserve Banks left the market for payment services, and TCH and the other providers took on these customers, their costs per transaction would likely increase due to the higher costs of serving the customers currently served by the Reserve Banks, thus reducing or eliminating any cost-effectiveness advantage. Correspondingly, if the Reserve Banks provided services only to the larger customers that process larger volumes, their costs per item would similarly be lower and their cost effectiveness would appear higher. The Federal Reserve noted that some of the differences in cost structures provide competitive advantages to competitors of the Reserve Banks. However, these cost differences may not be significant enough incentive for current Federal Reserve customers to turn to other providers. For example, staff from TCH said they have difficulty encouraging smaller institutions to use TCH for payment services because many of these institutions have payment volumes that are too low to produce savings significant enough to justify a switch from the Federal Reserve. TCH representatives expressed concerns that the Federal Reserve’s pricing and other behaviors have limited competitors’ ability to promote innovation in the payments system. Representatives from TCH said that the Federal Reserve’s pricing strategies have left little room for profitability in providing payment services, leading to an overall reduction in investment in research and development necessary for continued innovation in the payments industry. They also added that any innovations developed by TCH need to be accepted by the Federal Reserve, which can present a challenge. For example, TCH representatives said that they developed a universal payments identifier to increase privacy protections and reduce fraud in electronic payments, but the Federal Reserve did not adopt this innovation. Representatives from the Federal Reserve noted that they partnered with TCH to deploy this capability so that TCH customers wishing to use these identifiers for ACH payments could do so without concern that such payments would be rejected if they were routed across ACH networks. However, the Reserve Banks said that there was little market demand for this capability by their customers and determined not to offer the service directly. In contrast, Federal Reserve staff said that the Federal Reserve’s involvement in the payments market has contributed to the development of new products and more efficient processes over time. Federal Reserve staff and some market participants cited the Federal Reserve’s role in multiple market innovations. For example, Federal Reserve staff indicated that the remote capture of check deposits using smartphones and online service access were an outcome of the check image improvements that grew out of the Check 21 Act, which the Board helped to develop and the Reserve Banks helped to implement. In addition, a representative from a payment service provider said that the Federal Reserve was essential in transitioning the check-clearing industry to image exchange after Check 21 became effective in 2004. The representative added that the Federal Reserve has been helping to facilitate international ACH payments by creating connections to other countries. Other market participants said that the Federal Reserve has been leading the way on faster payment initiatives such as same-day ACH (payments can clear and settle on the same day they are submitted). The Reserve Banks began offering an opt- in same-day ACH settlement service for certain debit transactions in 2010, and expanded this service to include support for credit transactions in 2013. Federal Reserve staff said that their push toward instituting a same-day ACH service, along with NACHA’s rule amendment in 2015 allowing for same-day ACH payments, will help their customers develop new products, such as direct deposit for hourly payroll, which benefits users as well. With customers increasingly demanding faster, ubiquitous, safe, and inexpensive payment solutions, at least 18 other countries have developed real-time retail payments systems, according to a 2015 white paper from an international payments network. Representatives from TCH said that increased regulatory costs along with what they see as the unfair way that the Federal Reserve is competing in payment services is creating difficulties for the long-term viability of private-sector operators. TCH staff said that appropriate competition in the market for payment services, including higher prices, would facilitate continued research and development by the private sector, leading to ongoing private-sector innovation in the payments system. While the Monetary Control Act requires the Federal Reserve to give due regard to competitive factors and the provision of an adequate level of such services nationwide when pricing its payment services, the act does not address the preferred type or extent of private-sector competition in the payments industry. Federal Reserve staff said that there are clear benefits to vigorous competition with the private sector, such as the additional resilience provided to large bank customers due to the presence of two wire payment operators. In addition, they said that the competition between the two is helpful in ensuring both entities are as responsive as possible to customer needs. However, they also noted that the overall costs to the market of having two ACH operators are higher because of the loss of some economies of scale. Federal Reserve staff added that, while it is not their intent to drive TCH out of business, they also are not convinced it is necessary to have two operators, as many other countries only have one provider for such services. Because the effect of changing any Federal Reserve pricing likely would allow TCH to raise its own prices, the benefits of such actions for the overall marketplace and end-users is not clear. Conversely, if the Federal Reserve withdrew from the market, the costs to the overall payments system could decrease, but since TCH would likely have to expand its infrastructure and market reach, its costs would increase, and the effect on overall prices also would be unclear. To help ensure that they compete fairly with private-sector payment services providers and set fair pricing, the Reserve Banks must adhere to various pricing principles and Board policies. As discussed previously, the policies include the pricing principles established in the Monetary Control Act, which required Federal Reserve payment services to be priced at the same fee schedule for Federal Reserve members and nonmembers and that such fees be established on the basis of all direct and indirect costs, giving due regard to competitive factors and the provision of an adequate level of such services nationwide. The Board has adopted several additional pricing principles to help ensure that the Reserve Banks compete fairly. Generally, the Reserve Banks must set prices for each payment service so that revenues match costs over the long run. However, the Board’s pricing principles acknowledge that the Reserve Banks may set below-cost prices for a service if it is in the interest of providing adequate service nationwide. But such a decision would require a Board announcement. The Reserve Banks also must ensure that their services and pricing are responsive to the changing needs of particular markets and provide advance notice for changes in fees and significant changes in service arrangements to permit orderly adjustments by users and providers of similar services. To help ensure that Reserve Bank pricing determinations give adequate regard to competitive factors, Federal Reserve staff told us that they follow industry standards and best practices for pricing their services. They said that the factors they consider are similar to those that other service providers such as correspondent banks would consider. These factors include the costs associated with the service; the cost structure, such as the extent to which costs are fixed or variable; the price sensitivity of customers; and the extent to which the market for the product or service is competitive. They explained that price sensitivity—the extent to which a customer is likely to react to a pricing change—for a product is particularly important when determining whether to use volume pricing. For example, they said that higher-volume customers are fairly price sensitive; that is, they are more likely to send more or less business to the Reserve Banks depending on the prices charged. With the cost to provide services to higher-volume customers being lower than for other customers, staff said that using volume pricing to set lower prices for higher-volume customers was reasonable. Federal Reserve staff also said that they sometimes use pricing to influence consumer demand. For example, for a legacy product such as the access fee for using a dial-up connection to the Reserve Banks, they might increase the price to discourage its use. The Federal Reserve considers the various competitive factors for each pricing or service change proposal (typically during its annual pricing process). Each pricing or service change proposal during the process must consider customer, competitive, and policy implications before the Reserve Banks bring a formal proposal to the Board. At the beginning of this process, Federal Reserve staff consider market feedback from the prior year’s pricing changes and analyze market trends and projections as they develop new pricing proposals. The Board also has policies to prevent the Reserve Banks from engaging in anticompetitive or predatory pricing. According to the Department of Justice, predatory pricing occurs when a firm charges prices that are temporarily set below its incremental costs in an attempt to harm competitors. Department of Justice staff involved in antitrust and anticompetitive legal cases told us that a firm can be deemed to be competing unfairly if it is engaged in predatory pricing, bundling its products anticompetitively, or engaged in anticompetitive tying—requiring the purchase of additional products as part of another purchase. Federal Reserve staff told us that they used volume-based pricing in accordance with principles the Board published in the Federal Register in 1997, which are intended to avoid the risk of predatory pricing. These principles note that volume-based fees “promote the efficient use of payment services by allowing Reserve Banks to set variable fees closer to the incremental costs of providing services.” Federal Reserve staff said that they take into account competitive factors when establishing volume-based pricing because the need to attract sufficient revenue from large-volume customers better ensures that prices charged to low-volume customers do not get too expensive. However, these principles also state that the Reserve Banks will not price a particular service below its marginal cost, or the cost of clearing one more item. According to these principles, this type of pricing constraint is well established in antitrust law and is intended to prevent predatory pricing. In addition to these principles, the Federal Reserve conducts a competitive impact analysis for all proposed changes to products and prices and for all new products and prices. The analyses help ensure that the Reserve Banks are not unfairly leveraging any legal advantages they have over private-sector competitors—such as differing legal authority or their dominant market position deriving from such legal differences. According to a policy statement outlining its practices, the Federal Reserve will conduct a competitive impact analysis on all proposed operational or legal changes determined to have a substantial effect on market participants, even if the competitive effects are not apparent on the face of the proposal. In practice, Federal Reserve staff noted that they also conduct competitive impact analyses for routine proposals (those that only moderately affect existing product offerings). See appendix IV for more information about how the Board conducts and reviews competitive impact analyses. Based on Federal Reserve data and estimates and our analysis and interviews, the presence of the Reserve Banks in the payments services market appears to have reduced payments services costs for some customers to date. For instance, from 2001 through 2013 private-sector providers increased their market share for check, ACH, and wire services—an indication that the Reserve Banks have not necessarily negatively affected competition in these markets (see fig. 7). In 2001, the Reserve Banks had about 57 percent of the share of the market for check payments, about 64 percent of the market for wire payments, and more than 85 percent of the market for ACH transactions. By 2013 (the most recent data available at the time of this review), the Reserve Banks’ market share had declined in each of these payment services, with the largest declines occurring in the ACH market. Their share of payments originated declined from 86 percent to 49 percent and their share of payments received from 87 percent to 63 percent. Although the Federal Reserve’s most recent triennial payments study included market share data through 2013, some more recent data also exist. ECCHO staff, using a different methodology, in 2014 and 2015 estimated that the Federal Reserve had between 42 percent and 44 percent of the check-clearing market. For ACH, the Federal Reserve had around 55 percent of the market share for ACH originations and about 62 percent of the market for ACH receipts in 2014 and 2015, according to our analysis of Federal Reserve and NACHA data provided by the Federal Reserve. For wire payments, the Federal Reserve had about 55 percent of market share in 2014 and 51 percent in 2015, according to our analysis of Federal Reserve and TCH data provided by the Federal Reserve. These data suggest that the Reserve Banks’ market share for both check and wire payments has continued to decline since 2013, although their share of the ACH market has stabilized in the last few years. The effect of the Reserve Banks’ competition in the markets for payment services can vary across customers, but generally has resulted in lower prices for payment transactions, according to Federal Reserve and TCH staff. Federal Reserve staff told us that by competing actively to gain more volume and new customers through their pricing and product offerings, they have exerted downward pressure on prices for payment services. TCH staff told us that the prices they charge their customers are largely based on the cost of providing those services, taking into account the prices set by their competitors in the marketplace. The competition with the Reserve Banks often lowered prices for competitors’ customers as well. Private-sector payment service providers told us that the Reserve Banks’ published prices act as a baseline for the industry. For example, TCH primarily serves large banks in a network that, with few exceptions, offers the same pricing to all its members. Representatives of TCH told us that they price their services based largely on the cost of providing those services, taking into consideration the price set by the marketplace, which includes the pricing offered by the Reserve Banks and other private-sector entities. One nonbank service provider that performed check processing said that most large banks try to keep their prices about 10 percent lower than the Reserve Banks’. The bankers’ bank and corporate credit unions we interviewed generally serve smaller institutions in distinct geographical areas, such as a particular state. Staff from the bankers’ bank said that the Reserve Banks’ fee schedules serve as the pricing starting point for the industry. Some of these competitors told us that they often offer additional services to attract customers, similar to the Reserve Banks, and one also offers discounts for customers that use multiple products and services. Another servicer said that although they used to set prices directly off of the Reserve Banks, they now use a model that can generate a range of prices that allows them to maintain profitability. Although staff from one bankers’ bank said that they were unable to offer prices as low as the Reserve Banks’, they competed by offering more personalized customer service than other competitors. Our analysis of the Reserve Banks’ revenue and volume data shows that many customers generally appear to have benefitted from lower prices in recent years. We examined volume and revenue data for each of the Reserve Banks’ check, ACH, and wire services and determined that, in general, while price ranges have expanded as previously noted, average costs for financial institution customers generally decreased in recent years. For all check items, the Reserve Banks earned average revenue per item of $0.0249 in 2014, down 82 percent from $0.160 in 2007. Federal Reserve staff noted that the primary driver of this cost decline has been the transition from exchanging paper checks to check images. One of the most used check processing product types the Reserve Banks offer involves processing files containing check images. From 2004 to 2011 the most used product of this type was for files submitted by 8:00 p.m. (in 2012, the deadline was changed to 9:00 p.m.). The average cost per file processed went from $0.054 in 2007 to $0.020 in 2015—a decline of almost 63 percent. Similarly, many customers paid less for their ACH origination and receipt transactions over time as the Reserve Banks’ average per-item ACH revenues declined, although some customers benefited more than others. Specifically, the average revenues per item for ACH items decreased from $0.0046 in 2005 to $0.0044 in 2014, or about 5 percent. For both ACH origination and receipt services, the Reserve Banks saw the proportion of revenue, and the total revenue earned from their largest customers, decline while revenues increased from all other customers, despite the number of institutions in these categories remaining stable. For example, the share of ACH revenue earned from institutions with more than $1 billion in assets declined from 60 percent in 2005 to 56 percent in 2014, although total revenues from these customers grew from $35.6 million to $46.4 million, or from $42.7 million to $46.9 million in 2015 dollars. Because these larger institutions likely serve many other end-user business and retail customers, these lower costs likely benefited such end-users. The tendency of other providers to match or attempt to set lower prices than the Reserve Banks also would extend the benefits of lower Reserve Banks prices to the end-users that use other payment service providers. For its Fedwire service the Reserve Banks increased their revenues from larger and midsize customers as their revenues declined from their largest customers. Overall, Reserve Bank customers paid 76 percent more for wire transfers from 2005 to 2014—which reflects the costs of system upgrades that occurred during this time. From 2005 to 2014, the share of Fedwire revenues earned from the largest institutions (more than $1 billion in assets) declined from 78.1 percent in 2005 to 64.9 percent in 2014, although total revenues from these customers grew from almost $36 million to almost $50 million (or from about $43.2 million to $50.5 million in 2015 dollars) in that span. Revenues from the next largest institutions ($200 million to $1 billion in assets) increased from 8.5 percent to 13 percent. In contrast, the revenues from the smallest institutions (less than $50 million in assets) remained under 1 percent. Although smaller customers faced price increases, their actual costs are smaller than those incurred by larger institutions. For example, small credit union customers paid the Reserve Banks an average of $1,672 annually to receive ACH payments and small banks paid $1,772 in 2014. In contrast, banks with more than $1 billion in assets paid an average of almost $78,000 annually to send and receive FedACH payments that year. We compared these average ACH expenses to the noninterest expense amounts for all banks and credit unions with more than $1 billion in assets and found that these ACH expenses would represent from about 0.12 percent to 0.18 percent of the median institution’s total noninterest expenses, but for the small institutions (those with less than $50 million in assets), these ACH expenses would represent from about 0.05 percent to 0.48 percent of the median institution’s total noninterest expenses. Smaller institutions received far fewer Fedwire payments than larger institutions, on average. The average small credit union received between 100 and 224 Fedwire payments annually from 2005 through 2014, and small banks similarly received between 115 and 188. In contrast, the average Reserve Bank customer with more than $1 billion in assets received between 188,000 and 210,000 Fedwire payments annually in the same period. As a result, the average amount spent on Fedwire originations and receipts by smaller institutions was far lower than for larger institutions. From 2005 to 2014 (the last year full data were available), the average small credit union spent between $244 and $1,838 annually to send and receive Fedwire transactions, or $914 on average. Similarly, small banks spent between $396 and $1,442 on Fedwire transactions, or $1,058 on average. In contrast, the largest Federal Reserve customer banks spent between $48,000 and $77,000 annually, or almost $62,000 on average. The Federal Reserve performs various roles, including managing monetary policy, supervising bank holding companies and certain banks, and acting as a lender of last resort, which create potential conflicts of interest with the Reserve Banks’ role as provider of payment services. To prevent Reserve Bank staff from inappropriately using any knowledge gained from other activities (such as bank examinations) to increase the competitiveness of their payment services, the Board has established various policies and processes. In 1984, the Board issued various standards to minimize the potential that the various roles of the Federal Reserve could provide advantages for its payment services activities. These include organizing the Reserve Banks’ operations so that the duties of staff responsible for the Reserve Banks’ nonpayment services activities do not overlap with those of the staff who conduct payment services. Under this structure, Reserve Bank personnel with responsibility for payment services (unless acting in the capacity of president or first vice president) are prohibited from being responsible for monetary policy, bank supervision, or lending. Similarly, payment services personnel are prohibited from making policy decisions affecting monetary policy, bank supervision, or lending matters. Reserve Bank personnel involved in monetary policy, bank supervision, or lending are permitted to provide to Reserve Bank payment services personnel certain confidential information obtained in the course of their duties. However, sharing the information would have to fulfill an important supervisory objective, preserve the integrity of the payment mechanism, or protect the assets of the Reserve Banks. In such cases, information is to be provided on a need-to-know basis and only with the approval of senior management. To prevent payment services staff from obtaining information that could be used for competitive advantage from the Federal Reserve’s supervisory activities, Federal Reserve staff told us they have restrictions on access to the databases that store examination information and other confidential supervisory information. Board staff noted that the Reserve Banks have groups that monitor credit risks to the Reserve Bank to protect the assets of the Reserve Bank as well as to protect the payment system generally. The staff in these groups have access to confidential supervisory information to perform this activity, and sometimes must share information with the payment services staff when implementing risk controls on particular institutions’ accounts. The guidance that Federal Reserve staff provided to us addressing credit risk monitoring activities includes a section reminding Reserve Bank staff to share information on a need-to-know basis only. A Board review conducted in 2005 that surveyed the Reserve Banks on their information-sharing practices found that staff were sharing information only when appropriate. To limit potential for conflicts, Federal Reserve staff also have limited the extent to which the information technology systems that financial institutions use to access payment systems activities integrate with functions related to other Federal Reserve activities. For instance, the Reserve Banks offer a system known as Fedline, which provides the ability to conduct transactions across various payment system services. A July 2015 memorandum to staff responsible for statistics and deposit reserves activities noted that staff responsible for payment services sales had suggested that the applications for other business lines be more fully integrated into Fedline to allow more seamless movement among these activities. However, the memorandum reminds these staff that the applications for the other business line functions were purposefully segregated from the payment system applications in Fedline to better ensure that staff adhered to conflict-of-interest standards for payment services. The Federal Reserve also includes information in training to help ensure that relevant staff are aware of restrictions intended to prevent payment services activities from benefiting from information obtained from other Federal Reserve activities. Federal Reserve Board staff explained that conflict-of-interest issues are not covered in a separate training course but instead are addressed as part of other training. The 1984 standards note that Reserve Bank staff are expected to provide full and accurate information on Federal Reserve services (including features, quality, prices, and operating requirements) to enable depository institutions to make informed decisions, and that comparisons of Federal Reserve services with those of other providers should be fair and objective. During initial training, employees who work in the sales and marketing areas are made aware of these policies to help ensure that their sales interactions with banks avoid any inappropriate discussions. The staff noted that the credit risk management staff developed some training modules and an online training course that was shared among the 12 Reserve Banks that includes information on the Board’s guidance on information sharing. In addition to the Board’s policies, the individual Reserve Banks whose staff conduct payment service activities also have policies that restricted information sharing and other activities that could create potential conflicts. We reviewed the policies of five of the Reserve Banks that conduct payment services activities to determine if they addressed behavior that could create conflicts of interest among supervisory, payment services, and other activities. Each of the five Reserve Banks have policies that restrict the sharing of information between payment services staff and supervisory or other Reserve Bank staff. In addition, four of the banks specifically restrict supervisory staff from discussing payment services issues with financial institutions. Three of the banks’ policies also note that payment services staff should not disclose to other Reserve Bank staff whether a financial institution was a payment services customer. In addition, three of the banks’ policies note that decisions on whether to take supervisory actions against a financial institution should not be based on whether or not the institution was a payment services customer. The Reserve Bank policies generally note that sharing of information between payment services and staff with other responsibilities could occur if such sharing served a specific supervisory purpose or if the information was otherwise publicly available. To determine compliance with the policies to prevent staff from sharing information or exerting influence to advantage its payment services activities, the Board also conducts periodic reviews to evaluate the Reserve Banks’ application of the policies. The Division of Reserve Bank Operations and Payment Systems within the Board is responsible for conducting operations reviews of the Reserve Banks. As previously discussed, Board staff told us that they review operations at four Reserve Banks each year. As part of these reviews, Board staff discuss the Reserve Banks’ information sharing practices for staff and provide feedback to the banks about any concerns with the management of confidential supervisory information. The Federal Reserve also indicated that oversight by other auditors also helps provide assurance that it is taking adequate steps to minimize conflicts between its payment system activities and its other roles. The Board’s Inspector General conducts reviews that sometimes address the Board’s oversight of Reserve Bank payment systems activities. For example, in September 2014 the Inspector General reported on the extent and effectiveness of oversight (by the Division of Reserve Bank Operations and Payment Systems) of the Reserve Banks’ Fedwire and other wholesale financial services activities. The Inspector General’s review stated that it had not identified any deficiencies regarding the efficiency and effectiveness of the Board staff’s oversight, and that the staff employed off-site monitoring, ongoing communication, on-site reviews, and assistance from the general auditors at the Reserve Banks to provide oversight of the Reserve Banks’ wholesale financial services. The Board’s 1984 policy that sets out standards for the Reserve Banks’ payment services activities notes that an additional level of external review comes from providing the public with the ability to comment on significant Board proposals on Reserve Bank payment services activities. The Federal Reserve also has a process for addressing complaints about its payment system activities. Federal Reserve staff told us that they have sometimes received questions from market participants on these operations. If the issue is not resolved to the participant’s satisfaction, they can escalate the matter to the chair of the Board’s Committee on Federal Reserve Bank Affairs. This person is responsible for investigating and responding to complaints concerning actions of Reserve Bank personnel who are alleged to be inconsistent with the standards related to conflicts arising from its payment systems’ activities. Discussions with Federal Reserve staff and market participants suggest that the Reserve Banks comply with the policies intended to prevent them from using their other roles to benefit their payment services activities. When we last reported on the potential conflicts between the Reserve Bank’s payment services activities and the other roles of the Federal Reserve in 2000, we found no evidence to suggest that the Reserve Banks had not adequately separated their multiple roles. Since then, Board staff told us that they have rarely received complaints relating to conflicting roles in the payments system. For example, in the last 5 years, staff recalled one instance in which they received a complaint from a competing payment clearing organization. The complaint related to an alleged incident in which a Reserve Bank payment systems sales employee purportedly told a financial institution that use of Reserve Bank payment services would help them comply with any regulatory requirements. Board staff pursued the complaint, but were unable to address the specific allegation due to lack of details regarding the incident. However, Board staff held discussions with Reserve Bank staff responsible for payment services sales to reinforce policies concerning conflicts of interest. According to the Federal Reserve staff, Board staff advised the competing payment clearing organization of the steps that were taken in response to its complaint, and the organization did not pursue its concern with the chair of the Board’s Committee on Federal Reserve Bank Affairs. Most market participants we interviewed also indicated that they did not have concerns that the Reserve Banks were inappropriately using their various roles to benefit their payment services activities. To help assess how well the Reserve Banks were managing potential conflicts among their different roles, we interviewed 24 providers and users of payment services (including the top 5 largest banks and a randomly selected group of service providers and end users). These entities included: 12 financial institutions and nonbank entities that compete with the Reserve Banks to provide payment services; and 12 banks and credit unions that were end-user customers of private- sector providers, the Reserve Banks, or both (including 6 also supervised by the Federal Reserve). Of the 12 entities we interviewed that were end-user customers of payment services, most (10 of 12) did not express concerns with the Federal Reserve’s multiple roles. For example, staff at one large bank said the Federal Reserve managed any potential conflicts of interest between its payments side and its regulatory side well and that they had not seen evidence of conflicts. They noted that their discussions with Federal Reserve examination staff focused on safety and soundness, and conversations with the Federal Reserve payments services staff were similar to those they would have with a private-sector vendor. Of the entities with concerns, one was a credit union not supervised by the Federal Reserve whose representatives said that they were unsure of the need for the Federal Reserve to function as both a regulator and provider in the payment system. The other was a large bank, whose staff noted that although they were not aware of any situation where a Federal Reserve examiner raised concerns with their bank’s use of private-sector providers, they did note that concerns existed over whether the Federal Reserve is fully recovering its costs or whether it uses its advantages over private-sector competitors. Similarly, of the 12 entities we interviewed that competed with the Reserve Banks, representatives of 9 of these entities did not express any concerns over the Federal Reserve’s management of its multiple roles. Representatives of the 3 remaining entities did express some concerns. For example, staff at one payment services provider told us that some banks have been told by Federal Reserve staff that if they did not process sufficient volumes on both of the competing ACH networks—those operated by The Clearing House and by the Reserve Banks—it could be seen as a supervisory issue. Representatives of another institution told us that when they moved their check-clearing business from the Federal Reserve to a competing provider more than 3 years ago, Federal Reserve payment services employees allegedly made comments suggesting negative implications for the institution. But since then, the Federal Reserve has been this entity’s primary supervisor and the representatives said that the Federal Reserve has not taken any inappropriate actions. The third entity that expressed concerns was a large bank that is supervised by the Federal Reserve and offers payment services to others. Representatives of this bank noted their Federal Reserve examiners had not exercised any pressure on their institution to use the Federal Reserve’s payment services but questioned the appropriateness of the Federal Reserve offering comments on pricing on the ACH payment association’s proposal to implement same-day ACH transactions. Federal Reserve staff noted that these concerns related to the establishment, calculation, and future management of an interbank fee (in the nature of an interchange fee) for the ACH system’s same-day settlement transactions that would be processed by the Reserve Banks as an ACH operator under the proposed rules of NACHA for this service. Market participants we interviewed generally support the Reserve Banks’ role as providers of payment services. Many of the 34 market participants we interviewed—bank and credit union users of payment services and private-sector providers of payment services (both direct competitors and others involved in payment services activities)—said that the Federal Reserve has an important role in the payment system. Several market participants, including those that compete with the Reserve Banks in providing payment services, said that the Federal Reserve successfully promotes ubiquitous access to payment services and should continue to do so. Representatives of all 12 financial institutions that we interviewed that used the Reserve Banks’ payment services generally expressed positive views about the Federal Reserve’s roles in the payment system, including comments about the Federal Reserve providing stability, promoting competition, ensuring access to all institutions, and promoting innovation in the payments industry. Representatives of one large bank said that the Reserve Banks have strengthened competition in the market and put pressure on private-sector providers, which has benefitted all parties. Representatives of a community bank said that they think the Reserve Banks provide a valuable service, especially to community banks. Representatives from 2 of the 12 financial institutions had concerns about the Federal Reserve’s roles in payment services. Representatives from one large federal credit union said that the Reserve Banks’ prices were low and their service very good, but worried that the Reserve Banks’ actions to lower prices might weaken competition in this market. In contrast, representatives of several smaller financial institutions with whom we met said that they appreciated the Reserve Banks’ services in the payments system and preferred to use their services over a private- sector competitor. One bank official from a smaller institution said that although the Reserve Banks’ prices were not necessarily lower than the prices of private-sector providers, the official preferred the quality of service in the provision of services. Similarly, in our interviews all three payment service providers that do not compete directly with the Reserve Banks said that they generally thought the Reserve Banks’ provision of payment services has helped the payment services industry. One provider said that the Federal Reserve actively promoted innovation in the payments industry, citing the Federal Reserve’s involvement in transitioning the check industry to digital imaging, despite the resulting decrease in its own market share in that payment service. Representatives from another provider said that they believed that the Federal Reserve has always played the role of an “industry helper” and cited the Federal Reserve’s roles in guiding the industry toward adopting innovations in the coming years. However, representatives from some competing payment service providers said that they would prefer the Reserve Banks to compete less actively in the payment services market. At least 6 of 12 competing payment service providers and one trade association with members that are competing providers said that they thought the Reserve Banks should compete less actively in the payment services market, and several suggested that the Federal Reserve instead become more of a payment service “provider of last resort,” as illustrated in the following examples. Representatives from one large bank said that for years they considered the Reserve Banks as providing a critical function through their connections to many institutions. But they noted that the Reserve Banks recently made price and product changes to attract more business and that undermined market competition. The staff said that they would prefer the Reserve Banks to become providers of last resort. Some private-sector providers suggested that the Federal Reserve stop providing payment services and instead focus more on ensuring ubiquitous access to all financial institutions or simply act as a regulator by creating and overseeing rules for the private-sector providers. Staff from one medium-sized bank said that they thought the Reserve Banks should instead focus on setting the rules as a regulator of the payments system, while staff from a corporate credit union said the Reserve Banks should instead focus on settlement, and not clearing of payments. However, Federal Reserve staff told us that cost recovery requirements dictate that the Reserve Banks remain an active service provider, because being a “provider of last resort” would require them to make transactions too expensive. They said that larger-volume customers likely would use other providers, leaving revenue from the lower-volume customers that remained to recover costs. Moreover, they indicated that, if the Reserve Banks were providers of last resort, the Federal Reserve would likely not be able to meet its statutory cost-recovery requirement and would not further its mission to foster the efficiency of the payments system or ensure ubiquitous access. Representatives of two payment service providers said that the Federal Reserve could be more transparent in its payment service pricing and compliance with the Monetary Control Act’s cost recovery requirements. The pricing principles the Board developed in response to the Monetary Control Act require the Reserve Banks to publish their prices and to solicit public comments when proposing pricing or product changes that are expected to have significant longer-term effects on the payments system. Representatives of TCH said that, while TCH welcomes competition from the Federal Reserve, they believe that such competition should be strictly in compliance with the Monetary Control Act, and that the Federal Reserve should be transparent about such compliance. In acknowledgment of the need to ensure that the United States keeps pace with advancements in the payments system, the Federal Reserve has been convening groups of stakeholders to explore ways to improve the payments system, including bringing about faster and more secure payments. The Federal Reserve cited the rapid changes to the payments process brought on by high-speed data networks and other technology, as well as the escalating security threats towards existing payment systems, as evidence of the need for all stakeholders to join to improve the payment system. (Payment system stakeholders include large and small businesses, emerging payments firms, card networks, payment processors, consumers, financial institutions, and government agencies.) Furthermore, consumers and businesses have begun to desire fast, convenient, ubiquitous, safe, and inexpensive payment options, according to an international payments network. While other countries have developed real-time or near real-time retail payments systems, the U.S. payments system does not have a ubiquitous, convenient, and cost- effective way for consumers and businesses to make real-time or near real-time payments. According to a 2015 white paper from the same international payments network, 18 countries have real-time retail payments systems, an additional 12 countries have been either exploring or developing them, and another 17 have been considering developing a system that would span multiple countries. In one example, Australia has been making the transition to its New Payments Platform, which is designed to enable future payments to be processed and settled in real time with finality, even outside of normal banking hours. To help begin the process and explore and solicit input on concepts and criteria for a new system for the United States, the Federal Reserve published a public consultation paper on improving the payments system in September 2013. This paper provided perspectives on the key gaps in the current U.S. payment system and identified desired outcomes to address the gaps. Specifically, the Federal Reserve identified eight gaps and opportunities for improvement in the current payment environment, which included end users’ increased demand for real-time transactions and timely notifications; the lack of ubiquity in currently operating electronic payment services (as compared with legacy systems such as checks); and the challenges associated with cross-border payments. The paper also identified five desired outcomes to be achieved within 10 years to address these gaps and opportunities. These desired outcomes included having payment participants collectively identify and embrace key improvements, implementing process improvements that reduce costs and increase innovations over the long run, and having a system that offers consumers and businesses greater choice and security. The Federal Reserve obtained nearly 200 written responses from industry stakeholders on the consultation paper, and published these responses and the Federal Reserve staff summary of the responses on its website. According to the summary document, about 75 percent of the written responses agreed with the gaps, opportunities, and desired outcomes the paper had identified. Commenters also suggested additional areas for focus, particularly related to ensuring comparable regulation for payment providers and addressing the needs of the unbanked or underbanked. For example, according to the Federal Reserve’s summary document, depository institutions broadly argued that they are held to higher regulatory and risk-management standards than nonbank payment providers, and merchants expressed desire for a payment system governance structure that allows them to have more influence. According to the summary document, many respondents opined that a 10-year plan to improve the payments system was not aggressive enough, and that more action should be taken in the near term. To advance this effort, in January of 2015 the Federal Reserve issued Strategies for Improving the U.S. Payment System, a document that sets forth its strategies for bringing together all stakeholders to improve the payment system. In this document, the Federal Reserve refined and finalized the five desired outcomes into the following categories: speed, security, efficiency, international, and collaboration. In addition, the Federal Reserve identified five strategies to improve the payment system in the United States: actively engage with stakeholders on initiatives designed to improve the U.S. payment system; identify effective approaches for implementing a safe, ubiquitous, faster payments capability in the United States; work to reduce fraud risk and advance the safety, security, and resiliency of the payment system; achieve greater end-to-end efficiency for domestic and cross-border enhance Reserve Bank payments, settlement, and risk-management services. Since then, the Federal Reserve has been forming task forces of industry stakeholders, with one task force focused on evaluating effective approaches of a faster payments system, and the other focused on promoting payment security. These task forces have developed effectiveness criteria for assessing alternative solutions for faster payments and the Federal Reserve has also appointed key staff to support and guide these efforts. Although some market participants expressed concerns to us about the Federal Reserve’s process for moving toward a faster payments solution, Federal Reserve staff told us that these concerns appeared to reflect misunderstandings of the process. For example, representatives from a payment service trade association with whom we spoke said that the Federal Reserve was making edits and inserting criteria in documents containing stakeholder perspectives to emphasize its own service offerings. Specifically, they said that the Federal Reserve inserted a criterion that suggested that all faster payments positions should settle with the Reserve Banks. However, Federal Reserve staff noted that the criterion in question states “The solution should either enable settlement in central bank money, or minimize and strictly control the credit and liquidity risk arising from the use of commercial bank money for the inter- provider settlement process.” They added that settlement in central bank money does not mean that the Reserve Banks would operate the faster payments solution, as evident in TCH’s ACH service that settles using central bank money. Federal Reserve staff also told us that the drafting of the criteria documents for the Faster Payments Initiative took place during meetings of the Faster Payments Task Force and Steering Committee, and that this was a transparent and rigorous process. Representatives from a large bank also said that they were concerned about an intellectual property requirement contained in the participation agreement for stakeholders involved in the faster payments planning process. They said that the Federal Reserve required participants to sign an agreement that included language noting anything coming out of the discussion would be the intellectual property of the Federal Reserve. Because of these terms, the bank decided not to participate, and they said that they knew of other financial institutions that felt similarly. However, Federal Reserve staff said that the characterization of the participation agreement language is not correct and that the agreement does not limit a participant’s use of its own intellectual property. Instead, they said that the agreement includes terms for fair, reasonable, and nondiscriminatory licensing of intellectual property. In addition, there is an opt-out provision in the agreement that allows participants to identify any intellectual property present in a final report before it is published and decline to grant the license for it. Furthermore, based on feedback from the industry related to the intellectual property provisions, the Federal Reserve revised the participation agreement in March 2016 to reduce the scope and legal burdens for the participant in licensing its intellectual property. Federal Reserve staff said that the vast majority of current members have signed this agreement and additional industry participants have also joined their effort after these revisions were made. The presence and activities of the Federal Reserve in the payments system generally have been beneficial, including by helping to lower the cost of processing payments for many end-users. Market participants also generally supported having the Federal Reserve continue to play multiple roles in the payment system. The Federal Reserve also continues to support innovation and process improvements for the payments in the United States. To help ensure that it competes fairly with the private sector, the Federal Reserve uses a cost accounting system for capturing its payment system costs that is detailed and generally in alignment with comparable federal standards. It also uses a reasonable approach to impute the costs that it would bear if it was a private entity and includes these in the costs that it recovers with its payment services revenues. However, the Federal Reserve has not included in its imputed costs some costs that its competitors incur. These include those related to developing plans for recovery and orderly wind down, which are costs that its primary competitor in wire transfers has had to incur to comply with new requirements for resolution planning for systemically important payment system entities. Also, the Federal Reserve has not included costs borne by private-sector providers related to complying with antimoney- laundering requirements. By including these costs, the Federal Reserve would more completely impute and recover costs that it would have incurred as a private firm. In addition, although it also conducts internal reviews to help ensure that it captures the required costs accurately, the cost accounting system has not been specifically reviewed by an external auditor in more than 30 years. Internal control standards state that compliance with applicable laws and regulations is a key internal control objective, and a key means of providing such assurance can be the performance of monitoring activities, which can include external reviews, to ensure that such compliance is occurring. Having its cost accounting practices periodically subject to independent testing would provide greater assurance that the Federal Reserve is complying with the Monetary Control Act. To provide greater assurance that the Federal Reserve is complying with the Monetary Control Act’s requirement to establish fees on the basis of costs actually incurred and an allocation of imputed private-sector costs, the Chair of the Federal Reserve Board of Governors of the Federal Reserve System should: Consider ways to incorporate the costs related to integrated planning for recovery and wind down and compliance with antimoney- laundering requirements, to the extent practicable, in its imputed private-sector cost methodology. Periodically obtain independent testing of the methods the Federal Reserve uses to capture its actual costs and simulate those of the private sector. We provided a draft of this report to the Federal Reserve and to The Clearing House for review and comment. The Federal Reserve provided written comments that we reprinted in appendix V. The Federal Reserve and The Clearing House also provided technical comments that we incorporated, as appropriate. In written comments, the Federal Reserve stated that it is planning to take steps in response to both recommendations. In response to our recommendation that it consider ways to incorporate costs related to integrated planning for recovery and wind down and compliance with antimoney-laundering requirements in its imputed private-sector cost methodology, the Federal Reserve’s letter stated that it will consider ways to incorporate these costs. The Federal Reserve noted that, in some cases, these costs are difficult to measure, given the challenges in obtaining financial information from private-sector payment service providers. In other cases, the Federal Reserve noted that it already bears costs that its competitors do not. In response to our recommendation that the methods the Federal Reserve uses to capture its actual costs and simulate those of the private sector be independently tested periodically, the Federal Reserve stated that it will procure an independent review of the methods used for capturing actual and imputed costs related to its payment services. We acknowledge this step and note that having such reviews performed periodically will provide greater assurance to all payment services market participants of the Federal Reserve’s compliance with the Monetary Control Act. Along with its technical comments, The Clearing House noted an appreciation of our recommendations that the Federal Reserve consider ways to incorporate certain costs borne by the private sector in providing payment services and obtain periodic independent cost-capturing system testing. However, The Clearing House also stated that it was disappointed in our other findings, which did not appear to reflect the data provided to us on a variety of issues. We believe we incorporated the information provided by The Clearing House to the extent possible 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 Federal Reserve and other interested parties as appropriate. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs 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 three payment system services offered by the Federal Reserve—check clearing, electronic payments known as Automated Clearing House (ACH) payments, and wire transfer payments—because these are the services in which the Federal Reserve competes with private-sector entities. This report examined (1) how effectively the Federal Reserve captures and recovers its payment services costs; (2) the effect of the Federal Reserve’s practices on competition in the payment services market; (3) how the Federal Reserve mitigates the inherent conflicts posed by its various roles in the payments system; and (4) market participant viewpoints on the future role of the Federal Reserve in the payments system. To examine how effectively the Federal Reserve has recovered the costs of providing these payment services, we analyzed data on overall reported revenues and expenses associated with the three payment services from 1996 through 2015. We also analyzed data on the specific expenses associated with the payment services from 2001 through 2014 to identify relevant trends and cost structures. We assessed the reliability of these data by interviewing relevant Federal Reserve officials about the controls and quality assurance practices they used to compile these data, and determined the data were reliable for these purposes. We interviewed Federal Reserve staff about the processes used for capturing these costs and reviewed the Federal Reserve’s Planning and Control System (PACS) Manual for Federal Reserve Banks, which establishes cost accounting policies for the payment services at all Federal Reserve Banks, whose staff conduct the payment services activities. We obtained expert opinions on the soundness of the policies and practices detailed in the PACS manual, including consulting internally with a cost accounting expert within GAO, as well as with representatives from the auditing firm that had conducted the 2014 audit of the Federal Reserve’s financial statements. We analyzed 12 reviews conducted by an internal Board staff between 2012 and 2015 and a judgmental selection of 9 audits conducted by the internal audit staff of the Reserve Banks to determine the extent of their findings related to cost accounting practices. We also reviewed the only external audit that had examined the cost accounting practices at the Federal Reserve Banks that had been conducted in 1984. No private- sector cost accounting standards existed to compare to the cost accounting practices followed by the Reserve Banks, which are federally chartered but organized as private corporations. As a result, we compared the design of PACS to the elements that federal managerial cost accounting standards—Statement of Federal Financial Accounting Standards 4—recommend be included in federal agency cost accounting systems to determine how the Federal Reserve’s practices aligned with a comparable standard. To determine how the Federal Reserve was imputing and recovering costs that would have been incurred had its payment services been provided by a private firm, in accordance with the Monetary Control Act, we examined data and documentation relating to the Federal Reserve’s methodology for computing this “private sector adjustment factor” (PSAF). Based on our assessment of the controls and quality assurance practices the Federal Reserve used to compile these data, we determined the data were reliable for this purpose. We consulted with an internal GAO financial markets expert, a financial analyst who monitors payment service market participants, and three academic financial experts on the reasonableness of the methodology’s assumptions. We reviewed notices in the Federal Register from 2005 through 2014 that detailed proposed and final changes to the methodology over this period. For further explanation of these issues we spoke with Federal Reserve staff who oversee payment services activities. We also interviewed a financial trade association that issues rules governing payment system activities and whose members participate in the payments industry, as well as representatives of a major payment services provider to get their opinions on the Federal Reserve’s PSAF methodology. We also reviewed industry documentation on criticisms of the Federal Reserve’s PSAF methodology. To examine how the Federal Reserve prices its payment services and assesses the impact of its competition in this market, we analyzed volume and pricing data for the Federal Reserve’s check, wire, and ACH payment services from 2004 to 2014, including publicly available fee schedules. We also analyzed Federal Reserve pricing and revenue data for each of these services, including examining trends in service prices over time. To ensure that these data were sufficiently reliable for our purposes, we verified that we had obtained complete data on the revenue by type of customer by comparing them to the annual revenue totals reported publicly by the Federal Reserve. Based on this comparison and our assessment of the controls and quality assurance practices the Federal Reserve used to compile these data, we determined the data were reliable for this purpose. We also reviewed Federal Reserve documentation on pricing its services and on competitive impact analyses, including policies, guidance, and Federal Register notices. We interviewed Federal Reserve staff for information on how they price their services and compete in the payments market. We also interviewed staff from the Department of Justice to better understand what practices can be considered anticompetitive. For the perspectives of market participants on the Federal Reserve’s pricing and competitive impact in the payments industry, we interviewed 34 market participants, including: 7 financial trade associations whose members participate in payment systems and/or issue rules governing payment system activities (NACHA and the Electronic Check Clearing House Organization). 12 entities that provide payment services that compete with the 3 nonfinancial institution service providers, 6 correspondent banks that provide payment services to other institutions but also offer banking services to individual corporate and retail customers, 2 corporate credit unions and 1 bankers’ bank that conduct payment services and other activities for other institutions. 3 nonfinancial institution payment services providers that did not compete with the Federal Reserve. 12 financial institutions that were end users of payment services from other private-sector providers and/or the Federal Reserve, including 8 banks (including 6 that were regulated by the Federal Reserve), 4 credit unions. We selected the financial institutions that used the Federal Reserve or private-sector providers in two ways. First, we interviewed the 5 largest bank holding companies by total assets in the United States. Some of these institutions are both providers of payment services and users of the Federal Reserve’s services. Second, we interviewed an additional 11 banks and credit unions that were chosen by random selection within the following tiers based on total assets: Banks (7) >$50 billion (3 large) $10-$50 billion (2 midsized) <$10 billion (2 small) Credit Unions (4) >$5 billion (3 large) <$5 billion (1 small) The entities we interviewed that provide payment services were those selected randomly from a larger sample of institutions identified by a payments industry association and those identified in other interviews as service providers with valuable knowledge of the industry. We also analyzed data from the Federal Reserve that included the revenues it earned from various customer categories that it tracked internally. These categories included various ones for customer institutions of various asset sizes and for other entities, such as bankers’ banks or foreign banks. We used these data to identify the extent to which the Federal Reserve’s revenues had changed over time and how the amounts paid by different customer groups had changed. Because of circumstances in the check market—including the industry’s transition to images—we determined that the data for check were only sufficiently comparable from the period between 2007 and 2014, which was the last year that we obtained complete transaction volume data from the Federal Reserve. Data for ACH and wire transfers appeared to be sufficiently comparable from 2005 to 2014. Based on our assessment of the controls and quality assurance practices the Federal Reserve used to compile these data, we determined the data were reliable for this purpose. To examine how the Federal Reserve mitigates the inherent conflicts posed by its various roles in the payments system, we reviewed the Federal Reserve’s policies related to its payment services organizational structure and the requirements related to the conduct of its staff in the Monetary Control Act and relevant Federal Reserve policies. We also reviewed additional guidance the Federal Reserve provided to its staff on the conduct of its payment services activities. We also reviewed training materials the Federal Reserve used to inform its staff about requirements relating to its payment services activities. In addition, we reviewed audits or other reviews done by the Board’s Inspector General or other bodies related to the conduct of its payment services activities. We interviewed the Federal Reserve Board staff who oversee payment services activities, including about the extent to which they received complaints from market participants and about the conduct of the Federal Reserve’s payment services activities. In addition, we interviewed representatives of the 34 market participants to obtain their perspectives on the conflicts in the Federal Reserve’s roles in the U.S. payments system. To examine market participant viewpoints on the future role of the Federal Reserve in the payments system, we interviewed representatives of the 34 market participants, including bank and credit union users of payment services and private-sector providers of payment services (both direct competitors and others involved in payment system activities). We also reviewed the Federal Reserve’s policies that outline the criteria it would consider before offering a new payment service, including comment letters publicly posted by industry stakeholders in response to the Federal Reserve’s public consultation paper. We also obtained views of Federal Reserve staff about their payments improvement initiative. We conducted this performance audit from November 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. The Monetary Control Act requires that over the long run the Federal Reserve’s fees be established on the basis of all direct and indirect costs actually incurred in providing payment services, and an allocation of imputed costs that would have been incurred by a private-sector provider. The Federal Reserve Banks use a detailed cost accounting system that helps them meet their requirements relating to how to set fees and account for and recover costs incurred as part of providing payment services. According to data provided to us by the Federal Reserve, The Federal Reserve Banks incurred more than $410 million in costs as part of providing payment services in 2014 (see table 2). Of these, personnel costs represented about 7 percent of total payment services costs. Support costs represented the large majority of the costs of payment services activities. Nearly 78 percent of the overall costs of providing payment services arose from almost $320 million of expenses allocated to those services by the Federal Reserve’s National Support Services. These costs included the expenses arising from developing software applications, implementing information security, providing help-desk services, business development activities, accounting, and other support functions. The Federal Reserve Banks’ payment services were also allocated more than $28 million in local support services costs that include Reserve Bank information, technology services, audit expenses, and general administrative services. More than $22 million in various overhead costs—representing about 5 percent of overall payment services costs—were also allocated to payment services activities, and these included, Federal Reserve staff told us, expenses associated with overall corporate-wide functions such as bank administration, accounting, and contingency planning. According to the Planning and Control System (PACS) Manual for the Federal Reserve Banks, every dollar expended (or received) by the Reserve Banks is recorded into three cost categories: account, department, and activity. Federal Reserve staff described how a Reserve Bank’s expense related to a $10,000 contribution to the employees’ retirement thrift plan account would be recorded in the following way. Initially, costs are recorded at the account level. In this example, these contributions are recorded in a “Retirement and other benefits – Thrift Plan” expense account. Because the contributions were made for employees who work in different departments, the Federal Reserve would allocate these expenses to departments using various allocation methods. For example, the Retail Electronic Payments Department at a given Reserve Bank would be allocated some of the retirement expenses. The allocation would be calculated based on a “salary dollar ratio distribution,” equal to the salary expense of the department divided by the total salary expense of the Reserve Bank. Therefore, if the salaries in the department represented 1 percent of the salaries of the Reserve Bank, 1 percent of the retirement plan contribution ($100) would be allocated to the Retail Electronic Payments Department. Subsequently, the Federal Reserve would further allocate this departmental expense among the various activities that the department tracks. For example, if 70 percent of the department’s operations were devoted to automated clearing house (ACH) activities and 30 percent were associated with check processing, $70 of the department’s allocated retirement expense would be recorded under ACH activity and $30 under check activity. Similarly, the Federal Reserve Banks’ payment services would be allocated support and overhead expenses using the methods and procedures prescribed in the PACS manual, such as using a fixed percentage of some other factor or on a dollar-ratio basis. For example, maintenance expenses incurred at one Reserve Bank may be allocated to payment services activities on the basis of the amount of space their operations occupy in the bank’s buildings. As it is required under the Monetary Control Act to calculate imputed private-sector costs and return on capital, the Board of Governors of the Federal Reserve System (Board) has developed a PSAF methodology that allows it to calculate four costs that they do not incur, but that a typical private-sector payment services provider would incur: debt financing costs, equity financing costs (or return on equity), taxes, and payment services’ share of Federal Reserve Board expenses. A private firm providing payment services would need to raise capital to obtain the funds to invest in the necessary facilities, equipment, and other assets needed to conduct these activities. To determine the financing costs associated with this debt and equity capital, the Federal Reserve compiles the values of the actual assets it uses to conduct payment services activities. In addition to its premises, furniture, and equipment, these values may include an asset corresponding to the Federal Reserve’s net pension plan obligations. The PSAF methodology assumes that any short-term assets—such as supplies—are to be financed with short-term debt and that long-term assets—such as facilities and equipment—would be financed with long-term liabilities and a combination of imputed long-term debt and equity. The methodology also assumes that the Federal Reserve would use the same percentage mix of long-term debt and equity that it derives from the U.S. publicly traded firm index to finance its long-term assets not offset by long-term liabilities. Once it has identified the imputed amount of debt and equity it would need to fund its capital structure, the Federal Reserve calculates the rates for debt and equity financing. Using publicly available, market-based interest rates, it calculates a total amount of interest that it would have to pay for the year on the mix of short- and long-term debt amounts that were identified based on its asset structure. In 2016, the Federal Reserve’s PSAF methodology determined that it would have paid a rate of 0.3 percent on $19 million of short-term debt. The long-term debt financing rate was 4.2 percent. To determine the cost of the equity it would have to use to finance its payment services activities’ assets, the Federal Reserve uses a generally accepted financial formula for calculating the expected rate of return on equity that investors would demand based on its risk relative to the market as a whole. In 2016, the PSAF model calculated a pre-tax return on equity of about 9.8 percent, which represented additional imputed financing costs of $5.3 million. After these total imputed financing costs of debt and return on equity are calculated, the Federal Reserve’s PSAF methodology imputes two additional costs that a private-sector firm likely would incur. The first of these additional costs is an amount equivalent to the sales taxes that the Federal Reserve Banks would have incurred based on budgeted outlays for materials, supplies, and capital. These costs must be included as part of the allocation of imputed costs under the criteria listed in the Monetary Control Act. Furthermore, these costs are imputed rather than actual because the Federal Reserve Banks are exempt from paying sales taxes under the Federal Reserve Act. Then payment services’ share of Federal Reserve Board expenses, which Federal Reserve staff said are costs associated with the Board’s supervision of the payment services operations conducted by the Reserve Banks, are included in the PSAF, because, Federal Reserve staff told us, these costs are not captured by the PACS (which captures the actual costs Reserve Banks incur). In 2016, the expenses related to Board supervision and to imputed sales taxes were calculated to be $5.0 million and $2.8 million, respectively. Using its PSAF methodology, in 2016 the Federal Reserve calculated a total PSAF cost of $13.1 million that would have been incurred if the Reserve Banks were a private-sector provider, down from $18.0 million in 2015, as shown in table 3. This amount was allocated to each payment service based on the percentage of the projected operating expenses of the Federal Reserve Banks’ payment services that each service represented. As part of the Federal Reserve’s attempts to improve the PSAF’s accuracy and conform it to changes in the payment system market, Federal Reserve staff noted that the Board has made numerous changes to the methodology over the years. These changes included a change made in 2000 to begin allocating a portion of the Federal Reserve’s prepaid pension asset and postretirement and postemployment benefit liabilities into the asset and equity amounts the PSAF used for calculating imputed financing costs and returns on equity. This change was made because the value of the prepaid pension assets began to increase significantly due to large returns generated from its investments and because the effects of prepaid pension assets were being included in the balance sheets of the bank holding companies the Federal Reserve was using as its peer group to compute the PSAF’s financing rates and return on equity. This change resulted in an additional $60.5 million of pretax imputed costs being included in the 2000 PSAF amount. In 2005, the Federal Reserve simplified its methodology for calculating the PSAF’s equity financing rate by shifting from an average of three separate financing models to a single calculation based on the return on equity investors would demand based on the risk in the market. In the past, the Federal Reserve used financial information from large U.S. bank holding companies to calculate elements of the PSAF. For example, from 1981 to 2001, the Federal Reserve had been using the average debt and equity proportions used by the top bank holding companies in the United States, before setting the equity imputed into the PSAF to meet the FDIC definition of a well-capitalized institution. Additionally, the financial information from large bank holding companies was used to calculate the PSAF’s return on equity until 2006 and imputed taxes until 2013. In 2012, the Board adopted a policy of basing the imputed capital structure, debt and ROE rates, and tax rates on data for the U.S. publicly traded firm market. Federal Reserve staff noted that over time bank holding companies were engaged in different businesses and had risk profiles that were beyond those represented by the payment services of the Reserve Banks, many of which are now provided by nonbank entities. In 2012, the Federal Reserve amended Regulation D, governing reserve requirements, to eliminate the clearing balance program, which was largely modeled after similar programs offered by correspondent banks, wherein banks maintain balances with their correspondents. The level of clearing balances held at the Reserve Banks had declined after the Federal Reserve began paying interest on deposit balances held at Reserve Banks. Federal Reserve staff noted that the elimination of the clearing balance program significantly changed the size and nature of the assets and liabilities associated with the payment services to such an extent that the Federal Reserve determined that the use of bank holding companies as the peer group was no longer appropriate for the PSAF methodology. To ensure that it is not unfairly leveraging a possible legal advantage to benefit its payment service activities, the Board of Governors of the Federal Reserve System (Board) formally analyzes the potential competitive impact of any significant changes in the Reserve Banks’ payment services pricing or product offerings. The process it uses for conducting competitive impact analyses involves determining if a proposed change would harm other providers due to legal differences, and then weighing the potential harm of the change to competitors against the potential benefits to the overall payments system. For each price or service change proposal, the Board first considers whether the change would have a direct and material adverse effect on the ability of other service providers to compete with the Reserve Banks. According to its policy, if the Board identifies such an effect, staff then determine whether the effect was due to differing legal powers or the Reserve Banks’ dominant market position deriving from such legal differences. According to the Federal Reserve, existing legal disparities between the Reserve Banks and the private sector include differences in the rules for same-day settlement of paper checks, check presentment deadlines and locations, the ability of the paying bank to impose reasonable delivery requirements, and the control and timing of settlement. For example, according to the Federal Reserve Act and Federal Reserve regulations, every paying bank must accept paper checks from the Reserve Banks, and the Reserve Banks can obtain a same-day payment from a paying bank by debiting the paying bank’s account at a Reserve Bank without being charged a presentment fee. While the Board addressed this advantage through the adoption of Regulation CC in 1992 (effective in 1994), some market participants we interviewed noted that Regulation CC applied to paper check clearing only, and does not address the Reserve Banks’ advantage in the exchange of check images. In 1998 the Board proposed limiting or eliminating this and all remaining legal disparities between it and the private-sector competitors, but based on the public comments they received, the Board concluded that the significant costs associated with reducing the remaining legal disparities would outweigh any efficiency gains to the payment services industry, and could result in a reduction in efficiency to the payments system. For example, they said that providing for a later settlement of Reserve Bank presentments would delay the ability of the Reserve Banks to post credits for check deposits, making intraday account management more difficult for many banks and potentially increasing their daylight overdraft charges. Federal Reserve staff told us that a competitive impact analysis could indicate that a proposed change might have an adverse effect on private- sector competitors, but still not be considered unfair as long as it was determined that the Reserve Banks would not be leveraging their legal advantages. For example, the use of volume-based pricing and the bundling of services that has concerned some private-sector competitors did not raise objections in the Board’s competitive impact analysis process because these changes were not deemed to rely on a legal advantage. If the analysis of a proposed new product or pricing change determines that the Reserve Banks would obtain a competitive advantage stemming from their legal advantages, Federal Reserve staff then must continue to evaluate the proposed change to determine if the change furthers any overarching Board objectives, such as increasing the efficiency of the payments system or ensuring ubiquitous access. Staff must also consider whether the objective of the proposed change could be met in another way that would less adversely affect competing private-sector service providers. Finally, the Board may decide to modify the proposed change to lessen any adverse effects, or decide that the benefits to customers are significant enough to adopt the proposed change despite the potential for adverse effects on other competing market participants. To help ensure that it is complying with its pricing policies and effectively assessing its competitive impact, the Federal Reserve conducts various internal reviews. Federal Reserve staff said that all product and pricing changes must first be documented in a proposal by the relevant Reserve Bank product office. These proposals are to include customer and market competitive impact analyses. During proposal development, product office staff sometimes also consult with industry work groups to solicit their feedback. Once senior leadership in the product office achieve consensus on the proposals, staff may then send the proposals to the Reserve Banks’ Financial Services Policy Committee for its review and approval. The proposals—including the associated competitive impact analyses— then are sent to the Board, although Federal Reserve staff said that they often have ongoing and iterative discussions with Board staff prior to its receipt of the proposals. Board staff then conduct their own independent analysis of the proposals, and the Board will occasionally solicit additional public comments if it anticipates any significant long-term effects associated with the proposal. Nonroutine changes to pricing and product offerings are subject to approval by the Board or the director of its Division of Reserve Bank Operations and Payment Systems. The Federal Reserve estimated that staff have completed 32 competitive impact analyses for nonroutine proposals since 2000, in addition to the analyses conducted for routine proposals and for the Board’s public rulemaking process, as necessary. Nonroutine proposals are those that create a new service, create a new product line within an existing service, introduce new pricing structures, or are expected to generate significant comment from market participants. The Board’s annual repricing exercise is considered as a single, nonroutine analysis. A routine proposal, alternatively, is a new product or proposed change that only moderately affects existing products or is expected to result in minimal action from market participants. Federal Reserve staff estimated that they performed an average of 2–3 nonroutine analyses and 8–9 total analyses each year. After a new product introduction created controversy in 2013, the Federal Reserve added additional controls to better ensure that any subsequent changes would not result in unfair competition with the private sector. For their 2013 fee schedule, the Reserve Banks introduced a new check- clearing product known as “Choice Receiver,” which offered preferential prices to customers for using a Reserve Bank as the presentment bank. The Choice Receiver product was initially approved by the Board but later challenged by private-sector competitors as unfair. After reviewing more complete information about the product, Board staff said that they concluded that its approval had been inappropriate because the product office had not provided sufficient information to allow the Board to evaluate whether the product relied on the Federal Reserve’s legal advantages. Once all the relevant information had been considered, the Board rescinded the product later that year because it was deemed to have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve due to legal differences. As a result of this experience, Federal Reserve staff told us they modified their internal processes for analysis and review of proposed price and service changes. For example, they created a competitive impact analysis template that serves as a training tool for staff (staff respond to a series of questions evaluating the potential adverse effect of proposed changes). Reserve Banks also implemented a concept evaluation process, which provides a high-level overview of planned changes to products or prices in advance of formal proposals, and an enhanced postimplementation review process, which compares the actual performance of a product or service to the estimated changes in the original proposal. Federal Reserve staff said that these processes together have helped provide clarity to internal stakeholders on products in development; improved the transparency and collaboration between product offices and Board staff; and provided validation for prices and products after they have been implemented. In addition to the individual named above, Cody Goebel (Assistant Director), Nathan Gottfried (Analyst-in-Charge), William R. Chatlos, A. Nicole Clowers, Giselle Cubillos-Moraga, Robert Dacey, Simin Ho, John Karikari, Paul Kinney, Risto Laboski, Marc Molino, Patricia Moye, Barbara Roesmann, and Jason Wildhagen made major contributions to this report. | Federal Reserve Banks compete with private-sector entities to provide services while Federal Reserve Board staff also supervise the Reserve Banks and other service providers and financial institution users of these services. The Monetary Control Act requires the Federal Reserve to establish fees for its services on the basis of costs, including certain imputed private-sector costs. GAO was asked to review issues regarding the Federal Reserve's role in providing payment services. Among other objectives, GAO examined (1) how well the Federal Reserve calculates and recovers its costs, (2) the effect of the Federal Reserve on competition in the market, and (3) market participant views on the Federal Reserve's role in the payments system. GAO analyzed cost and price data trends; reviewed laws, regulations, and guidance related to Federal Reserve oversight and provision of payment services; and interviewed Federal Reserve officials, relevant trade associations, randomly selected payment service providers, customer financial institutions, and other market participants. The Federal Reserve Banks are authorized to provide payment services—such as check clearing and wire transfers—to ensure continuous and equitable access to all institutions. The Depository Institutions Deregulation and Monetary Control Act of 1980 (Monetary Control Act) requires the Federal Reserve to establish prices for its payment services on the basis of the costs incurred in providing the services and give due regard to competitive factors and the provision of an adequate level of services nationwide. GAO found the Federal Reserve had a detailed cost accounting system for capturing these costs that generally aligned with federal cost accounting standards. Although this system was evaluated and found effective by a public accounting firm in the 1980s, it has not undergone a detailed independent evaluation since then. In addition to the actual costs it incurs in providing services, the Federal Reserve also must include an allocation of imputed costs which takes into account the taxes that would have been paid and the return on capital that would have been provided if the services had been furnished by a private firm. Although its processes for simulating the imputed costs generally were reasonable, the Federal Reserve did not impute certain compliance costs private-sector firms can face—such as for planning for recovery and orderly wind down after financial or other difficulties. Including additional simulated costs competitors can incur and obtaining periodic external evaluations of its cost accounting practices would provide greater assurance that the Federal Reserve fully includes appropriate costs when pricing its services. Since the mid-2000s, the effects of Federal Reserve participation in the payment services market have included lower prices for many customers; overall market share for competitors also increased. Although some competitors raised concerns about some Federal Reserve pricing practices, customers GAO interviewed generally were satisfied with its services and prices. The Federal Reserve also has a process for assessing its pricing and products to help ensure it is not unfairly leveraging any legal advantages. Since 2005, the Federal Reserve lowered prices for checks and smaller electronic payments while increasing prices for wire transfers. During this time, private-sector competitors' market share expanded overall. But the Federal Reserve's only competitor in small electronic payments and wire transfers told GAO that increased regulatory costs and competitive pressure from the Federal Reserve creates difficulties for the long-term viability of private-sector operators. Most market participants GAO interviewed were satisfied with how the Federal Reserve performed various regulatory and service provider roles in the payments system. Most of the 24 participants GAO interviewed had no concerns over how the Federal Reserve separated its supervisory activities from its payment services activities. The Federal Reserve also has begun collaborating with market participants to pursue improvements to the safety, speed, and efficiency of the payment system. Although some competitors said the Federal Reserve should reduce its payment services role, many participants supported having the Federal Reserve remain an active provider. Federal Reserve staff indicated that these activities provide the Federal Reserve with sufficient revenue to enable it to provide ubiquitous access at affordable prices. GAO recommends that the Federal Reserve consider ways to incorporate, where appropriate, additional costs faced by private-sector competitors in its simulated cost recoveries and periodically obtain an external audit that tests the accuracy of the methods it uses to capture and simulate its costs. The Federal Reserve noted steps they will take to address GAO's recommendations. |
Autism is a complex developmental disability that impairs development in social interaction and communication and is often characterized by repetitive behaviors, such as jumping up and down and rocking. In particular, people with autism may be unable to process nonverbal communication, including body language or inflection, causing them to have difficulty understanding differences in tone, such as discerning when someone is joking. People with autism also often have difficulty ascertaining the emotional state of those around them. What is commonly referred to as autism is, more precisely, a group of disorders known as autism spectrum disorders. Autistic disorder is a more severe form of autism, and Asperger syndrome is a milder form. An individual who has symptoms of either of these disorders but does not meet their specific criteria is diagnosed with pervasive developmental disorder not otherwise specified. Other rare, severe disorders that are included in the group of autism spectrum disorders are Rett syndrome and childhood disintegrative disorder. While autism typically is detected during the first 3 years of life, the symptoms, degree, and manner of manifestation range substantially among those with autism. An individual with autism may have some degree of mental retardation or may have above-average intelligence, an expansive vocabulary, or extraordinary abilities in certain areas, such as mathematics or music. Symptoms that children with autism may exhibit include lack of meaningful gestures by 12 months of age, lack of speech by 16 months of age, inability to respond to one’s name, a loss of language or other social skills previously gained, poor eye contact, atypical attachment to a particular toy or object, or inability to use toys or objects. Furthermore, children with autism may not respond like other children. For example, they may seem indifferent, seldom seek comfort, and resist or passively accept affection. Because it is common for individuals with autism to have difficulty regulating their emotions, they may behave inappropriately, disruptively, or even aggressively. They may become frustrated when they are placed in a new environment, and when frustrated may pull their hair, bang their heads, or attack others or themselves. Currently, there is no consensus about the cause of autism. While autism is known to be the result of a neurological disorder that affects the normal functioning of the brain, it is not known precisely what causes the brain disorder or which factors are associated with particular severity levels within the autism spectrum. Theories include genetic components, environmental components, and some combination of genetics and the environment. Experts generally agree that early detection is the best hope of appropriate treatment and best quality of life in later years for those with autism. Most also agree that people with autism generally respond better to highly structured programs tailored to each individual’s particular developmental deficits. To date, most treatment for children with autism has focused on education interventions, which may include speech and language therapy, occupational therapy, and behavior modification. Under the Individuals with Disabilities Education Act (IDEA), states are required to provide eligible children with needed special education and related services. Some physicians may prescribe medications to treat behavioral problems such as aggression and self-injurious behavior; these medications are generally the same medications used to treat similar symptoms in other disorders. It is not known how many people in the United States currently have autism. In 1996, CDC began conducting population-based studies to determine the prevalence of and risk factors for autism, and the agency has reported prevalence rates for children in two communities. These rates were 3.4 and 6.7 per 1,000 children and were higher than previously reported prevalence rates. In addition, in May 2006, CDC reported estimated autism prevalence rates for the period of 2003 to 2004 based on two national surveys, one of which indicated a rate of 5.5 per 1,000 children and the other of which indicated a rate of 5.7 per 1,000 children. Some experts have attributed the reported increase in prevalence to changes in diagnostic criteria, and some have contended that it reflects improvements in early detection. The apparent increase in prevalence, coupled with the lack of a known cause or cure, has sparked concern, particularly among families with affected children. The Children’s Health Act of 2000 required HHS and certain HHS agencies to conduct various activities and programs related to autism. NIH was charged with expanding, intensifying, and coordinating research on autism and awarding grants for autism research centers of excellence. NIH was also directed to establish a program through which tissue samples and genetic materials would be made available for research and to establish a means through which the public could obtain information and provide comments on NIH’s autism-related activities. In addition, the law required CDC to establish an autism and developmental disabilities surveillance program through regional centers of excellence to collect and analyze information and coordinate research related to the epidemiology of autism. The law also required the establishment of an interagency autism coordinating committee to coordinate efforts within HHS. Many of these activities have been funded through lump sum appropriations to NIH and CDC, and the Congress has generally not appropriated funds specifically for autism projects and activities. NIH and CDC support an array of autism activities, and officials from both agencies told us that their funding of autism activities increased from fiscal year 2000 to fiscal year 2005. NIH’s efforts include research on determining the causes of autism, improving the diagnosis and treatment of autism, and improving the delivery of autism-related services. CDC supports surveillance activities, including tracking the characteristics and prevalence of autism. CDC’s surveillance programs have relied on information from multiple sources, including student education records, to obtain a complete and unduplicated count of the number of children with autism. However, CDC officials believe a 2003 change in Education’s interpretation of the federal law governing the privacy of education records has hindered CDC’s ability to continue to use this methodology. HHS and Education were required to submit a report to congressional committees in June 2005 identifying how to overcome the challenges CDC faces in using education records to conduct surveillance; as of June 2006, the agencies had not agreed on options for overcoming these challenges and had not completed the report. NIH’s estimated funding of autism research increased from about $51.5 million in fiscal year 2000 to about $101.6 million in fiscal year 2005. CDC’s total funding of autism activities increased from about $2.1 million to about $16.7 million during the same period. NIH has undertaken research activities that focus on determining the causes of autism, improving the diagnosis and treatment of autism, and improving the provision of services related to autism. (See app. II for information on selected NIH autism activities.) Many of these activities were developed to respond to the Children’s Health Act’s general requirement that NIH expand, intensify, and coordinate its autism research activities and to the act’s specific requirements, such as that NIH establish centers for conducting research on autism and establish a program through which tissue samples and genetic materials would be available for research. NIH research that focuses on determining the causes of autism includes efforts to identify genes that increase susceptibility to the disorder and efforts to ascertain the role of environmental exposures. For example, NIH’s National Institute of Environmental Health Sciences, in partnership with the Environmental Protection Agency, supports a national network of centers to examine the effect of environmental exposures on children’s health. Of the 11 centers this program supports, 2 centers conduct research on environmental causes of autism and perform clinical evaluations of children with autism. NIH also conducts research evaluating specific treatments for the symptoms associated with autism. Several federal officials and advocacy association representatives told us that there are not enough evidence- based treatments for people with autism, and NIH has several activities to help develop such treatments. For example, in response to the increasing use of medications to treat symptoms of autism, the National Institute of Mental Health (NIMH) in 1997 established a network of research sites to study the use of psychotropic drugs in the treatment of autism. In 2002, the network was renewed and expanded to include psychosocial and behavioral interventions. Support for the research is designated specifically for evaluating treatments for autism, and the networks are intended to be a national resource that will expedite clinical trials in children. For example, one study found that methylphenidate—a treatment for attention deficit/hyperactivity disorder—was often effective for improving inattention, hyperactivity, impulsivity, and distractibility in children with autism who participated in the study. NIH’s largest investment in autism research is through its support of networks of research centers, such as the Collaborative Programs of Excellence in Autism (CPEA), consisting of nine centers, and the Studies to Advance Autism Research and Treatment (STAART), consisting of eight centers and a data coordination center. NIH’s National Institute of Child Health and Human Development and National Institute on Deafness and Other Communication Disorders established the CPEA network in 1997; in 2002, they renewed the network for an additional 5 years and in 2003 expanded it to include a data coordinating center. NIH began the STAART program in 2001 in response to the Children’s Health Act. Some centers participate in both networks, which have similar purposes in conducting research on the causes, diagnosis, early detection, and treatment of autism. Unlike the CPEA network, the STAART network requires that each center have at least one treatment project. NIH officials told us the institutes are planning to unify the STAART centers and CPEAs into a new network—Autism Centers of Excellence—in an effort to improve coordination of NIH-sponsored efforts, avoid duplication, and maximize the efficient use of resources. NIH also supports programs that provide research resources, such as genetic materials and tissue samples, to scientists working on autism. For example, NIH’s National Institute of Neurological Disorders and Stroke and NIMH are providing support to the Harvard Brain Tissue Resource Center to increase the collection of brains from individuals diagnosed with autism, which is expected to facilitate neurobiological research on autism. In addition, several NIH institutes and centers support the collection, sharing, and distribution of genetic and tissue materials across the scientific community through NIMH’s Autism Genetics Initiative. NIH officials told us that through the agency’s internal Autism Coordinating Committee, five NIH institutes collaborate closely on their autism activities, such as managing grant programs, developing research program announcements, and responding to inquiries from researchers. For example, to encourage investigator-initiated studies, the five institutes jointly sponsor a broadly based program announcement that solicits research proposals designed to elucidate various issues related to autism, including causes and the optimal way of delivering services. NIH officials told us that there is usually no obvious scientific demarcation for which institute is the best fit for a grant application, so the committee generally determines the distribution of grants according to available resources. The committee is also working with the NIH Center for Information Technology to create and implement a National Database for Autism Research. NIH officials expect the database to allow researchers to share data; make disparate databases available through a single source; and coordinate data with other federal databases, such as NIMH’s Autism Genetics Repository. NIH officials also told us that the committee drafted the request for applications for the new Autism Centers of Excellence program. CDC supports surveillance activities in certain locations that track the prevalence of autism and other developmental disabilities in children. In 1996, CDC began collecting information on the prevalence of autism as a part of its Metropolitan Atlanta Developmental Disabilities Surveillance Program, and in 1999, CDC began supporting autism surveillance in West Virginia. CDC expanded its surveillance activities in fiscal year 2000 to form the Autism and Developmental Disabilities Monitoring Network, which initially consisted of 5 project sites established to conduct surveillance in 6 states. Subsequent expansions of the network in fiscal years 2002 and 2003 added additional project sites and states, and as of February 2006, the network consisted of 10 project sites established to conduct surveillance in 11 states. CDC also supports surveillance at 6 additional sites through its Centers of Excellence for Autism and Developmental Disabilities Research and Epidemiology, established in 2001 in response to the Children’s Health Act. In addition to engaging in surveillance, these sites conduct research to determine the causes of and risk factors for autism. CDC, through its autism surveillance activities, also collects information on the characteristics of autism, including the severity of symptoms and the presence of co-occurring disorders. To obtain a complete and unduplicated count of the number of children with autism, most of CDC’s surveillance sites have shared the same method of comparing information from multiple data sources—including student education records, medical records, and vital records. For example, according to CDC officials, information in education records has been used to identify children with autism who were not identifiable from other sources. In addition, a child with autism may be identified in multiple data sources, and comparing these sources helps ensure the child is not counted more than once. CDC officials said that to compare multiple data sources accurately, the surveillance sites must have personally identifiable data, such as the child’s name or Social Security number. To protect the privacy of information in children’s education records, after CDC researchers are sure they have an unduplicated count, all personally identifiable markers in the data sets are replaced with codes that are not linked to personally identifiable data, according to CDC officials. CDC officials believe the agency’s surveillance programs will not be able to continue using this methodology because of a 2003 change in Education’s interpretation of FERPA. FERPA guarantees parents access to their child’s education records and protects the privacy of these records by prohibiting their disclosure without parents’ prior written consent, except in limited circumstances. In December 2000, CDC entered into a memorandum of agreement with Education that designated CDC an authorized representative of Education, which allowed CDC access to data in personally identifiable education records for its surveillance program in Atlanta. Several other sites in the monitoring network entered into similar agreements with their respective state education agencies to gain access to this type of data. However, in 2003, Education determined that this sharing of information was not consistent with FERPA, stating that only employees, contractors, and others under the direct control of a state education agency can be designated as its authorized representative. In response to subsequent inquiries, Education sent letters to two states’ education agencies informing them of this reinterpretation of FERPA. It posted these letters on the Education Web site. The agreement between Education and CDC that governed the surveillance program in Atlanta expired in December 2005, and based on its 2003 interpretation of the statute, Education did not renew it. According to CDC, as of May 2006, 9 of its 16 autism surveillance sites were operating under state-level memorandums of agreement to access education records, while the Atlanta site had stopped collecting data and the other sites were using other methodologies, such as collecting data only from medical sources. CDC and Education officials have discussed issues related to CDC’s use of education records for autism surveillance. Education officials have stated that FERPA requires CDC to obtain written parental consent to gain access to personally identifiable education records and that as an alternative, CDC could choose to conduct its surveillance activities using aggregated data. CDC officials said that obtaining parental consent is not an optimal research method because, in general, low proportions of parents of school-aged children respond to such requests, resulting in incomplete data. They also said that personally identifiable data are needed during the initial stage of surveillance to ensure an unduplicated count of individuals with autism. CDC officials discussed with us approaches that they believe would allow CDC to continue surveillance using personally identifiable education records. The options CDC identified would require either legislative or administrative action, including amending FERPA, the Children’s Health Act, or the Public Health Service Act to permit autism surveillance activities without parental consent or to provide for a passive consent system for parents; or allowing staff from education agencies to oversee or participate in data collection. The Birth Defects and Developmental Disabilities Prevention Act of 2003 required the Secretary of HHS and the Secretary of Education to submit a report to congressional committees by June 2005 concerning CDC’s autism and developmental disabilities surveillance activities, including a description of challenges to CDC’s obtaining education records. The report is also to describe methods for overcoming these challenges, such as efforts to increase parental consent, and to describe the justifications for any recommendations for legislative changes, including changes to FERPA. As of June 2006, CDC and Education had not agreed on options for overcoming the challenges CDC faces in using education records, and CDC and Education officials told us they could not estimate when the report would be ready for submission. CDC officials told us that the agency was developing a draft of the report, which Education would then need to review. NIH’s funding of autism research increased from about $51.5 million in fiscal year 2000 to about $101.6 million in fiscal year 2005, based on estimated funding data provided by NIH. (See table 1.) NIH data show that NIMH has provided the greatest amount of support for autism research among NIH’s institutes, and its estimated funding for autism research increased from about $22.6 million in fiscal year 2000 to about $58.4 million in fiscal year 2005. NIMH considers the total amount awarded for each project as autism funding, even when autism is only one of several disabilities being studied. According to NIMH, many of the institute’s grants target a broad question related to neurodevelopment that has implications for autism and many other developmental disabilities. Because the research has the potential to produce important information about autism, however, NIMH believes that 100 percent of the grant amount should be considered autism funding even though the grant also covers other disabilities. Estimated combined funding for autism research at other NIH institutes increased from about $28.9 million in fiscal year 2000 to about $43.2 million in fiscal year 2005. Unlike NIMH, these institutes prorate the research dollars, estimating a percentage of the project that focuses on autism, but NIH officials told us that there is variability in how these institutes estimate the prorated amounts. NIH officials told us that the agency is developing a single system for disease coding across all NIH institutes; the agency anticipates implementing this system in October 2007. CDC’s funding of autism activities increased from about $2.1 million in fiscal year 2000 to about $16.7 million in fiscal year 2005. The National Center on Birth Defects and Developmental Disabilities has provided the most support for CDC’s autism activities, and agency officials told us that the center’s funding of these activities increased from about $1.1 million to about $14.9 million during this period. CDC’s funding amounts include the agency’s funding of autism and developmental disabilities surveillance activities and of research to determine the causes and characteristics of autism. CDC officials told us that CDC counts the total amount of its funding of the surveillance activities as autism funding because researchers need to collect information on other developmental disabilities to identify autism cases. (See table 2 for CDC’s funding of autism activities for fiscal years 2000 through 2005.) Federal agencies support services for people with autism primarily through broader programs that focus on disabilities, and some services may not always be available to meet the needs of this population. ACF and Education support education services for children with autism through broader programs for people with disabilities. ACF’s Head Start program provides early childhood education to young children in low-income families and is often the first opportunity to identify a child’s disability. Education supports programs that provide special education services for children and young adults with disabilities, but schools face challenges in providing services. Other federal agencies, including HRSA and CMS, support programs that provide services or enhance the delivery of health care for people with developmental disabilities. For example, CMS supports community-based services to meet the needs of people with autism through Medicaid programs; however, many people with autism may not be able to obtain services through these programs. ACF and Education administer programs that identify and educate children with disabilities, including autism. ACF’s Head Start program provides early childhood education and services to children from low- income families, generally from birth to age five, with the goal of increasing school readiness. Head Start policies and procedures must ensure that at least 10 percent of all enrollment opportunities in each state are available to children with disabilities and ensure that services are provided to meet their individual needs. For a child enrolled in Head Start, the program is often the first opportunity to identify a disability affecting the child’s development. According to ACF, in fiscal year 2004, about 55 percent of the children with disabilities enrolled in Head Start had their disabilities identified after becoming enrolled. Education has responsibility for implementing IDEA, whose purpose is to provide a free and appropriate public education to children with disabilities. Under IDEA, Education supports early intervention services for children under age 3 through the Early Intervention Program for Infants and Toddlers with Disabilities, which provides grants to states to implement programs to reduce the risk that children will have a substantial developmental disability in the future. Beginning at age 3 and generally through age 21, children with disabilities are eligible to receive special education and related services that conform with an individualized education program (IEP). IDEA requires parents, teachers, school personnel, and sometimes the student to work as a team to develop an IEP that includes annual goals that reflect the child’s educational, behavioral, and physical needs and describes the services that the student will receive. Each school is responsible for ensuring that the IEP is carried out as written, notifying parents of the child’s progress, and reevaluating the child at least every 3 years. Under IDEA, parents have several options to advocate and negotiate for what will be included in the IEP. If parents disagree with the education plan determined by the IEP team, they may discuss their concerns with other members of the team; if agreement is not reached, parents may ask for mediation, file a complaint with the state education agency, or request a hearing before the appropriate education agency. Parents who are not satisfied with the outcome of the hearing may file a lawsuit under certain circumstances. The availability of education services for children with disabilities, including autism, varies across states and school districts, and schools face challenges in providing services for these children. For example, many children with autism have communication problems, but some school districts have encountered difficulties in providing speech and language services because of a shortage of specialists who can provide these services. In addition, some school districts have found it difficult to provide certain recommended interventions for particular children—such as one-to-one instruction—because of their high cost. The National Academies’ National Research Council reported that schools, faced with high costs for some of the recommended treatments for their students with autism, have tried to find a way of providing services they believe are appropriate but that will not overburden their budgets. The National Research Council concluded that school districts need financial help to provide appropriate services for children with autism, and the council recommended that states develop strategies for coordinating state education agencies with other state agencies to fund interventions for children with autism. Education also supports transition services that are designed to provide skills training, job training, and job placement to young adults with disabilities who are in transition from high school to postsecondary education or employment. When a child receiving special education services under IDEA reaches age 16, the IEP must identify the transition services needed to reach the post-high school goals set in the IEP. Education supports state vocational rehabilitation agencies that can help individuals with disabilities prepare for and engage in gainful employment. State vocational rehabilitation programs must develop individualized plans for employment for students eligible for vocational rehabilitation services before they leave school. Furthermore, for a student with a disability who is receiving special education services, this plan must be coordinated with the goals, objectives, and services in the student’s IEP. Children with disabilities, including autism, may not always receive the transition services they need. For example, under the vocational rehabilitation program, although all people with physical or mental impairments are potentially eligible for services, we previously reported that states may serve only those with the most significant disabilities in times of funding constraint, and that according to Education officials, a number of states have waiting lists for vocational rehabilitation services. We also reported that many local school systems do not have transition coordinators or work preparation programs to adequately plan for student transitions, and that the task of linking schools with adult service providers falls on special education personnel who may not be trained to address the transition needs of young adults with disabilities. In addition, according to representatives of advocacy associations, special education programs may not sufficiently prepare students for life beyond the classroom. For example, although job skills training in schools may be able to help young adults with autism obtain employment, the young adults may not have developed the social or independent living skills, such as the ability to navigate the public transportation system, necessary to keep their jobs. Education also supports programs to develop and implement evidence- based practices for educating children with autism. Under IDEA, Education administers a discretionary grant program that in fiscal year 2004 made over 40 awards for projects focused on autism and related developmental disabilities. The grant projects currently under way include research on education-based treatment interventions and training for parents and professionals working with children with autism. Education supports six Professional Development in Autism sites across the nation through which school personnel and families are provided training, support, and information on how to use evidence-based practices for students with autism. In addition, Education’s Institute of Education Sciences reported that it will sponsor a competitive grant research program in fiscal year 2007 to develop or test the effectiveness of comprehensive pre-school and school-based interventions that improve the cognitive, communication, academic, social, and behavioral outcomes of children with autism. Several federal agencies support services for people with autism through programs that provide services or enhance the delivery of care for people with developmental disabilities. Experts and officials from federal agencies told us there are not enough services—including behavioral therapy, speech therapy, occupational therapy, and supported living services—to meet the needs of people with autism. In addition, experts and federal officials have said that the shortage of professionals trained to serve people with autism makes it difficult for people with this disability to obtain the full range of services they need. Through programs targeted to people with developmental disabilities, ACF supports services for people with autism and training for professionals who work with this population. The agency supports the following grant programs to help meet the needs of individuals with developmental disabilities: the State Councils on Developmental Disabilities, Projects of National Significance, and State Protection and Advocacy Agencies. (See table 3 for a description of these programs.) In addition, ACF supports the operation and administration of 65 University Centers for Excellence in Developmental Disabilities Education, Research, and Service. The centers, which receive program funding from other sources, conduct research, disseminate information, and provide interdisciplinary training for medical residents, pediatricians, and other health care professionals on treating autism and other developmental disabilities. HRSA supports two programs to train professionals who work with people with developmental disabilities, including autism. HRSA’s Leadership Education in Neurodevelopmental Disabilities program has 35 centers across the nation that focus on training professionals with a variety of professional backgrounds—such as psychologists, pediatricians, and speech-language pathologists—to improve health care for children with developmental disabilities. HRSA also supports the Developmental- Behavioral Pediatrics Training Program to enhance the behavioral, psychosocial, and developmental aspects of general pediatric care. The program consists of 9 centers located in institutions of higher learning, which support fellows in behavioral pediatrics to help prepare them for leadership roles as teachers, researchers, and clinicians. CMS supports services to meet the needs of people with autism through Medicaid autism and developmental disability programs. These programs operate under CMS’s home and community-based services waivers that allow individuals who would otherwise need long-term care in nursing homes or other institutional settings to receive coverage for long-term care services in community settings. States determine the types of long-term care services they wish to offer under the waiver. For example, states with autism or developmental disabilities waiver programs may cover the costs for specific disability-related services—such as speech therapy, occupational therapy, and respite care—when those services are not otherwise covered under the state’s Medicaid program. States’ autism waiver programs generally offer the same services as their developmental disability waiver programs; the primary difference is that the autism waiver program may offer early intervention behavioral therapies targeted to young children. According to CMS, as of April 2006, 44 states and the District of Columbia had developmental disability waiver programs, and 3 states had autism waiver programs. In the 2 states operating both waiver programs, a person eligible for the state’s autism waiver program could also be eligible for the state’s developmental disability waiver program. However, in these states, a person can receive services under only one waiver program at a time. Although Medicaid autism and developmental disability waiver programs support the provision of treatment services for people with autism, many people with autism may be unable to obtain services through these programs because they do not meet the programs’ eligibility rules or because states limit enrollment. To be eligible to receive services under the programs, a person would need long-term care in a nursing home or other institutional setting in the absence of the waiver. As a result, people at the higher functioning end of the autism spectrum, including people with Asperger syndrome, are generally not eligible to receive services under the waiver programs. Furthermore, states are allowed to cap the number of people who can enroll in these programs. In some states, enrollment waiting lists for the waiver programs are several years long. Because some autism interventions have been found to be effective only when applied by a certain early age, children with autism who remain on waiting lists for several years may exceed the eligible age range for the intervention before they can enroll in the waiver program. Officials in one state told us the average length of time a person is on the waiting list for either its autism or developmental disability waiver program exceeds 5 years. This state requires that a specific intensive one-on-one intervention be covered under its autism waiver program; however, state officials told us that in practice no child has ever received the service through the Medicaid waiver program. Because a child must receive the intervention by age six, and children are not usually diagnosed with autism until age three, by the time they come off the waiting list, they are no longer eligible for the intervention. CMS has another waiver program that can assist people with autism and other disabilities. According to CMS, as of April 2006, 12 states were operating Independence Plus waiver programs. These waiver programs, which allow participant input, support services that teach skills, such as planning, budgeting, and decision making. The Independence Plus waiver programs also support home and community-based services—such as respite care and transportation—for people with disabilities, including developmental disabilities. The primary vehicle for coordinating federal agencies’ autism activities is the IACC. In accordance with the Children’s Health Act, NIH in 2001 established the IACC to enhance effective collaboration within HHS and among other agencies conducting autism-related activities and to improve constructive dialogue with members of the public and interest groups. NIMH was designated the lead agency for the IACC, which includes representation from other NIH institutes, other HHS agencies, and Education. The IACC meets semiannually and has facilitated the exchange of information on autism activities among member agencies by providing a forum for federal agencies to share information on existing and planned autism-related activities and to obtain comments from participating agencies and the public. For example, CDC officials told us they shared information with the IACC from a series of listening sessions the agency conducted with parents, health care professionals, and others, because the concerns raised at the sessions touched on issues related to research or providing services that were outside of CDC’s purview. Officials from member agencies told us that the interagency committee has increased communication; improved planning; and helped agencies avoid duplicative research, such as on environmental risk factors for autism. The IACC has enhanced federal coordination in the development of research priorities and of recommendations for improving service delivery. In 2003, the IACC produced a research matrix (see app. III), which NIH officials view as a comprehensive list of autism research goals. NIH officials told us the agency’s institutes have used the matrix to guide their funding of autism-related activities and programs. For example, NIH has indicated that the focus of its planned Autism Centers of Excellence will relate to the research matrix goals of determining the causes of and best treatments for autism. NIH officials told us that the matrix is not a static document and that it will need to be updated to reflect goals that have been achieved and new priorities. HHS officials told us that a portion of the IACC’s November 2006 meeting will be devoted to updating the matrix’s goals. In addition to focusing on research, the IACC has also supported efforts related to early identification and screening for autism and to the provision of services for people with autism. The IACC established a screening subcommittee to develop a screening campaign and work on ways to link families to referrals for services. One of the accomplishments of the subcommittee was CDC’s autism awareness campaign: “Learn the Signs. Act Early.” This campaign is aimed at encouraging awareness of early childhood development, including warning signs of autism and other developmental disabilities. Through the campaign, CDC disseminates information, provides educational materials, and supports online resources to inform parents and health care providers of the importance of early screening and intervention for children with autism and other developmental disabilities. In addition, because of its concern that services for people with autism are fragmented, poorly coordinated, and not always available, the IACC established a services subcommittee— currently cochaired by officials from Education and the Autism Society of America—to consider the service needs of people with autism. The services subcommittee defined its mission as identifying the service needs of individuals with autism and their families, describing current federal efforts to meet those needs, identifying challenges to meeting those needs, and making recommendations for action. In July 2004, the services subcommittee convened a panel of autism experts to develop an action plan for enhancing existing service systems, expanding services for individuals with autism and their families, and coordinating services across systems. This document—the Autism Spectrum Disorders Roadmap—was presented to the IACC in May 2005. The roadmap provided a synthesis of issues and challenges related to serving people with autism and a set of performance measures and recommendations for improving services. A subcommittee member told us that the subcommittee’s vision was that each agency could begin to implement the recommendations without much difficulty. (See app. IV for additional information on the roadmap.) The services subcommittee also presented a report to the IACC that identified agencies’ existing activities related to the recommendations in the roadmap. The report also identified recommendations that could be implemented in the short term and assigned lead responsibility to specific agencies for implementing them. Some agencies have begun to address the short-term recommendations. For example, in light of the goal of improving access to comprehensive information about autism services, the Agency for Healthcare Research and Quality is planning to develop a single autism Web site to consolidate all government information for parents and service providers. An agency official told us that the agency is exploring the possibility of linking information from Education and other agencies with HHS’s existing autism Web site. In addition, to respond to the recommendation related to identifying Medicaid waiver programs for people with autism, a CMS official told us that the agency is working on a report that will discuss promising practices supported by autism waiver programs in two states and expects to post the report on its promising practices Web site by September 2006. Although some federal agencies have begun to address some of the roadmap’s recommendations, the document lacks the specificity that would help a state or federal agency easily implement all of its findings. For example, the roadmap indicates there is a lack of adequately trained autism providers, but does not specify which types of providers are needed. The roadmap also indicates there is a lack of understanding and communication regarding autism, but does not specify the type of training and technical assistance professionals and families of people with autism need. While the IACC has created a forum for sharing information and identifying areas to pursue to improve research and services, officials told us that there is limited coordination of federal agencies’ autism-related activities. For example, although officials from IACC member agencies told us about programs their agencies had under way related to autism, very few of those programs represented coordinated efforts across agencies. Officials from federal agencies and representatives of advocacy associations told us that federal coordination is hindered because no agency on the IACC actively monitors federal agencies’ responses to recommendations to ensure that tasks are completed. In addition, because it is simply a coordinating body, the IACC does not have authority to ensure that agencies follow up on committee or subcommittee recommendations. Moreover, no federal agency perceives itself as having lead responsibility for addressing the service needs of adults with autism or services for children beyond education. NIH and CDC have increased their funding to support autism activities and have pursued many avenues of research, including those specified in the Children’s Health Act and in the IACC’s research matrix. In addition to developing research goals for its member agencies, the IACC has provided a forum for federal agencies to inform each other and the public about their current autism activities and has recommended approaches for improving services for people with autism. However, coordination among agencies in carrying out their autism activities remains limited. Furthermore, successful implementation of IACC research goals and services recommendations will depend on individual agencies taking the initiative to develop new programs or tailor existing ones and coordinating with other public and private agencies as appropriate. This is especially critical for improving the availability and delivery of services, because although ACF and Education have primary responsibility for federal programs that support education services for children with autism, no single agency has a lead role in supporting the delivery of other types of services for people with autism. The information on the characteristics and prevalence of autism being tracked through CDC’s surveillance activities could also help federal agencies better develop or tailor services for people with autism. However, the current limitation on CDC’s ability to use information in education records has presented challenges to the agency’s ability to report accurate and complete data. Conducting autism surveillance and protecting the privacy of sensitive information in education records are both important goals. The Congress required HHS and Education to jointly develop a report describing the challenges to CDC’s obtaining education records for autism surveillance and identifying options for overcoming them. As of June 2006, HHS and Education had not completed this report, which could help the Congress determine how to accommodate both of these goals. Resolving the challenges facing CDC would facilitate continued progress toward identifying the characteristics and prevalence of autism. These efforts are essential for advancing knowledge about autism diagnosis, treatment, and services, which could help improve the lives of people with autism and their families. We recommend that to ensure continued progress toward the development of accurate and comparable data on autism characteristics and prevalence and to provide the information the Congress required on CDC’s surveillance activities, the Secretary of Health and Human Services and the Secretary of Education work together to promptly identify options for overcoming challenges to CDC’s ability to use education records for surveillance of autism. We provided a draft of this report to HHS and Education for comment. (HHS’s and Education’s comments are reprinted in appendixes V and VI, respectively.) In addition to general comments, HHS and Education also provided technical comments, and we revised our report to reflect the comments where appropriate. HHS and Education did not agree with the report’s recommendation. In its comments, HHS said that the recommendation suggested that HHS and Education had not worked together to identify options that would enable CDC to continue to obtain and use education records for autism surveillance. Although the draft report did not indicate that the departments had not worked together, we added a statement that HHS and Education have had discussions about this issue. However, as of June 2006, HHS and Education had not agreed on options or submitted the report due to the Congress in June 2005 describing these options, as required by the Birth Defects and Developmental Disabilities Prevention Act of 2003. Education expressed concern in its comments that the recommendation did not take into account the privacy protections provided by FERPA. We added language to the final report to acknowledge that autism surveillance and protecting the privacy of information in education records are both important goals. We did not modify our recommendation because we continue to believe it is important for Education and HHS, consistent with the Birth Defects and Developmental Disabilities Prevention Act of 2003, to work together to promptly identify options for overcoming the challenges CDC faces in using education records so that the Congress can make an informed decision on how to accommodate both of these goals. Education’s comments included several points about the draft report’s treatment of FERPA’s privacy protections. Education said that protecting the privacy of sensitive information in education records should not be viewed as a challenge to overcome, but as an important public safeguard. Our use of the word challenge does not negate the importance of protecting the privacy of education records. We have used this word because the Birth Defects and Developmental Disabilities Prevention Act of 2003 specifically required Education and HHS to describe the challenges to CDC’s obtaining education records and identify methods for overcoming them. In its description of the act’s discussion of methods for overcoming these challenges, Education emphasized the methods related to increasing parental consent and said that this was the Congress’ primary concern. However, the act specifically instructed the departments to provide justifications for any recommendations to change existing statutory authority, including FERPA, indicating that the Congress contemplated possible changes to current privacy protections. Education stated that it is willing to discuss with CDC options related to CDC’s use of information in education records for autism surveillance. In its response to the draft report’s discussion of CDC’s description of possible approaches that would allow it to continue using personally identifiable education records for surveillance, Education noted that FERPA does not permit schools to use a passive consent model for the disclosure of education records. We revised the report to clarify that passive consent systems are not authorized under FERPA. The draft report stated that Education sent letters to two states’ education agencies, in response to their inquiries, informing them of Education’s reinterpretation of FERPA, but had not communicated this change to other states’ education agencies. Education commented that this was inaccurate and said that it had posted these letters on its Web site and that it provides training on FERPA to education officials. We revised the report to reflect this information. Regarding the draft report’s discussion of services for children with autism, Education expressed concern that the draft report implied that there was a widespread problem of schools violating IDEA in their provision of services to children with disabilities, including autism. We did not intend to imply this, and we revised the report to emphasize that schools face challenges in providing such services. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Secretary of Education, the Director of the Centers for Disease Control and Prevention, the Director of the National Institutes of Health, the Administrator of the Centers for Medicare & Medicaid Services, the Administrator of the Health Resources and Services Administration, the Administrator of the Substance Abuse and Mental Health Services Administration, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on 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) 512-7101 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. To determine the autism-related activities and programs that the Department of Health and Human Services’ (HHS) National Institutes of Health (NIH) and Centers for Disease Control and Prevention (CDC) have under way, we collected documents from and interviewed agency officials about their fiscal year 2005 research and surveillance activities. To help confirm that we had a complete list of agencies’ programs, we compared the information agency officials gave us with programs in the online Catalog of Federal Domestic Assistance and the Computer Retrieval of Information on Scientific Projects. We identified in the Children’s Health Act of 2000 the specific autism-related mandates and authorizations for NIH and CDC and reviewed agency-provided lists of activities and interviewed agency officials to determine which activities the agencies had conducted to respond to the act. We also compared the agencies’ autism- related programs to goals developed by the Interagency Autism Coordinating Committee (IACC). To determine NIH’s and CDC’s funding of activities related to autism, we asked agency officials to provide funding for autism, by institute and center, for fiscal year 2000—one fiscal year before passage of the Children’s Health Act—through fiscal year 2005. The funding data we obtained generally represented obligated funds—funds the agencies had legally committed to spend but might not yet have expended. In addition, NIH’s data represent the agency’s estimated funding of autism research. We did not verify the accuracy of these data; however, we interviewed agency officials knowledgeable about the data, and we determined that the data were sufficiently reliable for the purposes of this report. We relied primarily on agency-reported program descriptions and funding amounts; we did not independently verify the use of grant money by recipients and therefore could not determine any causal link between enactment of the Children’s Health Act and changes in funding for autism-related projects. To identify the programs federal agencies have under way to support services for people with autism, we interviewed officials from other HHS agencies—the Administration for Children and Families, Agency for Healthcare Research and Quality, Centers for Medicare & Medicaid Services, Food and Drug Administration, Health Resources and Services Administration, Office on Disability, and Substance Abuse and Mental Health Services Administration. We also interviewed officials from the Environmental Protection Agency and the Department of Education’s Family Policy Compliance Office, Institute of Education Sciences, Office of Elementary and Secondary Education, and Office of Special Education and Rehabilitative Services. To determine how federal departments and agencies coordinate their autism activities and programs, we reviewed minutes and reports of interagency meetings and interviewed federal agency officials. We also attended the November 2005 meeting of the IACC to observe how member agencies shared information and coordinated programs and activities. In addition, we interviewed federal agency officials on the challenges of and potential areas for improvement in federal agencies’ coordination efforts. It was beyond the scope of this engagement to identify all federal programs that provide services to people with autism and all coordination activities among federal agencies and departments. We focused on programs designed to meet the specific needs of people with autism or developmental disabilities or that have specific program goals targeted to this population. It was also beyond our scope to evaluate the quality of the activities and programs we described. However, we reviewed the relevant literature and interviewed experts in autism and representatives from several professional and advocacy associations to identify concerns about federal agencies’ current activities and coordination efforts and potential areas for improvement. Specifically, we interviewed officials from the American Academy of Pediatrics, American Psychiatric Association, American Speech-Language-Hearing Association, National Association of State Directors of Developmental Disabilities Services, National Association of State Directors of Special Education, and National Association of State Medicaid Directors. We also interviewed representatives from two advocacy associations that focus on autism research and representatives from two advocacy associations with a broad focus on autism research, services, and public awareness. We conducted our work from August 2005 through July 2006 in accordance with generally accepted government auditing standards. Appendix III: Interagency Autism Coordinating Committee Research Goals Define and plan Autism Phenome Project and study existing data to begin to characterize the autism phenome Establish resources for genotype and phenotype studies (e.g., genetic repository) Develop nonbrain biomarkers (e.g., blood levels of specific molecules) to provide the biological characteristics of autism Implement multisite longitudinal study of subsequent pregnancies and infant siblings of children with autism to identify risk factors, broader phenotype, and early characteristics of autism Identify genes that increase susceptibility for autism and animal models of autism for further study of phenotypic characteristics of autism Expand, disseminate, and implement effective interventions, including transition services, to improve outcomes in school and community settings throughout a person with autism’s life span Develop, evaluate, implement, and disseminate innovative intervention strategies, including transition services, to improve outcomes in school and community settings throughout a person with autism’s life span Continue formulating, evaluating, and implementing appropriate and effective intervention strategies incorporating research-based findings to improve outcomes in school and community settings throughout the life span of a person with autism Ensure appropriate and effective interventions are widely recognized and broadly implemented in school and community settings throughout the life span of a person with autism Implement first-generation, intensive community-based prevalence studies with clinical evaluations; the studies will produce initial data for detecting changes in prevalence of autism Plan and implement second-generation intensive community-based prevalence studies with clinical evaluations Develop a randomized clinical trial for evaluating the effectiveness of early behavioral interventions and factors predicting response to interventions Implement a multisite, randomized clinical trial to identify moderators and effective components of early intervention treatments (e.g., dose, intensity, mode of delivery, age of onset) There will be universal early identification of signs of autism, followed by appropriate referral to a coordinated and comprehensive service system. Individuals with autism and their families will have ready access to integrated and coordinated health, mental health, education, and social services provided by well qualified autism providers throughout the life span of individuals with autism. Community-based services will be organized so that individuals with autism and their families can use them easily. Support family-driven state and community development initiatives to implement creative and effective practices Provide technical assistance to states and communities to implement effective service delivery models Provide a user-friendly Web-based resource for families and providers that includes information on autism (e.g., successful screening models, autism providers) All individuals with autism will receive the services necessary to make transitions to all aspects of adult life, including health care, work, and independent living. Public and private financing of autism- related services will be expanded and standardized so people with autism and their families have access to early and continuous screening; comprehensive diagnosis; and needed health care, mental health, education, and social services. In addition to the contact named above, Helene F. Toiv, Assistant Director; Jennie Apter; Janina Austin; Julian Klazkin; Robert Lepore; and KaSandra Rogiérs made key contributions to this report. | Autism is a developmental disorder involving communication and social impairment. It has no known cause or cure, and its prevalence is unknown. The Children's Health Act of 2000 required the Department of Health and Human Services (HHS) and HHS agencies to conduct activities related to autism research, surveillance, and coordination. This report provides information on (1) the National Institutes of Health's (NIH) and the Centers for Disease Control and Prevention's (CDC) autism activities and these agencies' funding of autism activities, (2) programs that federal agencies have under way to support services for people with autism and concerns related to providing services, and (3) coordination of federal autism activities. NIH and CDC have undertaken a range of autism activities, and the agencies reported that their funding of autism activities has increased. Many of NIH's activities were developed in response to requirements in the Children's Health Act for NIH to expand, intensify, and coordinate its autism activities. According to estimates from NIH, the agency increased funding for autism from about $51.5 million in fiscal year 2000 to about $101.6 million in fiscal year 2005. CDC supports surveillance activities in certain locations that track the prevalence of autism and other developmental disabilities, and its total funding of autism activities increased from about $2.1 million in fiscal year 2000 to about $16.7 million in fiscal year 2005. CDC's surveillance methodology has relied, in part, on information in student education records, but CDC officials believe that a 2003 change in the Department of Education's (Education) interpretation of relevant federal privacy law has hindered CDC's ability to use this methodology to determine the prevalence of autism. Education stated that the law does not allow CDC to access these records without written parental consent. A 2003 law required HHS and Education to submit a report to the Congress by June 2005 describing ways to overcome the challenges CDC faces in obtaining education records. As of June 2006, CDC and Education had not agreed on options for overcoming these challenges and could not estimate when the report would be completed. Federal agencies support services for people with autism primarily through broader disability programs, and some services may not always be available to meet the needs of this population. Education and HHS's Administration for Children and Families support services for children with autism through education programs for children with disabilities. Other federal agencies support services for people with autism, generally as part of broader programs to provide services or enhance the delivery of health care to people with developmental disabilities. For example, HHS's Centers for Medicare & Medicaid Services supports services to meet the needs of people with autism through Medicaid programs targeted to people with developmental disabilities. However, many people with autism may not be able to obtain services under these Medicaid programs because they do not meet eligibility rules or because states limit enrollment. The primary vehicle for coordinating federal agencies' autism activities is the Interagency Autism Coordinating Committee (IACC), and although it has enhanced communication and coordination among agencies, coordination remains limited. The IACC developed recommendations on how to better serve people with autism and established autism research goals. Agency officials told us that federal coordination is limited, in part because, except for education services, no agency perceives itself as having lead responsibility for supporting services for people with autism. |
The major requirements for the protection of personal privacy by federal agencies are specified in two laws, the Privacy Act of 1974 and the E-Government Act of 2002. The Federal Information Security Management Act of 2002 (FISMA) also addresses the protection of personal information in the context of securing federal agency information and information systems. The Privacy Act places limitations on agencies’ collection, disclosure, and use of personal information maintained in systems of records. The act describes a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a “system-of-records notice”: that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended “routine” uses of data, and procedures that individuals can use to review and correct personal information. Among other provisions, the act also requires agencies to define and limit themselves to specific predefined purposes. For example, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual’s rights or benefits under a federal program. The provisions of the Privacy Act are largely based on a set of principles for protecting the privacy and security of personal information, known as the Fair Information Practices, which were first proposed in 1973 by a U.S. government advisory committee; these principles were intended to address what the committee termed a poor level of protection afforded to privacy under contemporary law. Since that time, the Fair Information Practices have been widely adopted as a standard benchmark for evaluating the adequacy of privacy protections. Attachment 2 contains a summary of the widely used version of the Fair Information Practices adopted by the Organization for Economic Cooperation and Development in 1980. The E-Government Act of 2002 strives to enhance protection for personal information in government information systems and information collections by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to Office of Management and Budget (OMB) guidance, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form, or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. FISMA also addresses the protection of personal information. It defines federal requirements for securing information and information systems that support federal agency operations and assets; it requires agencies to develop agencywide information security programs that extend to contractors and other providers of federal data and systems. Under FISMA, information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure to protect personal privacy. To oversee its implementation of privacy protections, DHS has established a Chief Privacy Officer, as directed by the Homeland Security Act of 2002. According to the act, the Chief Privacy Officer is responsible for, among other things, “assuring that the use of technologies sustain, and do not erode privacy protections relating to the use, collection, and disclosure of personal information,” and “assuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974.” As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. Our reviews of DHS programs have identified cases where these challenges were not fully met, including data mining, airline passenger prescreening, use of data from commercial sources, use of personal identification technologies (especially RFID), and development of an information sharing environment. I will now discuss each of these subjects in greater detail. Many concerns have been raised about the potential for data mining programs to compromise personal privacy. In our May 2004 report on federal data mining efforts, we defined data mining as the application of database technology and techniques—such as statistical analysis and modeling—to uncover hidden patterns and subtle relationships in data and to infer rules that allow for the prediction of future results. As we noted in our report, mining government and private databases containing personal information raises a range of privacy concerns. In the government, data mining was initially used to detect financial fraud and abuse. However, its use has greatly expanded. Among other purposes, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sector data. Through data mining, agencies can quickly and efficiently obtain information on individuals or groups from large databases containing personal information aggregated from public and private records. Information can be developed about a specific individual or a group of individuals whose behavior or characteristics fit a specific pattern. For example, terrorists can be tracked through travel and immigration records, and potential terrorist-related activities, including money transfers and communications, can be pinpointed. The ease with which organizations can use automated systems to gather and analyze large amounts of previously isolated information raises concerns about the impact on personal privacy. As a July 2006 report by the DHS Privacy Office points out, “privacy and civil liberties issues potentially arise in every phase of the data mining process.” Potential privacy risks include improper access or disclosure of personal information, erroneous associations of individuals with undesirable activities, misidentification of individuals with similar names, and misuse of data that were collected for other purposes. Our recent report notes that early attention to privacy in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement) could reduce risks that personal information could be misused. ADVISE is a data mining tool under development intended to help DHS analyze large amounts of information. It is designed to allow an analyst to search for patterns in data—such as relationships among people, organizations, and events—and to produce visual representations of these patterns, referred to as semantic graphs. The intended benefit of the ADVISE tool is to help detect threatening activities by facilitating the analysis of large amounts of data. Although the tool is being considered for several different applications within DHS, none of them are yet operational. DHS is currently in the process of testing the tool’s effectiveness. DHS did not conduct a PIA as it developed the ADVISE tool, as required by the E-Government Act of 2002. A PIA, if it had been completed, would identify specific privacy risks and help officials determine what controls were needed to mitigate those risks. DHS officials believed that ADVISE did not need to undergo such an assessment because the tool itself did not contain personal data. However, the intended uses of the tool included personal data, and the E-Government Act and related guidance emphasize the need to assess privacy risks early in system development. Further, if an assessment were conducted and privacy risks identified, a number of controls could be built into the tool to mitigate those risks. Because privacy had not been assessed and mitigating controls had not been implemented, the department faced the risk that systems based on ADVISE that also contained personal information could require costly and potentially duplicative retrofitting to add the needed controls. We made recommendations to DHS to conduct a PIA of the ADVISE tool and implement privacy controls, as needed, to mitigate any identified risks. In its comments, DHS stated that it is currently developing a “Privacy Technology Implementation Guide” to be used to conduct a PIA. Broadly considered, data mining is a tool that has the potential to provide valuable assistance to analysts and investigators as they pursue the war on terror. However, it has been challenging for DHS to thoroughly consider and address privacy concerns early enough in its attempts to develop data mining tools and applications. As the department moves forward with ADVISE and other data mining activities, close attention to privacy will remain a critical concern. An example of the importance of ongoing attention to privacy can be taken from TSA’s development of passenger prescreening programs. TSA is responsible for securing all modes of transportation while facilitating commerce and the freedom of movement for the traveling public. Passenger prescreening is one program among many that TSA uses to secure the domestic aviation sector. The process of prescreening passengers—that is, determining whether airline passengers might pose a security risk before they reach the passenger-screening checkpoint—is used to focus security efforts on those passengers that represent the greatest potential threat. In accordance with a requirement set forth in the Aviation and Transportation Security Act, TSA has been working since 2003 to develop a computer-assisted passenger prescreening system to be used to evaluate passengers before they board an aircraft on domestic flights. An early version of that system, known as the Computer-Assisted Passenger Prescreening System II, was canceled in 2004 based in part on concerns about privacy and other issues expressed by us and others. In its place, TSA announced a new passenger prescreening program, called Secure Flight, that would be narrower in scope and designed to avoid problems that had been raised about the previous program. Aspects of the new Secure Flight system underwent development and testing in 2005. In July 2005, we reported on privacy problems associated with testing of Secure Flight. In 2004, TSA had issued privacy notices in the Federal Register that included descriptions of how personal information drawn from commercial sources would be used during planned upcoming tests. However, these notices did not fully inform the public about the procedures that TSA and its contractors would follow for collecting, using, and storing commercial data. In addition, the scope of the data used during commercial data testing was not fully disclosed. Specifically, a contractor, acting on behalf of the agency, collected more than 100 million commercial data records containing personal information such as name, date of birth, and telephone number without informing the public. As a result, the public did not receive the full protections of the Privacy Act. In its comments on our findings, DHS stated that it recognized the merits of the issues we raised, and that TSA had acted immediately to address them. The privacy problems faced in developing Secure Flight arose not because it was prohibitively difficult to protect privacy while prescreening airline passengers, but because TSA had not reassessed privacy risks when key programmatic changes were made and taken appropriate steps to mitigate them. Recently, TSA officials stated that as they work to restructure the Secure Flight program, they plan a more privacy-enhanced program by addressing concerns identified by us and others. For example, officials stated that the program no longer plans to use commercial data. Officials also stated that they have added privacy experts to the system development teams to address privacy issues as they arise. It is encouraging that TSA is now including privacy experts within its development teams, with the express goal of continuously monitoring privacy concerns. We will continue to assess TSA’s efforts to manage system privacy protections as part of our ongoing review of the program. A major task confronting federal agencies, especially those engaged in antiterrorism tasks, is to ensure that information obtained from resellers is being appropriately used and protected. In fiscal year 2005, DHS reported planning to spend about $9 million on acquiring personal information from information resellers. The information was acquired chiefly for law enforcement purposes, such as developing leads on subjects in criminal investigations, and for detecting fraud in immigration benefit applications (part of enforcing the immigration laws). For example, the agency’s largest investigative component, U.S. Immigration and Customs Enforcement—the largest user of personal information from resellers—collects data such as address and vehicle information for criminal investigations and background security checks. DHS also reported using information resellers in its counterterrorism efforts. For example, as already discussed, TSA used data obtained from information resellers as part of a test associated with the development of Secure Flight. In our report on the acquisition of personal information from resellers by agencies such as DHS, we noted that the agencies’ practices for handling this information did not always reflect the Fair Information Practices. For example, system-of-records notices issued by these agencies did not always state that agency systems could incorporate information from data resellers, a practice inconsistent with the principle that the purpose for a collection of personal data should be disclosed beforehand and its use limited to that purpose. Furthermore, accountability was not ensured, as the agencies did not generally monitor usage of personal information from resellers; instead, they relied on end users to be responsible for their own behavior. Contributing to the uneven application of the Fair Information Practices was a lack of agency policies, including at DHS, that specifically address these uses. Reliance on information from resellers is an emerging use of personal data for which the government has been challenged to develop appropriate guidance. We recommended that DHS and other agencies develop specific policies, reflecting the Fair Information Practices, for the collection, maintenance, and use of personal information obtained from resellers. According to the DHS Privacy Office, while a policy governing the department’s use of commercial data is being drafted, the document has not yet been issued. Until the department issues clear guidance on this use, it faces the risk that appropriate privacy protections may not be in place consistently across its programs and applications. RFID is an automated data-capture technology that can be used to electronically identify, track, and store information contained on a tag. The tag can be attached to or embedded in the object to be identified, such as a product, case, or pallet. RFID technology provides identification and tracking capabilities by using wireless communication to transmit data. In May 2005, we reported that major initiatives at federal agencies that use or propose to use the technology included physical access controls and tracking assets, documents, or materials. For example, DHS was using RFID to track and identify assets, weapons, and baggage on flights. The Department of Defense was also using it to track shipments. In our May 2005 report we identified several privacy issues related to both commercial and federal use of RFID technology. Among these privacy issues is the potential for the technology to be used inappropriately for tracking an individual’s movements, habits, tastes, or predilections. Tracking is real-time or near-real-time surveillance in which a person’s movements are followed through RFID scanning.) Public surveys have identified a distinct unease with the potential ability of the federal government to monitor individuals’ movements and transactions. Like tracking, profiling— the reconstruction of a person’s movements or transactions over a specific period of time, usually to ascertain something about the individual’s habits, tastes, or predilections—could also be undertaken through the use of RFID technology. Once a particular individual is identified through an RFID tag, personally identifiable information can be retrieved from any number of sources and then aggregated to develop a profile of the individual. Both tracking and profiling can compromise an individual’s privacy. Concerns also have been raised that organizations could develop secondary uses for the information gleaned through RFID technology; this has been referred to as mission or function “creep.” The history of the Social Security number, for example, gives ample evidence of how an identifier developed for one specific use has become a mainstay of identification for many other purposes, governmental and nongovernmental. Secondary uses of the Social Security number have been a matter not of technical controls but rather of changing policy and administrative priorities. DHS uses and has made plans to use RFID technology to track individuals in several border security programs. This has been met with concern from the DHS Data Privacy and Integrity Advisory Committee, which reiterated our concerns that employing the technology for human identification poses privacy risks, including notice problems and potential for secondary use. One program that planned to make use of RFID was the US-VISIT program, a multibillion dollar program that collects, maintains, and shares information on selected foreign nationals who enter and exit the United States at over 300 ports of entry around the country. The incorporation of RFID into the program arose from the agency’s requirement for a less costly alternative to biometric verification of visitors exiting the country. We recently testified that US-VISIT RFID tests revealed numerous performance and reliability problems. For example, the readers placed to detect identifying tags failed to do so for a majority of the RFID tags. Faced with these test results, the Secretary of Homeland Security recently stated that the agency would cancel the use of RFID for US-VISIT. However, despite having rejected RFID for US-VISIT, the department has endorsed the technology for another border control initiative, the proposed PASSport (People Access Security Service) system identification card, which is part of the Western Hemisphere Travel Initiative. The RFID-enabled PASSport card would serve as an alternative to a traditional passport for use by U.S. citizens who cross the land borders and travel by sea between the United States, Canada, Mexico, the Caribbean, or Bermuda. The department’s varying approaches to the use of RFID for human identification suggests the need for a departmentwide policy that fully addresses privacy concerns. Unless DHS issues comprehensive guidance to direct the development and implementation of new technologies such as RFID, it faces the risk that appropriate privacy protections may not be implemented consistently across its programs and applications. According to the DHS Privacy Office, it is considering developing guidance to address the use of specific technologies, including RFID. The challenges that DHS faces in protecting privacy extend beyond the need to consider and address privacy issues while developing its own programs and systems. The department also interacts with many other intelligence and law enforcement entities, both within and outside the federal government, and potentially shares information with them all. As with its own programs and systems, it will be important for DHS to ensure that privacy has been thoroughly considered and guidelines clearly established as it participates in the emerging information sharing environment. As directed by the Intelligence Reform and Terrorism Prevention Act of 2004, the administration has taken steps, beginning in 2005, to establish an information sharing environment to facilitate the sharing of terrorism information. The direction to establish an information sharing environment was driven by the recognition that before the attacks of September 11, 2001, federal agencies had been unable to effectively share information about suspected terrorists and their activities. In addressing this problem, the National Commission on Terrorist Attacks Upon the United States (9/11 Commission) recommended that the sharing and uses of information be guided by a set of practical policy guidelines that would simultaneously empower and constrain officials, closely circumscribing what types of information they would be permitted to share as well as the types they would need to protect. Exchanging terrorism-related information continues to be a significant challenge for federal, state, and local governments—one that we recognize is not easily addressed. Accordingly, since January 2005, we have designated information sharing for homeland security a high-risk area. In developing guidelines for the information sharing environment, there has been general agreement that privacy considerations must be addressed. The Intelligence Reform Act called for the issuance of guidelines to protect privacy and civil liberties in the development and use of the information sharing environment, and the President reiterated that requirement in an October 2005 directive to federal departments and agencies. Based on the President’s directive, a committee within the Office of the Director of National Intelligence was established to develop such guidelines, and they were approved by the President in November 2006. According to its annual report for 2004–2006, the DHS Privacy Office has played a role in developing these guidelines. However, the guidelines as issued provide only a high-level framework for addressing privacy protection and do not include all of the Fair Information Practices. The 9-page document includes statements of principles, such as “purpose specification,” “data quality,” “data security,” and “accountability, enforcement, and audit” that align with certain elements of the Fair Information Practices, but it provides little or no guidance on how these principles are to be implemented and does not address another key practice—limiting the collection of personal information. For example, as the policy director of the Center for Democracy and Technology has pointed out, a number of principles mentioned in the guidelines do not include any specificity on how they should be carried out. The guidelines call for agencies to “take appropriate steps” when merging information about an individual from two or more sources to ensure that the information is about the same individual, but they give no indication of what steps would be adequate to achieve this goal. For example, no guidance is provided on gauging the reliability of sources or determining the minimum amount of information needed to determine that different sources are referring to the same individual. Likewise, the guidelines direct agencies to implement adequate review and audit mechanisms to ensure compliance with the guidelines but, again, do not specify the nature of these mechanisms, which could include, for example, the use of electronic audit logs that cannot be changed by individuals. Finally, the guidelines also direct agencies to put in place internal procedures to address complaints from persons regarding protected information about them that is under the agency’s control. No further guidance is provided about the essential elements of a complaint process or what sort of remedies to provide. According to the DHS Privacy Office, individual agencies, including DHS, are to develop specific guidelines that implement the high- level framework embodied in the governmentwide guidelines. However, no overall DHS guidance on the protection of privacy within the context of the information sharing environment has yet been developed. According to the Privacy Office, an effort is currently being initiated to develop such guidance. While DHS is only one participant in the governmentwide information sharing environment, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Until it adopts specific implementation guidelines, the department will face the risk that its information sharing activities may not protect privacy adequately. In summary, DHS faces continuing challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. We have made recommendations previously regarding ADVISE, Secure Flight, and use of information resellers, and officials have taken action or told us they are taking action to address our recommendations. Implementation of these recommendations is critical to ensuring that privacy protections are in place throughout key DHS programs and activities. Likewise, issuing guidance for participation in the information sharing environment will also be critical to ensure implementation of consistent, appropriate protections across the department. Mr. Chairman, this concludes my testimony today. I would be happy to answer any questions you or other members of the subcommittee may have. If you have any questions concerning this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6240, or [email protected]. Other individuals who made key contributions include Barbara Collier, Susan Czachor, John de Ferrari, Timothy Eagle, David Plocher, and Jamie Pressman. Data Mining: Early Attention to Privacy in Developing a Key DHS Program Could Reduce Risks. GAO-07-293. Washington, D.C.: February 28, 2007. Aviation Security: Progress Made in Systematic Planning to Guide Key Investment Decisions, but More Work Remains. GAO- 07-448T. Washington, D.C.: February 13, 2007. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Personal Information: Key Federal Privacy Laws Do Not Require Information Resellers to Safeguard All Sensitive Data. GAO-06-674. Washington, D.C.: June 26, 2006. Veterans Affairs: Leadership Needed to Address Information Security Weaknesses and Privacy Issues. GAO-06-866T. Washington, D.C.: June 14, 2006. Privacy: Preventing and Responding to Improper Disclosures of Personal Information. GAO-06-833T. Washington, D.C.: June 8, 2006. Privacy: Key Challenges Facing Federal Agencies. GAO-06-777T. Washington, D.C.: May 17, 2006. Personal Information: Agencies and Resellers Vary in Providing Privacy Protections. GAO-06-609T. Washington, D.C.: April 4, 2006. Personal Information: Agency and Reseller Adherence to Key Privacy Principles. GAO-06-421. Washington, D.C.: April 4, 2006. Information Sharing: The Federal Government Needs to Establish Policies and Processes for Sharing Terrorism-Related and Sensitive but Unclassified Information. GAO-06-385. Washington, D.C.: March 17, 2006. Data Mining: Agencies Have Taken Key Steps to Protect Privacy in Selected Efforts, but Significant Compliance Issues Remain. GAO- 05-866. Washington, D.C.: August 15, 2005. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05- 864R. Washington, D.C.: July 22, 2005. Identity Theft: Some Outreach Efforts to Promote Awareness of New Consumer Rights are Under Way. GAO-05-710. Washington, D.C.: June 30, 2005. Information Security: Radio Frequency Identification Technology in the Federal Government. GAO-05-551. Washington, D.C.: May 27, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Data Mining: Federal Efforts Cover a Wide Range of Uses, GAO-04- 548. Washington, D.C.: May 4, 2004. Aviation Security: Computer-Assisted Passenger Prescreening System Faces Significant Implementation Challenges. GAO-04-385. Washington, D.C.: February 12, 2004. Privacy Act: OMB Leadership Needed to Improve Agency Compliance. GAO-03-304. Washington, D.C.: June 30, 2003. Data Mining: Results and Challenges for Government Programs, Audits, and Investigations. GAO-03-591T. Washington, D.C.: March 25, 2003. Technology Assessment: Using Biometrics for Border Security. GAO-03-174. Washington, D.C.: November 15, 2002. Information Management: Selected Agencies’ Handling of Personal Information. GAO-02-1058. Washington, D.C.: September 30, 2002. Identity Theft: Greater Awareness and Use of Existing Data Are Needed. GAO-02-766. Washington, D.C.: June 28, 2002. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.: May 31, 2002. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. The version of the Fair Information Practices shown in table 1 was issued by the Organization for Economic Cooperation and Development (OECD) in 1980 and has been widely adopted. | Advances in information technology make it easier than ever for the Department of Homeland Security (DHS) and other agencies to obtain and process information about citizens and residents in many ways and for many purposes. The demands of the war on terror also drive agencies to extract as much value as possible from the information available to them, adding to the potential for compromising privacy. Recognizing that securing the homeland and protecting the privacy rights of individuals are both important goals, the Congress has asked GAO to perform several reviews of DHS programs and their privacy implications over the past several years. For this hearing, GAO was asked to testify on key privacy challenges facing DHS. To address this issue, GAO identified and summarized issues raised in its previous reports on privacy and assessed recent governmentwide privacy guidance. As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. GAO's reviews of DHS programs have identified cases where these challenges were not fully met. For example, increased use by federal agencies of data mining--the analysis of large amounts of data to uncover hidden patterns and relationships--has been accompanied by uncertainty regarding privacy requirements and oversight of such systems. As described in a recent GAO report, DHS did not assess privacy risks in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement), as required by the E-Government Act of 2002. ADVISE is a data mining tool under development intended to help the department analyze large amounts of information. Because privacy had not been assessed and mitigating controls had not been implemented, DHS faced the risk that uses of ADVISE in systems containing personal information could require costly and potentially duplicative retrofitting at a later date to add the needed controls. GAO has also reported on privacy challenges experienced by DHS in reassessing privacy risks when key programmatic changes were made during development of a prescreening program for airline passengers. The Transportation Security Administration (TSA) has been working to develop a computer-assisted passenger prescreening system, known as Secure Flight, to be used to evaluate passengers before they board an aircraft on domestic flights. GAO reported that TSA had not fully disclosed uses of personal information during testing of Secure Flight, as required by the Privacy Act of 1974. To prevent such problems from recurring, TSA officials recently said that they have added privacy experts to Secure Flight's development teams to address privacy considerations on a continuous basis as they arise. Another challenge DHS faces is ensuring that privacy considerations are addressed in the emerging information sharing environment. The Intelligence Reform and Terrorism Prevention Act of 2004 requires the establishment of an environment to facilitate the sharing of terrorism information, as well as the issuance of privacy guidelines for operation in this environment. Recently issued privacy guidelines developed by the Office of the Director of National Intelligence provide only a high-level framework for privacy protection. While DHS is only one participant, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Accordingly, it will be important for the department to clearly establish departmental guidelines so that privacy protections are implemented properly and consistently. |
Wildland fires triggered by lightning are both natural and inevitable and play an important ecological role on the nation’s landscapes. These fires shape the composition of forests and grasslands, periodically reduce vegetation densities, and stimulate seedling regeneration and growth in some species. Over the past century, however, various land use and management practices—including fire suppression, grazing, and timber harvesting—have reduced the normal frequency of fires in many forest and rangeland ecosystems and contributed to abnormally dense, continuous accumulations of vegetation. Such accumulations not only can fuel uncharacteristically large or severe wildland fires, but also—with more homes and communities built in or near areas at risk from wildland fires— threaten human lives, health, property, and infrastructure. The Forest Service and four Interior agencies—the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service—are responsible for wildland fire management. These five agencies manage about 700 million acres of land in the United States, including national forests, national grasslands, Indian reservations, national parks, and national wildlife refuges. The federal wildland fire management program has three major components: preparedness, suppression, and fuel reduction. To prepare for a wildland fire season, the agencies acquire firefighting assets— including firefighters, engines, aircraft, and other equipment—and station them either at individual federal land management units (such as national forests or national parks) or at centralized dispatch locations. The primary purpose of these assets is to respond to fires before they become large—a response referred to as initial attack—thus forestalling threats to communities and natural and cultural resources. The agencies fund the assets used for initial attack primarily from their wildland fire preparedness accounts. When a fire starts, current federal policy directs the agencies to consider land management objectives—identified by land and fire management plans developed by each local unit, such as a national forest or a Bureau of Land Management district—and the structures and resources at risk when determining whether or how to suppress it. A wide spectrum of fire response strategies is available to choose from, and the manager at the affected local unit—known as a line officer—is responsible for determining which strategy to use. In the relatively rare instances when fires escape initial attack and grow large, the agencies respond using an interagency system that mobilizes additional firefighting assets from federal, state, and local agencies, as well as private contractors, regardless of which agency or agencies have jurisdiction over the burning lands. Federal agencies typically fund the costs of these activities from their wildland fire suppression accounts. In addition to preparing for and suppressing fires, the agencies attempt to reduce the potential for severe wildland fires, lessen the damage caused by fires, limit the spread of flammable invasive species, and restore and maintain healthy ecosystems by reducing potentially hazardous vegetation that can fuel fires. The agencies generally remove or modify hazardous vegetation using prescribed fire (that is, fire deliberately set in order to restore or maintain desired vegetation conditions), mechanical thinning, herbicides, certain grazing methods, or combinations of these and other approaches. The agencies fund these activities from their fuel reduction accounts. Congress, the Office of Management and Budget, federal agency officials, and others have expressed concern about mounting federal wildland fire expenditures. Federal appropriations to the Forest Service and the Interior agencies to prepare for and respond to wildland fires, including appropriations for reducing fuels, have more than doubled, from an average of $1.2 billion from fiscal years 1996 through 2000 to an average of $2.9 billion from fiscal years 2001 through 2007 (see table 1). Adjusting for inflation, the average annual appropriations to the agencies for these periods increased from $1.5 billion to $3.1 billion (in 2007 dollars). The Forest Service received about 70 percent and Interior about 30 percent of the appropriated funds. The Forest Service and the Interior agencies have improved their understanding of wildland fire’s role on the landscape and have taken important steps toward improving their ability to cost-effectively protect communities and resources. Although the agencies have long recognized that fire could provide ecological benefits in some ecosystems, such as certain grassland and forest types, a number of damaging fires in the 1990s led them to develop the Federal Wildland Fire Management Policy. The policy formally recognizes not only that wildland fire can be beneficial in some areas, but also that fire is an inevitable part of the landscape and, moreover, that past attempts to suppress all fires have been in part responsible for making recent fires more severe. Under this policy, the agencies abandoned their attempt to put out every wildland fire, seeking instead to (1) make communities and resources less susceptible to being damaged by wildland fire and (2) respond to fires so as to protect communities and important resources at risk but also to consider both the cost and long-term effects of that response. By emphasizing firefighting strategies that focus on land management objectives, rather than seeking to suppress all fires, the agencies are increasingly using less aggressive firefighting strategies—strategies that can not only reduce costs but also be safer for firefighters by reducing their exposure to unnecessary risks, according to agency fire officials. To help them better achieve the federal wildland fire management policy’s vision, the Forest Service and the Interior agencies in recent years have taken several steps to make communities and resources less susceptible to damage from wildland fire. These steps include reducing hazardous fuels, in an effort to keep wildland fires from spreading into the wildland-urban interface and to help protect important resources by lessening a fire’s intensity. As part of this effort, the agencies reported they have reduced fuels on more than 29 million acres from 2001 through 2008. The agencies have also nearly completed their geospatial data and modeling system, LANDFIRE, as we recommended in 2003. LANDFIRE is intended to produce consistent and comprehensive maps and data describing vegetation, wildland fuels, and fire regimes across the United States. Such data are critical to helping the agencies (1) identify the extent, severity, and location of wildland fire threats to the nation’s communities and resources; (2) predict fire intensity and rate of spread under particular weather conditions; and (3) evaluate the effect that reducing fuels may have on future fire behavior. LANDFIRE data are already complete for the contiguous United States, although some agency officials have questioned the accuracy of the data, and the agencies expect to complete the data for Alaska and Hawaii in 2009. The agencies have also begun to improve their processes for allocating fuel reduction funds to different areas of the country and for selecting fuel reduction projects, as we recommended in 2007. The agencies have started moving away from “allocation by tradition” toward a more consistent, systematic allocation process. That is, rather than relying on historical funding patterns and professional judgment, the agencies are developing a process that also considers risk, effectiveness of fuel reduction treatments, and other factors. Despite these improvements, further action is needed to ensure that the agencies’ efforts to reduce hazardous fuels are directed to areas at highest risk. The agencies, for example, still lack a measure of the effectiveness of fuel reduction treatments and therefore lack information needed to ensure that fuel reduction funds are directed to the areas where they can best minimize risk to communities and resources. Forest Service and Interior officials told us that they recognize this shortcoming and that efforts are under way to address it; these efforts are likely to be long term involving considerable research investment, but they have the potential to improve the agencies’ ability to assess and compare the cost-effectiveness of potential treatments in deciding how to optimally allocate scarce funds. The agencies have also taken steps to foster fire-resistant communities. Increasing the use of protective measures to mitigate the risk to structures from wildland fire is a key goal of the National Fire Plan. The plan encourages, but does not mandate, state or local governments to adopt laws requiring homeowners and homebuilders to take measures—such as reducing vegetation and flammable objects within an area of 30 to 100 feet around a structure, often called creating defensible space, and using fire- resistant roofing materials and covering attic vents with mesh screens—to help protect structures from wildland fires. Because these measures rely on the actions of individual homeowners or homebuilders, or on laws and land-use planning affecting private lands, achieving this goal is primarily a state and local government responsibility. Nonetheless, the Forest Service and the Interior agencies have helped sponsor the Firewise Communities program, which works with community leaders and homeowners to increase the use of fire-resistant landscaping and building materials in areas of high risk. Federal and state agencies also provide grants to help pay for creating defensible space around private homes. In addition, the agencies have made improvements laying important groundwork for enhancing their response to wildland fire, including: Implementing the Federal Wildland Fire Management Policy. The Federal Wildland Fire Management Policy directs each agency to develop a fire management plan for all areas they manage with burnable vegetation. Without such plans, agency policy does not allow the use of the entire range of wildland fire response strategies, including less aggressive strategies, and therefore the agencies must attempt to suppress a fire regardless of any benefits that might come from allowing it to burn. We reported in 2006 that about 95 percent of the agencies’ 1,460 individual land management units had completed the required plans. The policy also states that the agencies’ responses to a wildland fire are to be based on the circumstances of a given fire and the likely consequences to human safety and natural and cultural resources. Interagency guidance on implementing the policy, adopted in 2009, clarifies that the full range of fire management strategies and tactics are to be considered when responding to every wildland fire, and that a single fire may be simultaneously managed for different objectives. Both we and the Department of Agriculture’s Inspector General had criticized the previous guidance, which required each fire to be managed either for suppression objectives—that is, to put out the fire as quickly as possible—or to achieve resource benefits—that is, to allow the fire to burn to gain certain benefits such as reducing fuels or seed regeneration. By providing this flexibility, the new guidance should help the agencies better achieve management objectives and help contain the long-term costs of fire management. Improving fire management decisions. The agencies have recently undertaken several efforts to improve decisions about firefighting strategies. In one such effort, the agencies in 2009 began to use a new analytical tool, known as the wildland fire decision support system. This new tool helps line officers and fire managers analyze various factors— such as the fire’s current location, adjacent fuel conditions, nearby structures and other highly valued resources, and weather forecasts—in determining the strategies and tactics to adopt. For example, the tool generates a map illustrating the probability that a particular wildland fire, barring any suppression actions, will burn a certain area within a specified time, and the structures or other resources that may therefore be threatened. Having such information can help line officers and fire managers understand the resources at risk and identify the most appropriate response—for example, whether to devote substantial resources in attempting full and immediate suppression or to instead take a less intensive approach, which may reduce risks to firefighters and cost less. Other efforts include (1) establishing experience and training requirements for line officers to be certified to manage fires of different levels of complexity, and (2) forming four teams staffed with some of the most experienced fire managers to assist in managing wildland fires. The Forest Service has also experimented in recent years with several approaches for identifying ongoing fires where suppression actions are unlikely to be effective and for influencing strategic decisions made during those fires, in order to help contain costs and reduce risk to firefighters. Although these efforts are new, and we have not fully evaluated them, we believe they have the potential to help the agencies strengthen how they select firefighting strategies. By themselves, however, these efforts do not address certain critical shortcomings. We reported in 2007, for example, that officials in the field have few incentives to consider cost containment in making critical decisions affecting suppression costs, and that previous studies had found that the lack of a clear measure to evaluate the benefits and costs of alternative firefighting strategies fundamentally hindered the agencies’ ability to provide effective oversight. Acquiring and using firefighting assets effectively. The agencies have continued to make improvements—including better systems for contracting with private vendors to provide firefighting assets and for dispatching assets to individual fires—in how they determine the firefighting assets they need and in how they acquire and use those assets, although further action is needed. For example, although the agencies in 2009 began deploying an interagency budget-planning system known as fire program analysis (FPA) to address congressional direction that they improve how they determine needed firefighting assets, our 2008 report on FPA’s development identified several shortcomings that limit FPA’s ability to meet certain key objectives. FPA was intended to help the agencies develop their wildland fire budget requests and allocate funds by, among other objectives, (1) providing a common budget framework to analyze firefighting assets without regard for agency jurisdictions; (2) examining the full scope of fire management activities; (3) modeling the effects over time of differing strategies for responding to wildland fires and treating lands to reduce hazardous fuels; and (4) using this information to identify the most cost-effective mix and location of federal wildland fire management assets. We reported in 2008 that FPA shows promise in achieving some of the key objectives originally established for it but that the approach the agencies have taken hampers FPA from meeting other key objectives, including the ability to project the effects of different levels of fuel reduction and firefighting strategies over time. We therefore concluded that agency officials lack information that would help them analyze the extent to which increasing or decreasing funding for fuel reduction and responding more or less aggressively to fires in the short term could affect the expected cost of responding to wildland fires over the long term. Senior agency officials told us in 2008 that they were considering making changes to FPA that may improve its ability to examine the effects over time of different funding strategies. The exact nature of these changes, or how to fund them, has yet to be determined. Officials also told us the agencies are currently working to evaluate the model’s performance, identify and implement needed corrections, and improve data quality and consistency. The agencies intend to consider the early results of FPA in developing their budget requests for fiscal year 2011, although officials told us they will not rely substantially on FPA’s results until needed improvements are made. As we noted in 2008, the approach the agencies took in developing FPA provides considerable discretion to agency decision makers and, although providing the flexibility to consider various options is important, doing so makes it essential that the agencies ensure their processes are fully transparent. In addition, previous studies have found that agencies sometimes use more, or more-costly, firefighting assets than necessary, often in response to political or social pressure to demonstrate they are taking all possible action to protect communities and resources. Consistent with these findings, fire officials told us they were pressured in 2008 to assign more firefighting assets than could be effectively used to fight fires in California. More generally, previous studies have found that air tankers may be used to drop flame retardants when on-the-ground conditions may not warrant such drops. Aviation activities are expensive, accounting for about one- third of all firefighting costs on a large fire. We believe that providing clarity about when different types of firefighting assets can be used effectively could help the agencies resist political and social pressure to use more assets than they need. Despite the important steps the agencies have taken, much work remains. We have previously recommended several key actions that, if completed, would improve the agencies’ management of wildland fire. Specifically, the agencies need to: Develop a cohesive strategy. Completing an investment strategy that lays out various approaches for reducing fuels and responding to wildland fires and the estimated costs associated with each approach and the trade- offs involved—what we have termed a cohesive strategy—is essential for Congress and the agencies to make informed decisions about effective and affordable long-term approaches for addressing the nation’s wildland fire problems. The agencies have concurred with our recommendations to develop a cohesive strategy but have yet to develop a strategy that clearly formulates different approaches and associated costs, despite our repeated calls to do so. In May 2009, agency officials told us they had begun planning how to develop a cohesive strategy but were not far enough along in developing it to provide further information. Because of the critical importance of a cohesive strategy to improve the agencies’ overall management of wildland fire, we encourage the agencies to complete one and begin implementing it as quickly as possible. The Federal Land Assistance, Management, and Enhancement Act, introduced in March 2009 and sponsored by the chairman of this committee, would require the agencies to produce, within 1 year of the act’s enactment, a cohesive strategy consistent with our previous recommendations. Although they have yet to complete a cohesive strategy, the agencies have nearly completed two projects—LANDFIRE and FPA—they have identified as being necessary to development of a cohesive strategy. However, the shortcomings we identified in FPA may limit its ability to contribute to the agencies’ development of a cohesive strategy. Establish a cost-containment strategy. We reported in 2007 that although the Forest Service and the Interior agencies had taken several steps intended to help contain wildland fire costs, they had not clearly defined their cost-containment goals or developed a strategy for achieving those goals—steps that are fundamental to sound program management. The agencies disagreed, citing several agency documents that they argued clearly define their goals and objectives and make up their strategy to contain costs. Although these documents do provide overarching goals and objectives, they lack the clarity and specificity needed by land management and firefighting officials in the field to help manage and contain wildland fire costs. Interagency policy, for example, established an overarching goal of suppressing wildland fires at minimum cost, considering firefighter and public safety and importance of resources being protected, but the agencies have established neither clear criteria for weighing the relative importance of the often-competing elements of this broad goal, nor measurable objectives for determining if the agencies are meeting the goal. As a result, despite the improvements the agencies are making to policy, decision support tools, and oversight, we believe that managers in the field lack a clear understanding of the relative importance that the agencies’ leadership places on containing costs and—as we concluded in our 2007 report—are therefore likely to continue to select firefighting strategies without duly considering the costs of suppression. Forest Service officials told us in July 2009 that although they are concerned about fire management costs, they are emphasizing the need to select firefighting strategies that will achieve land management objectives and reduce unnecessary risks to firefighters, an emphasis they believe may, in the long run, also help them contain costs. Nonetheless, we continue to believe that our recommendations, if effectively implemented, would help the agencies better manage their cost-containment efforts and improve their ability to contain wildland fire costs. Clearly define financial responsibilities for fires that cross jurisdictions. Protecting the nation’s communities is both one of the key goals of wildland fire management and one of the leading factors contributing to rising fire costs. A number of relatively simple steps—such as using fire-resistant landscaping and building materials—can dramatically reduce the likelihood of damage to a structure from wildland fire. Although nonfederal entities—including state forestry entities and tribal, county, city, and rural fire departments—play an important role in protecting communities and resources and responding to fires, we reported in 2006 that federal officials were concerned that the existing framework for sharing suppression costs among federal and nonfederal entities insulated state and local governments from the cost of providing wildland fire protection in the wildland-urban interface. As a result, there was less incentive for state and local governments to adopt laws—such as building codes requiring fire-resistant building materials in areas at high risk of wildland fires—that, in the long run, could help reduce the cost of suppressing wildland fires. We therefore recommended that the federal agencies work with relevant state entities to clarify the financial responsibility for fires that burn, or threaten to burn, across multiple jurisdictions and develop more specific guidance as to when particular cost-sharing methods should be used. The agencies have updated guidance on when particular cost-sharing methods should be used, although we have not evaluated the effect of the updated guidance; the agencies, however, have yet to clarify the financial responsibility for fires that threaten multiple jurisdictions. Without such clarification, the concerns that the existing framework insulates nonfederal entities from the cost of protecting the wildland-urban interface from fire—and that the federal government, therefore, would continue to bear more than its share of that cost—are unlikely to be addressed. Mitigate effects of rising fire costs on other agency programs. The sharply rising costs of managing wildland fires have led the Forest Service and the Interior agencies to transfer funds from other programs to help pay for fire suppression, disrupting or delaying activities in these other programs. Better methods of estimating the suppression funds the agencies request, as we recommended in 2004, could reduce the likelihood that the agencies would need to transfer funds from other accounts, yet the agencies continue to use an estimation method with known problems. A Forest Service official told us the agency had analyzed alternative methods for estimating needed suppression funds but determined that no better method was available. Because the agencies have had to transfer funds in each of the last 3 years, however, a more accurate method for estimating suppression costs may still be needed. To further reduce the likelihood of transferring funds from the agencies’ other programs to cover suppression costs, our 2004 report also noted, Congress could consider establishing a reserve account to fund emergency wildland firefighting. Congress, for example, could provide either a specified amount (known as a definite appropriation) or as much funding as the agencies need to fund emergency suppression (known as an indefinite appropriation). Establishing a reserve account with a definite appropriation would provide the agencies with incentives to contain suppression costs within the amount in the reserve account, but depending on the size of the appropriation and the severity of a fire season, suppression costs could still exceed the funds reserved, and the agencies might still need to transfer funds from other programs. An account with an indefinite appropriation, in contrast, would eliminate the need for transferring funds from other programs but would offer no inherent incentives for the agencies to contain suppression costs. Furthermore, both definite and indefinite appropriations could raise the overall federal budget deficit, depending on whether funding levels for other agency or government programs are reduced. The Federal Land Assistance, Management, and Enhancement Act proposes establishing a wildland fire suppression reserve account; the administration’s budget overview for fiscal year 2010 also proposes a $282 million reserve account for the Forest Service and a $75 million reserve account for the Interior to provide funding for firefighting when the appropriated suppression funds are exhausted. We are making no new recommendations at this time. Rather, we believe that our previous recommendations—which the agencies have generally agreed with—could, if implemented, substantially assist the agencies in capitalizing on the important progress they have made to date in responding to the nation’s growing wildland fire problem. We discussed the factual information in this statement with agency officials and incorporated their comments where appropriate. 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], or Robin M. Nazzaro, Director, 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. Steve Gaty, Assistant Director; David P. Bixler; Ellen W. Chu; Jonathan Dent; and Richard P. Johnson made key contributions to this statement. 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 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 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. 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. 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 nation's wildland fire problems have worsened dramatically over the past decade, with more than a doubling of both the average annual acreage burned and federal appropriations for wildland fire management. The deteriorating fire situation has led the agencies responsible for managing wildland fires on federal lands--the Forest Service in the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service in the Department of the Interior--to reassess how they respond to wildland fire and to take steps to improve their fire management programs. This testimony discusses (1) progress the agencies have made in managing wildland fire and (2) key actions GAO believes are still necessary to improve their wildland fire management. This testimony is based on issued GAO reports and reviews of agency documents and interviews with agency officials on actions the agencies have taken in response to previous GAO findings and recommendations. The Forest Service and Interior agencies have improved their understanding of wildland fire's ecological role on the landscape and have taken important steps toward enhancing their ability to cost-effectively protect communities and resources by seeking to (1) make communities and resources less susceptible to being damaged by wildland fire and (2) respond to fire so as to protect communities and important resources at risk while also considering both the cost and long-term effects of that response. To help them do so, the agencies have reduced potentially flammable vegetation in an effort to keep wildland fires from spreading into the wildland-urban interface and to help protect important resources by lessening a fire's intensity; sponsored efforts to educate homeowners about steps they can take to protect their homes from wildland fire; and provided grants to help homeowners carry out these steps. The agencies have also made improvements that lay important groundwork for enhancing their response to wildland fire, including adopting new guidance on how managers in the field are to select firefighting strategies, improving the analytical tools that assist managers in selecting a strategy, and improving how the agencies acquire and use expensive firefighting assets. Despite the agencies' efforts, much work remains. GAO has previously recommended several key actions that, if completed, would substantially improve the agencies' management of wildland fire. Specifically, the agencies should: (1) Develop a cohesive strategy laying out various potential approaches for addressing the growing wildland fire threat, including estimating costs associated with each approach and the trade-offs involved. Such information would help the agencies and Congress make fundamental decisions about an effective and affordable approach to responding to fires. (2) Establish a cost-containment strategy that clarifies the importance of containing costs relative to other, often-competing objectives. Without such clarification, GAO believes managers in the field lack a clear understanding of the relative importance that the agencies' leadership places on containing costs and are therefore likely to continue to select firefighting strategies without duly considering the costs of suppression. (3) Clarify financial responsibilities for fires that cross federal, state, and local jurisdictions. Unless the financial responsibilities for multijurisdictional fires are clarified, concerns that the existing framework insulates nonfederal entities from the cost of protecting the wildland-urban interface from fire--and that the federal government would thus continue to bear more than its share of the cost--are unlikely to be addressed. (4) Take action to mitigate the effects of rising fire costs on other agency programs. The sharply rising costs of managing wildland fires have led the agencies to transfer funds from other programs to help pay for fire suppression, disrupting or delaying activities in these other programs. Better methods of predicting needed suppression funding could reduce the need to transfer funds from other programs. |
The Megaports Initiative is part of DOE’s Office of the Second Line of Defense, whose aim is to strengthen the overall capability to detect and deter illicit trafficking of nuclear and other radioactive materials across international borders. DOE, with the assistance of several DOE national laboratories and private contractors, generally implements its Megaports Initiative at foreign seaports in six phases: (1) port prioritization; (2) government-to-government negotiations and port familiarization; (3) technical site surveys, site design, and training; (4) final design, construction, and equipment installation; (5) equipment calibration and testing; and (6) maintenance and sustainability. The Maritime Prioritization Model, which is maintained by Sandia National Laboratories (Sandia), uses unclassified information to rank foreign seaports for their attractiveness to a potential nuclear material smuggler. This information is maintained within the model in several categories that are individually weighted and scored and then combined to provide each port with an overall score. Ports receiving higher scores are considered more attractive to a nuclear material smuggler and therefore of potentially higher interest for inclusion in the Initiative. In May 2004, DOE directed Sandia to conduct a peer review of the model to determine the validity of its modeling approach, the appropriateness of the factors used in the model, and the suitability of the data for selecting and prioritizing foreign ports for the Initiative. The peer review panel concluded in August 2004, that the approach used in the design and execution of the model is conceptually sound and provides a relevant, defensible baseline from which to pursue bilateral engagements for installing radiation detection equipment at foreign ports. The panelists noted that the primary strengths of the model are the ease with which new sources of information relevant to prioritizing potential nuclear material smuggling routes can be added and the transparency of the data and calculations used in the model. Currently, the model ranks about 120 seaports worldwide, and DOE plans to add an additional 80 ports to the model in fiscal year 2005. DOE officials noted that the model will continue to evolve to more clearly consider both volume and threat. DOE also considers other factors when deciding which specific ports to engage, such as a potential host country’s level of interest in the Initiative and the location of significant world events, such as the Olympic Games. Once DOE selects a port for inclusion in the Initiative, DOE officials and host country representatives begin to negotiate an agreement or memorandum of understanding that defines the scope of work and level of cooperation between DOE and the host country for work at the selected port or ports. Concurrently, a team of experts from DOE’s national laboratories visits the selected port to familiarize themselves with the port’s operations and layout. Discussions are also conducted, as appropriate, with major port and terminal operators. In many cases the port-operating companies, along with terminal operators, have an economic interest in cooperating with the Initiative, since they have the most to lose in the event terrorists are successful in exploiting weaknesses of the maritime shipping network to launch an attack using weapons- usable nuclear or other radioactive material. After an MOU has been signed, the technical site survey, design, and training phase begins. Initially, one or more site visits are conducted to gather technical information to determine the degree to which cargo can be effectively screened in a port, to assess the vulnerabilities of the port to illicit trafficking in nuclear and other radioactive materials, and to estimate equipment needs. These visits help DOE determine port security information, port traffic patterns, shipping volume, training needs, and any other relevant information. Program officials then develop a port security report that analyzes the flow of container traffic for all port entry and exit gates, as well as for cargo that arrives at a port on one ship, is offloaded onto a dock, and then leaves aboard another ship—known as transshipped cargo. DOE also performs a cost benefit analysis of the proposed equipment installations at specific entry and exit gates. On the basis of the results of these assessments, DOE develops a design requirements package that includes the port’s layout, proposed equipment needs, and installation requirements. This information is used to conduct more detailed engineering surveys to develop the final design. During this phase, DOE also begins to provide training to foreign customs officials, including training at the DOE Hazardous Materials Management and Emergency Response center located at Pacific Northwest National Laboratory (PNNL). The training focuses on radiation safety, the use of radiation detection equipment, and alarm response procedures. The training generally consists of a 1-week course with both classroom learning and simulated field operations. Training is tailored to each port, and materials are provided in the working language of the host country. During the final design, construction, and equipment installation phase, DOE determines the equipment needs of the port, the specific placement of the equipment, and any site preparation or construction work to be done at the port. The equipment that DOE provides through the Initiative is commercially available, off-the-shelf technology. DOE provides radiation detection portal monitors, which are stationary pieces of equipment designed to detect radioactive materials being carried by vehicles or pedestrians. These portal monitors can detect both gamma and neutron radiation, which is important for detecting the presence of highly enriched uranium and plutonium, respectively. In addition, DOE provides portable radiation detection devices, including handheld devices that can help assist foreign customs officials conduct secondary inspections to pinpoint the source of an alarm and to determine the type of radioactive material present. DOE also provides radiation detection pagers, which are small detectors that can be worn on a belt to continuously monitor radiation levels in the immediate area of the customs officials wearing the pagers. DOE installs the portal monitors at specific locations within the port, such as terminal entry and exit gates, and integrates the portal monitors with a central alarm station through the use of fiber optic cable or other methods. Once installation is complete, the equipment is calibrated and tested before being turned over to the host country’s government. DOE officials calibrate the equipment to optimal specifications for the detection of weapons- usable nuclear material. The settings, which determine the equipment’s sensitivity, are based on a number of factors, including the level of background radiation of the location, the type of cargo handled at a specific port, and the potential use of shielding. Once the equipment is calibrated and tested, the host country’s customs officials can begin to screen cargo containers for radiation. When a container is scanned, an alarm will sound if the equipment detects radiation. A monitoring system logs which monitor set off the alarm, the date and time of the alarm, the alarm type, the gamma and neutron count for the alarm, any indications of tampering, an average reading of the background radiation of the area, and takes a photograph of the container’s identification number. If determined necessary, the customs official then conducts a secondary inspection with a handheld radiation detection device to identify the source and location of the radiation. If the radiation profile of a scanned container’s contents matches the profile of consumer goods that are known to contain natural sources of radiation, foreign customs officers may opt not to conduct a secondary inspection. However, the profile of consumer goods can appear different from the typical profile if the container is not uniformly packed with this item or if the container is filled with a combination of consumer goods. If the customs officials cannot determine the content of the container after the screening with a handheld radiation device, they may manually inspect the container or request assistance from other agencies within their government. Concurrent with the calibration and testing phase, DOE national laboratory experts travel to the host country to provide specific in-country training to foreign customs officials in the proper use of the radiation portal monitors as well as portable radiation detection equipment. Once DOE fully turns the equipment over to the host government, the project moves to the maintenance and sustainability phase. Typically, DOE plans to fund 3 years of sustainability activities at each port. These activities include providing refresher training for foreign customs officials; general maintenance of the radiation detection equipment; spare parts; and, as negotiated with the host country, periodic evaluation of alarm data and port procedures to ensure that the equipment is being operated properly. DOE wants the U.S. government to be informed of any incidents or seizures that occur as a result of using equipment provided by the Initiative. Additionally, other technical data may be exchanged to assist technical experts from both DOE and the host country in their ongoing analysis of the operational effectiveness of the systems. To date, data sharing provisions have been incorporated into the agreements signed by DOE and host country governments. DOE’s Megaports Initiative has made limited progress in beginning to install radiation detection equipment at seaports identified as high priority by its Maritime Prioritization Model. According to DOE officials, the Initiative’s limited success in initiating work at certain ports is largely due to difficulties negotiating agreements with foreign governments, in particular with countries that have ports ranked as high priority by DOE’s model, such as China. Further, DOE has completed work at only two ports, both of which were ranked lower in priority than other ports by DOE’s model. Given DOE’s limited success in installing radiation detection equipment at most high priority ports, it is particularly noteworthy that the Initiative does not have a comprehensive long-term plan that describes how DOE plans to measure program success, overcome obstacles it faces, and achieve the goals of the Initiative. DOE has had difficulty reaching agreement with some countries where high-priority ports are located, such as China, due to a variety of political factors often outside of DOE’s control. DOE has completed work at two ports and signed agreements to initiate work at five others, two of which were ranked in the 20 highest priority ports by DOE’s model. According to DOE officials, some foreign governments have been hesitant to participate in the Megaports Initiative for two main reasons: possible interruptions to the flow of commerce at their ports and reluctance to hire the additional customs agents necessary to operate and maintain the radiation detection equipment DOE provides. First, some foreign governments have concerns that the flow of commerce at their ports could be disrupted by participating in the Initiative in both the short- and long-term. For the short-term, some foreign governments have expressed concern that the flow of commerce at their ports could be disrupted during the installation of radiation detection equipment. A related long-term concern is that, by agreeing to participate in the Initiative, the host country’s customs officials will be screening large volumes of cargo containers, which could lead to delays or disruptions to the flow of commerce at the port. To address these concerns, DOE provides prospective Initiative participants with information on how the radiation detection equipment would be installed and operated in the country, including information on the design, construction, training, and implementation processes. To alleviate concerns about construction issues, such as the placement of radiation portal monitors, DOE analyzes the natural choke points that occur in a port and seeks to install equipment at these locations to avoid the interruption of commerce. According to a DOE official, to avoid delays in port operations during installation of equipment, construction work is often performed at night so that normal port operations are not impeded. To further demonstrate how the radiation detection equipment is installed and operated, DOE officials show prospective Initiative participants a video or arrange site visits to the port of Rotterdam, where DOE has completed equipment installations in a pilot project at one port terminal, so that they can witness port operations and have an example of how the equipment will be operated in their country. A second impediment to negotiating agreements with foreign governments is their reluctance to hire additional officials (generally customs agents) to operate and maintain the equipment DOE provides through the Initiative. Although some foreign governments have large numbers of personnel at their ports to regulate imports and exports, others lack the staff necessary to both perform other port functions and operate and monitor the radiation detection equipment DOE provides. For example, the Dutch government expressed this reservation before it agreed to participate in the Initiative, and Dutch officials told us that they will need to hire and train an additional 40-60 customs agents when radiation detection equipment is installed at all port terminals in Rotterdam. The need for additional workers, combined with limited financial resources, may prevent some countries from participating in the Megaports Initiative. However, DOE officials told us that they do not believe that this impediment would prevent a foreign government’s participation in the Initiative. DOE officials told us that they are in the process of negotiating with the governments of 18 countries to gauge their interest in participating in the Initiative. According to DOE officials, the Initiative has primarily focused on engaging countries that have ports ranked in the top 50 by DOE’s model, but it also pursues ports of special interest that may be ranked lower than 50. DOE plans to begin work at Antwerp and to complete the installations in Colombo, Sri Lanka, Freeport, Bahamas, and Algeciras, Spain by the end of fiscal year 2005, but complications may prohibit DOE from meeting this goal. For example, a DOE official told us that program officials are currently in the process of determining the impact of the December 2004 tsunami disaster on DOE’s planned work at the port of Colombo, Sri Lanka. According to a DOE official, resources for project construction and materials may be affected. If so, DOE may not be able to complete installation of radiation detection equipment at this port in fiscal year 2005. Additionally, on March 10, 2005, DOE and the government of Singapore signed an agreement to include the port of Singapore in the Megaports Initiative. DOE officials also told us that they are close to signing agreements to initiate work in five additional countries. Figure 1 shows the location of the ports DOE completed in fiscal year 2004 and those it plans to complete in fiscal year 2005. DOE has completed work at only two ports: Rotterdam, the Netherlands, and Piraeus, Greece, both of which were ranked lower in priority than other foreign seaports by DOE’s model. The port of Rotterdam, which is the largest in Europe and handles an estimated 40 percent of all European shipments bound for the United States, became part of the Initiative on August 13, 2003, when DOE signed an MOU with the Dutch government. DOE installed a limited number of vehicle radiation detection portal monitors at the largest of Rotterdam’s four terminals, which ships an estimated 87 percent of all of Rotterdam’s cargo destined for the United States (see figure 2). Initially, DOE planned to install monitors at all four terminals at Rotterdam. However, as discussions with Dutch officials progressed, the Dutch government decided to limit its level of involvement in the Initiative by permitting DOE to install monitors at only one of Rotterdam’s four terminals. Additionally, DOE trained 43 Dutch customs officials at its training center at PNNL and conducted additional onsite training for other Dutch customs officials. DOE also provided over 20 pieces of handheld radiation detection equipment for use in conducting secondary inspections. DOE officials told us that they consider the installation at Rotterdam a pilot project and believe it to be a success because, as a result of their experience with it, the Dutch government agreed to pay for the installation of radiation detection equipment throughout the rest of the port. Dutch government officials told us that they plan to complete the full installation of radiation detection equipment at all four Rotterdam terminals by 2006. Although this type of cost-sharing arrangement is not an established objective of the Initiative, DOE officials believe that they may pursue other such pilot projects when a host government requests limited assistance from DOE. DOE completed the pilot project and the radiation detection equipment was fully turned over to the Dutch government in April 2004. During fiscal year 2005, DOE plans to conduct additional training on secondary inspection methods at Rotterdam for between 20 and 30 Dutch customs officials and will continue to provide equipment support and maintenance. Beyond fiscal year 2005, DOE’s involvement at the port will likely be limited to training and technical consultations on future equipment installations made by the Dutch government. While the port of Piraeus, Greece, is not one of the largest container ports in the world and was not ranked as a high priority by DOE’s model, security concerns at the port increased prior to the 2004 Olympic Games in Greece. The heightened importance of Piraeus, which is about 6 miles from the center of Athens, led DOE to include the port in the Megaports Initiative as part of its efforts to secure Greece prior to the Olympic Games. Initially, the Greek Atomic Energy Commission requested assistance from IAEA in identifying ways to mitigate radiological and nuclear threats during the Olympics. IAEA then approached DOE to consider including the port of Piraeus in the Initiative. On October 30, 2003, DOE, the Greek Atomic Energy Commission, and the Greek Customs Service signed a tripartite agreement to include Piraeus in the Initiative. Because the design, construction, installation, training, and equipment testing needed to be complete before the Olympic Games, DOE executed the project on an accelerated schedule and, as a result, completed all equipment installations in July 2004. DOE installed a limited number of vehicle portal monitors at the cargo terminal in Piraeus (see figure 3), and some portal monitors (for both vehicles and pedestrians) at the passenger terminal of the port of Piraeus. Piraeus has one of Europe’s largest ferry terminals, and the Greek government anticipated an increased volume of passenger traffic associated with the Olympic Games. DOE officials told us that providing radiation detection equipment to passenger terminals is normally outside the scope of the Megaports Initiative, but the potential security issues surrounding Greece’s hosting of the Olympic Games led DOE to provide radiation detection equipment to the Piraeus passenger terminal. DOE also trained 10 Greek customs officials from Piraeus at its training center and provided additional in-country training to 50 Greek customs officials who work at the port. In fiscal year 2005, DOE plans to provide additional onsite training to Greek officials, determine whether any additional equipment installations are necessary, and evaluate any equipment problems that arise. DOE’s Megaports Initiative does not have a comprehensive long-term plan to guide the Initiative as it moves forward, which is particularly important given DOE’s recent proposal to expand the Initiative’s scope to include additional foreign seaports. To set the direction for the Megaports Initiative, DOE currently uses three planning documents: the Megaports Initiative Fiscal Year 2005 Program Work Plan, the DOE Future Years Nuclear Security Program, and the Megaports Initiative Strategy Paper. The Fiscal Year 2005 Program Work Plan is an evolving planning document that incorporates day-to-day changes in program activities and documents the scope of work to be conducted in this fiscal year. This plan also includes a detailed activity-based budget for the current fiscal year to guide the work of national laboratories and contractors involved in the Initiative. The Future Years Nuclear Security Program includes a 5-year financial-based projection of the number of ports to be completed. Additionally, at a February 22, 2005, meeting to discuss an early draft of this report, DOE officials provided us with a copy of the Megaports Initiative Strategy Paper. This two and one half-page document provides a broad vision for the Initiative, and describes some factors that may affect program success, but it contains few details about how DOE plans to achieve the goals of the Initiative. These three documents provide some elements that are needed in a long- term plan for the Initiative. Specifically, the DOE Future Years Nuclear Security Program establishes that the long-term goal for the program is to install radiation detection equipment at 20 ports by 2010 and provides cost estimates for the Initiative. In addition, the Megaports Initiative Strategy Paper describes DOE’s approach for determining which ports to target for inclusion in the Initiative and states that the Initiative’s mission is to diminish the probability of illicit trafficking of nuclear materials and other radioactive material in the global maritime system that could be used against the United States, its key allies, and international partners. However, DOE’s goal of completing 20 ports may not be an adequate measure toward sufficiently addressing the overall threat of nuclear smuggling in the international maritime system. As previously stated, DOE uses its Maritime Prioritization Model to rank foreign ports on their relative attractiveness to nuclear smugglers and as a tool to help program officials decide which ports to pursue for inclusion in the Initiative. DOE has annual performance measures to install radiation detection equipment at a given number of ports to show progress towards its long-term goal of completing installations at 20 ports by 2010. While using the number of ports completed annually provides a broad measure of the Initiative’s progress, this measure does not take into account whether the ports where equipment is being installed are of highest priority. That is, DOE has not tied its annual performance measures of completing a certain number of ports to the model it uses to determine which ports are of highest priority. In addition, DOE did not meet its fiscal year 2004 performance measure of completing three ports through the Megaports Initiative. DOE officials stated that the Initiative did not meet this measure because of their inability to sign agreements with foreign governments to install radiation detection equipment. DOE’s lack of progress in gaining agreements with countries that contain high-priority ports has led it to initiate work at ports that were not ranked as highest priority by DOE’s model. Developing a comprehensive long-term plan for the Megaports Initiative would require DOE to, among other things, develop criteria for deciding how many and which lower priority ports to complete, or what other actions may be warranted, if it continues to have difficulties gaining agreements to install radiation detection equipment at the highest priority ports. DOE officials told us that they intend to develop such a plan for the Initiative in the near future. Since the inception of the Megaports Initiative in fiscal year 2003 through the end of fiscal year 2004, DOE had spent about $43 million on Megaports Initiative activities. DOE spent these funds on such activities as the completion of a pilot project at Rotterdam, the Netherlands; equipment installations at Piraeus, Greece; the advanced purchase of equipment for use at future ports; program oversight; and the development and maintenance of DOE’s Maritime Prioritization Model (see figure 4). As figure 4 shows, DOE spent $13.8 million, or 32 percent of program expenditures, to complete installations at Rotterdam, the Netherlands, and Piraeus, Greece. DOE also spent an additional $238,000 on activities related to future equipment installations in Freeport, Bahamas. DOE spent $28.8 million on program integration activities, which are costs not directly associated with installing equipment at a specific port. Of this amount, $13.7 million was spent on advanced equipment procurement activities, which include the purchase and storage of approximately 408 portal monitors and associated spare parts for use at future installations. DOE also spent $6.6 million on program oversight activities, such as program cost and schedule estimating, technical assistance provided by participating national laboratories, contractor reviews of project work plans, travel coordination, and translation services. In addition, $1.9 million was spent on other program integration activities, such as the development of materials and curricula for training foreign customs agents on the use of radiation detection equipment. DOE’s current plan is to install radiation detection equipment at a total of 20 ports by 2010 at an estimated cost of $337 million, but several uncertainties may affect the Initiative’s scope, cost, and time frames for completion. First, DOE uses $15 million as its estimate for what an average port should cost to complete, but this estimate may not be accurate. Second, DOE is currently assessing whether the Initiative’s scope should increase beyond 20 ports. Regarding the first uncertainty, DOE officials told us that the primary basis for their $15 million per port cost estimate was DOE’s prior experience deploying radiation detection equipment at Russian land border crossings, airports, and seaports. However, DOE acknowledged that the cost of doing business in Russia may not be an accurate basis for developing their per port cost estimate, and DOE has yet to reevaluate this estimate in light of work it has performed installing radiation detection equipment at ports. Furthermore, the costs of installing equipment at individual ports vary and are influenced by factors such as a port’s size, its physical layout, existing infrastructure, and the level of the host country’s cooperation with DOE. For example, the port of Antwerp, Belgium, which is the second largest port in Europe, will be a much larger, more expensive and complex project than DOE’s two previously completed installations. According to DOE officials, because of the large physical size of the port, an estimated 60 radiation detection portal monitors will be required to complete the installation. The age of the port and the geographic location of some of the terminals will also create challenges in integrating information generated from the radiation detection monitors to the central alarm station where the alarm information will be processed and evaluated. Additionally, another factor that may affect DOE’s installation costs at a particular port is that, as a result of negotiating agreements with foreign governments, DOE’s level of involvement at specific ports may vary, affecting the amount of radiation detection equipment DOE installs and, thereby, its installation costs. For example, although the port of Rotterdam is the largest port in Europe, the Dutch government chose to limit the scope of DOE’s involvement at the port to installing equipment at only one of the port’s four terminals. This resulted in DOE’s costs at Rotterdam being significantly reduced compared to what it would have cost to install equipment all four terminals. DOE officials stated that as future agreements are reached with foreign governments and more port installations are completed, additional data will be gathered, which could assist them in refining the average per port cost estimate. By the end of fiscal year 2005, DOE plans to have completed installations at a total of five ports and should have additional information with which to reevaluate the accuracy of its current per port cost estimate. DOE officials told us that they plan to reevaluate the cost estimate once these ports are completed. A reevaluation of this estimate would allow DOE to better project individual port costs, as well as the total future costs of the Initiative. However, if DOE does not reevaluate its average per port cost estimate it will be difficult to accurately determine the total future costs of the Initiative and future annual funding needs. DOE also is currently assessing whether the Initiative’s scope should increase beyond 20 ports. DOE officials told us that DOE did not intend for the Initiative’s initial goal to be static and they believe the scope of the Initiative will likely increase in the future. Additionally, these officials stated that if they determine that installing radiation detection equipment at a total of 20 ports does not sufficiently reduce the risk of illicit trafficking of nuclear and other radioactive materials, they plan to expand the scope of the Initiative to include a greater number of ports. In its fiscal year 2006 budget proposal, DOE proposed expanding the scope of the Initiative to 24 ports, but this scope expansion is subject to congressional approval. If the scope of the Initiative increases, the total costs and time frames for completion will also increase. In its effort to install radiation detection equipment at foreign seaports, DOE faces several operational and technical challenges. First, the capability of radiation detection equipment to detect nuclear material depends on such factors as how fast containers pass through the radiation portal monitors and how near the containers are to the detection equipment. Additionally, some nuclear materials can be shielded with lead or other materials to prevent radiation from being detected. Compounding these challenges, DOE faces technical challenges related to ports’ physical layouts and cargo stacking configurations in its effort to screen cargo containers for radioactive and nuclear materials. Further, environmental conditions specific to ports, such the existence of high winds and sea spray, can affect the radiation detection equipment’s performance and long-term sustainability. Three factors have an impact on the effectiveness of radiation detection equipment: time, distance, and shielding. The time factor refers to the amount of time that a radiation detector has to perform the process of detecting radiological material. For example, trucks carrying cargo containers are supposed to drive through a vehicle radiation detector at a uniform controlled speed. Variation from this program requirement can impact the radiation detection equipment’s performance. The distance between the radiation detection equipment and the material being scanned also affects the effectiveness of the equipment. As a general rule, the closer the nuclear material is to the detector, the better the radiation detection equipment will perform. Nuclear materials are more difficult to detect if lead or other metal is used to shield them. For example, in July 2004, a container that housed a small amount of radioactive material passed through radiation detection equipment that DOE had installed at one of the ports it has completed without being detected due to the presence of the large amounts of scrap metal in the same container. The host country’s government later received information about the container, which led to the discovery of the radioactive source. The host country’s government raised concerns that the radiation detection equipment did not register an alarm during a scan of the container and asked DOE to investigate the incident. DOE national laboratory experts determined that the radiation detection equipment had been set to program requirements. As a result, DOE national laboratory officials and the host country’s government decided not to alter the settings of the radiation detection equipment. A technical challenge is to detect and identify low-level radiation sources in the presence of high background radiation levels. Detecting actual cases of illicit trafficking in weapons-usable nuclear material is complicated because one of the materials of greatest concern in terms of proliferation— highly enriched uranium—is amongst the most difficult materials to detect due to its relatively low level of radioactivity. Uranium emits only gamma radiation so the radiation detection equipment, which contains gamma and neutron detectors, will only detect uranium from the gamma detector. Plutonium emits both gamma and neutron radiation. However, shielding of nuclear material does not prevent the detection of neutron radiation and, as a result, plutonium can be detected by neutron detectors regardless of the amount of shielding. According to DOE officials, a neutron alarm can be caused by only a few materials, while a gamma alarm can be caused by a variety of sources including commercial goods such as bananas, ceramic tiles and fertilizer and nuclear materials, such as plutonium and uranium. Once DOE finishes installing radiation detection equipment at a port and hands control of the equipment over to the host government, the United States no longer has control over the specific settings used by the equipment or how the equipment is used by foreign government customs officials. Settings can be changed to decrease the number of nuisance alarms, which may also decrease the probability that the equipment will detect nuclear material. Additionally, foreign customs officials may decide not to perform secondary inspections when alarms sound in order to increase the flow of traffic through a port. Therefore, the level of effective use of the equipment is unclear. According to DOE officials, the periodic maintenance DOE national laboratory official perform on the radiation detection equipment helps them to ensure that the equipment is set to the optimal calibrations and operated appropriately. If the equipment settings have been altered, the DOE officials can inquire about these discrepancies to the foreign government and work to resolve any problems. When implementing its Megaports Initiative at foreign ports, DOE has the specific challenge of trying to screen all cargo passing through a port. Currently, DOE usually installs radiation detection equipment at locations within a port where natural choke points occur. These locations slow down the transport of containers, making them optimal locations for the installation of radiation detection equipment. At some ports, however, a high percentage of cargo containers do not leave the port but are gathered together in the shipyard and then shipped to another location. DOE is addressing this problem in two ways: (1) by placing radiation detection equipment within ports to be able to screen cargo that moves between port terminals and (2) working with Los Alamos National Laboratory (Los Alamos) to develop a mobile radiation detection system for screening of this type of cargo. At some ports, DOE plans to place radiation detection equipment at the exits of each port terminal so that inter-terminal transport of cargo can be monitored, despite the fact that the cargo does not leaving the port itself. Additionally, Los Alamos officials are working to fit radiation detection equipment onto a straddle carrier so that containers that are awaiting transshipment can be scanned for the presence of radiation. This carrier would be able to scan containers stacked three containers high within the shipyard before they are loaded onto the next ship. The straddle carrier would scan the stacked containers with its radiation detection equipment to determine if radiological materials are present and follow-up inspections would then occur if necessary. See figure 5 for a diagram of the proposed straddle carrier design modified to carry radiation detection equipment. According to Los Alamos officials, the modified straddle carrier will be more effective than a vehicle radiation detection portal monitor because the distance from the monitor to the container is greatly reduced, which increases the overall detection capabilities of the system. Los Alamos officials stated that they plan to test the design in a foreign seaport in summer 2005. If this testing is successful, DOE plans to implement this design in other ports that have similar cargo stacking arrangements and that utilize straddle carriers. However, this technology cannot remedy the entire problem DOE faces because many ports stack greater than three containers on top of each other in their shipyards and not all ports have straddle carriers because they move their containers with other types of equipment and stack them in different configurations. According to a DOE official, because the straddle carrier solution will not work at all ports, DOE will continue to seek additional solutions to this problem. Another technical challenge specific to ports is coping with environmental conditions, particularly high winds and sea spray, which can cause problems for radiation detection equipment. Wind disturbances can vibrate the equipment and interfere with its ability to detect radiation. For example, after the pilot project at Rotterdam was completed, the bases of the radiation detection portal monitors DOE installed had to be reinforced with steel plates to stabilize them because high winds were causing them to vibrate and reducing their capability to detect nuclear material. Sea spray may also affect radiation detection equipment by corroding the equipment and its components. The corrosive nature of sea spray combined with other conditions such as coral in the water can accelerate the degradation of equipment. If the equipment casing becomes corroded, moisture can get into the equipment and affect its performance and long-term sustainability. Corrosion and moisture can cause radiation detection alarms to go off when they should not and not when they should. DOE and national laboratory officials told us that they are analyzing the problem to identify methods to alleviate sea spray’s adverse effects on the equipment. At one port where DOE plans to complete installations in fiscal year 2005, sea spray is a potentially large problem. In December 2004, DOE convened a workshop of U.S. government officials and contractors to discuss possible solutions to the sea spray problem. At this workshop, several options for addressing the issue were discussed, such as installing special stainless steel casings, installing bolts and other hardware with protective coatings, and using nitrogen-filled housings to protect the video cameras. DOE officials are considering the recommendations from the workshop and how they should be implemented in this port and at other ports where DOE plans to install equipment. DOE uses a threat- and volume-based analysis to determine which foreign seaports are of highest priority, and we believe that this is a sound basis for targeting the expenditure of U.S. funds. While DOE has completed work at two ports, Rotterdam, the Netherlands, and Piraeus, Greece, both were ranked lower in priority than other foreign seaports by DOE’s Maritime Prioritization Model. In addition, DOE has been unable to reach agreement with many key countries that have ports ranked as high priority by its model. If DOE continues to have difficulty gaining agreements to install radiation detection equipment at its highest priority ports, then this could raise questions about the Initiative’s effectiveness and about how many lower priority ports to include. Currently, however, the Initiative’s long- term goal is to install radiation detection equipment at 20 foreign seaports regardless of their priority. This goal is inconsistent with DOE’s approach for selecting high-priority ports and does not provide a reasonable measure of long-term program success. Considering its limited progress at the highest priority ports, a well thought out plan can be an important guide for DOE’s efforts in the further implementation of its Megaports Initiative. However, to date, DOE has not developed such a plan for the Initiative. Without a comprehensive long-term plan for the Initiative, Congress may not be able to judge whether DOE is making progress towards achieving the Initiative’s long-term goals or how best to assist DOE in working toward its goals. DOE officials told us that they will be developing a plan for the Initiative in the near future, and we agree that such a plan is needed. While the cost of installing radiation detection equipment at a port is dependent on a number of variables, such as the port’s size, physical layout, and existing infrastructure, the costs of installing equipment at the two ports DOE has completed to date were significantly less than the $15 million per port cost estimate that DOE used to develop its long-term cost projection for the Initiative. DOE’s $15 million estimate for the average cost of installing equipment at a port was based on the department’s prior experience installing radiation detection equipment at Russian land borders, airports, and seaports. DOE officials acknowledged that the cost of doing business in Russia may not be an accurate basis on which to estimate the costs of installing such equipment at other foreign ports. Because DOE has not yet reevaluated its per port cost estimate to reflect its recent experience installing radiation detection equipment at ports, the accuracy of DOE’s long-term cost projection for the Initiative is questionable. By the end of fiscal year 2005, DOE plans to have completed installations at a total of 5 ports, and will have additional information about the costs of these installations that could assist it in refining its per port cost estimate and long-term cost projection for the Initiative. We recommend that the Secretary of Energy, working with the Administrator of the National Nuclear Security Administration, take the following two actions: Develop a comprehensive long-term plan to guide the future efforts of the Initiative that includes, at a minimum, (1) performance measures that are consistent with DOE’s desire to install radiation detection equipment at the highest priority foreign seaports, (2) strategies DOE will employ to determine how many and which lower priority ports it will include in the Initiative if it continues to have difficulty installing equipment at the highest priority ports as identified by its model, (3) projections of the anticipated funds required to meet the Initiative’s objectives, and (4) specific time frames for effectively spending program funds. Evaluate the accuracy of the current per port cost estimate of $15 million, make any necessary adjustments to the Initiative’s long-term cost projection, and inform Congress of any changes to the long-term cost projection for the Initiative. We provided the Department of Energy with a draft of this report for its review and comment. DOE’s written comments are presented as appendix V. DOE generally agreed with our recommendations. In its written comments, DOE also provided further clarification on the evolution of its Maritime Prioritization Model. Specifically, DOE noted that in the early stages of the Megaports Initiative, it focused on the 20 highest-volume-to- U.S. seaports, which was consistent with the approach taken by the Department of Homeland Security’s Container Security Initiative. However, when DOE initially briefed us on its model in July 2004, DOE had changed its prioritization approach and was focusing almost entirely on a threat- based model. As DOE notes in its comments, it did not present us with information on modifications to its model until February 22, 2005, which was after DOE received an early draft of this report for a factual review. DOE’s new port prioritization approach represents a combination of ports that ship large volumes of containers to the United States and ports that lie in regions of interest. DOE also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly release the contents of this report earlier, we plan no further distribution until 30 days from the report date. We will then send copies of this report to the Secretary of Energy; the Administrator, the National Nuclear Security Administration; the Secretary of Homeland Security; the Director, Office of Management and Budget; and interested congressional committees. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, I can be reached at 202-512-3841 or [email protected]. Key contributors to this report include R. Stockton Butler, Julie Chamberlain, Nancy Crothers, Chris Ferencik, and F. James Shafer, Jr. We performed our review of the Department of Energy’s (DOE) Megaports Initiative at DOE’s offices in Washington, D.C.; the Department of Homeland Security (DHS) in Washington, D.C.; the Department of State in Washington, D.C.; Los Alamos National Laboratory (Los Alamos) in Los Alamos, New Mexico; Sandia National Laboratories (Sandia) in Albuquerque, New Mexico; and the National Nuclear Security Administration’s Service Center in Albuquerque, New Mexico. Additionally, we visited completed Megaports Initiative installations in Rotterdam, the Netherlands, and Piraeus, Greece. To assess the progress DOE has made in implementing its Megaports Initiative, we reviewed documents and had discussions with officials from DOE; DHS; Los Alamos; Sandia; DOE’s private sector contractors—SI International and Tetra Tech/Foster Wheeler; and a number of nongovernmental entities, including nonproliferation and port security experts. In addition, in October 2004, we visited the Netherlands and Greece to interview Dutch and Greek officials and to see the completed Megaports Initiative installations at the ports of Rotterdam and Piraeus, respectively. While in Rotterdam, we spoke with officials from the Dutch Ministry of Finance, the Dutch Customs authority, the U.S. Embassy in The Hague, and a U.S. official from Container Security Initiative for the port of Rotterdam. We toured the Megaports Initiative installations in Rotterdam and observed the radiation detection equipment DOE installed. When we visited Piraeus, we interviewed officials from the Greek Atomic Energy Commission; the Port Authority of Piraeus; the Greek Ministry of Economy and Finance, Customs Directorate General (Greek Customs Service); DOE’s contractors—Los Alamos, SI International, and Tetra Tech/Foster Wheeler; and officials from the Container Security Initiative in Piraeus. We toured the Megaports Initiative installations at both the passenger and cargo terminals at the port of Piraeus and observed the radiation detection equipment DOE had installed. Additionally, while we were in Greece, we toured (1) two border crossings where DOE had installed radiation detection equipment through its Second Line of Defense-Core program (SLD-Core), (2) the SLD-Core installations at the passenger arrival area of Athens International Airport, and (3) a small research reactor in Athens that received physical security upgrades from DOE prior to the 2004 Olympic Games. To better understand DOE’s Maritime Prioritization Model and port prioritization process, we met with officials from DOE and Sandia National Laboratories in August 2004 to discuss the components of the model, the types of data the model uses to rank foreign seaports, as well as the port prioritization list DOE provided us in July 2004. DOE and Sandia officials told us that the model was threat-based and that the overall volume of containers shipped from a given port to the United States accounted for only 20 percent of the port’s overall prioritization score. In addition, we reviewed a briefing packet on the model developed by Sandia as well as the report of the Maritime Prioritization Model Peer Review that was conducted in August 2004 by members of academia, the intelligence community, and industry experts. We also visited Sandia National Laboratories in November 2004 and discussed the model and the results of the peer review report with a Sandia official in charge of the development and maintenance of the model. While we did not conduct an assessment of the model, it is worth noting that we were informed by the DOE project manager for the Megaports Initiative on January 24, 2005, that the port prioritization list we were using was still the current operational model that DOE was using for the Initiative. However, when we met with DOE officials 2 weeks later on February 14, 2005, to discuss their comments on a review of an early draft of this report they informed us that, because they had made recent changes to the model, the prioritization list we had been using was now outdated and no longer accurate. At a February 22, 2005, meeting, DOE and Sandia officials informed us that the revised model and port prioritization process, among other things, (1) reduced the emphasis on the threat of nuclear smuggling at individual ports and placed a greater emphasis on ports with a high volume of cargo containers that enter and exit the port by land, rather than cargo that is transshipped and (2) deemphasized the risk from spent (used) nuclear fuel in a target country. DOE also provided us with a new prioritization list that showed its 35 highest priority ports listed alphabetically, rather than ranked from highest to lowest priority. We also spoke with DOE officials about strategic planning and reviewed DOE documentation, such as the Megaports Program Work Plan for Fiscal Year 2005 and DOE’s Future Years Nuclear Security Program. We reviewed the Government Performance and Results Act of 1993, the President’s Management Agenda from fiscal year 2002, and several of our previous reports on strategic planning and related topics. To assess the current and expected costs of the Initiative, we reviewed DOE documents detailing program expenditures, projected costs, and schedule estimates. We reviewed contract data for expenditures through the end of fiscal year 2004 and met numerous times with DOE agency officials to discuss the data. We obtained responses from key database officials to a number of questions focused on data reliability covering issues such as data entry access, internal control procedures, and the accuracy and completeness of the data. Follow-up questions were added whenever necessary. We also reviewed DOE's 2004 Performance and Accountability Report. A caveat worth noting is that although DOE gathers and maintains expenditure data reported by contractors assisting in implementing the Megaports Initiative, rather than conducting routine follow-up checks to corroborate the data reported by the contractors, DOE officials noted that periodic follow-up checks will be conducted, if necessary. In addition, during the course of our review we found that for fiscal year 2004, approximately $5.45 million in program expenditures had been inappropriately costed to the Megaports Initiative, which should have been costed to the SLD-Core program. As a result, total expenditures for the Megaports Initiative are $5.45 million less than what is reflected in DOE's fiscal year 2004 financial reports. DOE officials told us that this mistake will be corrected and reflected in DOE's fiscal year 2005 financial reports. We determined that the data were sufficiently reliable for the purposes of this report based on work we performed. To identify challenges DOE faces in installing radiation detection equipment at foreign ports, we examined documents and spoke with officials from DOE, Los Alamos, Sandia, Pacific Northwest National Laboratory, and nongovernmental entities, including nonproliferation and port security experts. We also attended a National Academies of Science conference on non-intrusive technologies for improving the security of containerized maritime cargo. Additionally, we attended the National Cargo Security Council conference on Radiation Detection and Screening. We conducted our review between June 2004 and March 2005 in accordance with generally accepted government auditing standards. In addition to developing and maintaining the Maritime Prioritization Model, Sandia also conducts research related to international threat information, which is used to maintain the Megaports Design Basis Threat document. This document contains information on both known maritime smuggling activities and plans by terrorist organizations seeking to acquire nuclear and other commodities that have parallels to nuclear smuggling patterns. Related to this, Sandia maintains a seaport information database and develops port specific background papers to assist DOE in evaluating ports for engagement. Furthermore, Sandia officials conduct port familiarization visits and technical site visits in order to gain a general understanding of port operations as well as to determine specific information on the physical layout of the port, security, port traffic, shipping volume, the host country’s commitment level to implementing the Initiative, training needs, and other relevant information. This information is used to develop vulnerability assessments, which help DOE determine the most cost-effective locations at a seaport in which to install the equipment. PNNL provides specific in-country training to foreign customs officials, as well as training at DOE’s Hazardous Materials Management and Emergency Response facility. Training includes hands-on instruction in the use of the radiation detection equipment and systems provided under the Initiative and covers operation, maintenance, and appropriate response protocols. To do this training, PNNL purchases presentation equipment and handheld radiation detection equipment and develops and maintains training props and related documentation. Training is tailored to each port and developed and delivered by technical experts in the form of presentations, manuals, hands-on practical exercises, field training, videos, and interactive games. In addition, PNNL provides the Initiative with a certified project manager at each port who assists the federal project manager in overseeing the implementation of the Initiative at a given port and is the primary point of contact responsible for integrating all the work conducted by the participating national laboratories and contractors. Los Alamos provides expertise in radiation detection technologies and is the lead national laboratory for testing and evaluating the performance of radiation detection equipment. Los Alamos tests the deployed radiation detection equipment and supports Sandia in performing site surveys and preparing design requirements documents. In addition, Los Alamos technical experts analyze portal detection performance data to ensure the deployed equipment is meeting current detection requirements. Los Alamos has also conducted equipment testing in order to overcome challenges associated with scanning transshipped cargo. Oak Ridge provides technical assistance at DOE headquarters on the communications infrastructure associated with the installation of radiation detection equipment at foreign ports and assists with the testing and evaluation of radiation detection equipment. Oak Ridge officials told us that a trainer from Oak Ridge will be provided to assist in each of the classes conducted for foreign customs officials at PNNL’s Hazardous Materials Management and Emergency Response training facility during fiscal year 2005. TSA Systems is a private contractor that manufactures the radiation portal monitors that DOE installs at foreign ports and also provides technical support to DOE on the equipment. According to TSA officials, each site is visited yearly to check the monitors for damage and to perform routine maintenance. In addition, TSA has modified radiation portal monitors to address challenges specific to particular ports. For example, TSA installed stabilization plates on portal monitors at Rotterdam to deal with high winds at the port. Tetra Tech/Foster Wheeler is an engineering and construction company who was the primary contractor in charge installing equipment at Rotterdam and Piraeus. Tetra Tech/Foster Wheeler also led the construction of the associated infrastructure to support the radiation detection equipment at these ports. Ahtna will be the primary contractor for the design and construction of future Megaports Initiative installations. Ahtna was not involved in the installation of equipment in Rotterdam or Piraeus. Ahtna has entered into a subcontract with the former design build contractor, Tetra Tech/Foster Wheeler, to support design and construction activities at future installations. Technology Ventures Incorporated provides logistical support to DOE’s Megaports Initiative by storing and shipping radiation portal monitors that DOE procures in advance for installation at future ports. SI International provides DOE with technical support related to the development and installation of the communications infrastructure associated with radiation detection equipment installed under the Initiative. SI International staff provide onsite training to foreign customs officials in operating and maintaining the communications systems. Miratek helps DOE manage and maintain budget and expenditure data for the Megaports Initiative. The Ministry of Finance of the Netherlands signed a memorandum of understanding (MOU) with the Department of Energy (DOE) on August 13, 2003, to include the port of Rotterdam in the Megaports Initiative. The Netherlands was the first European Union country to join the Initiative. Rotterdam is Europe’s largest port. The volume of containers passing through Rotterdam is roughly 7 million twenty-foot equivalent units (TEU) annually, about 6 percent of which is shipped to the United States. Approximately 20 percent of cargo passing through Rotterdam is transshipped, meaning it does not pass through any natural choke points, such as vehicle or rail entry and exit gates. Containers at the port are handled primarily in four container terminals. In addition, the Department of Homeland Security began conducting Container Security Initiative (CSI) activities at Rotterdam in June 2002. The Directorate General of Customs and Excise of the Ministry of Economy and Finance of the Hellenic Republic, the Greek Atomic Energy Commission, and DOE signed a tripartite agreement on October 30, 2003 to include the port of Piraeus in the Megaports Initiative. The port is located in the southwestern Aegean Sea on the innermost point of the Saronikas Gulf. The port received increased attention because of security concerns associated with the 2004 Olympic Games. Piraeus was also considered a significant port for inclusion in the Initiative because it not only serves as a major seaport for Greece, but also is the third largest passenger port in the world. The volume of containers passing through Piraeus is about 1.6 million TEUs annually. In addition, roughly 11,000 TEUs were shipped from Piraeus directly to the United States during 2003. Greece was the second European Union country to join the Initiative and become fully operational. CSI also began operations at Piraeus in June 2004. The Ministry of Ports and Aviation of the Democratic Socialist Republic of Sri Lanka and DOE signed an MOU on July 20, 2004 to include the port of Colombo in the Megaports Initiative. The port is located on the southwest coast of the country. The port of Colombo has a high level of container traffic—over 1.9 million TEUs annually. The port uses cranes to move containers within and out of the terminals. DOE anticipates using vehicle monitors to screen all containers imported to Sri Lanka, all export containers originating in Sri Lanka, and all inter-terminal transshipment containers as they exit the terminals. CSI became operational at Colombo in June 2003. The Federal Public Service of Finance of the Kingdom of Belgium signed an MOU with DOE on November 24, 2004 to include the port of Antwerp in the Megaports Initiative. Antwerp is the 4th largest seaport in the world and the largest port in Belgium. Container traffic through the port is over 5 million TEUs annually, while traffic to the United States accounts for nearly 5 percent of the total annual container traffic through Antwerp. In 2003, Antwerp ranked 9th in the world for total volume of container traffic shipped to the United States. Additionally, there are direct cargo routes from Antwerp to many major U.S. seaports. The port is geographically split into a right and a left bank. While the right bank is fully operational, the left bank has two operational terminals with another two large terminals currently under construction. When the terminals are completed, the volume of cargo passing through the port will double. In addition, CSI began operations at Antwerp in June 2002. The Central Agency for Tax Administration of the Kingdom of Spain signed an MOU with DOE on December 21, 2004 to include the port of Algeciras in the Megaports Initiative. The port is located on the southernmost tip of Spain adjacent to Gibraltar. It is the 25th largest container port in the world with container traffic through the port being over 2.5 million TEUs annually. The port is strategically important in its location because, in addition to being a through route from the Atlantic Ocean to the Mediterranean, and on to the Far East, the port lies on the crossroads of the busiest sea-lanes that use the Suez Canal. Spain’s cooperation with DOE currently includes only the port of Algeciras, the Spanish port DOE was most interested in. However, the Spanish government wants DOE to consider installing equipment at the ports of Valencia and Barcelona as well. Currently, DOE is considering this request, including the possibility of using a cost-sharing arrangement similar to the one used in Rotterdam. In addition, CSI became operational at the port in January 2003. The Ministry of Finance of the Commonwealth of the Bahamas and DOE signed an MOU on December 30, 2004 to include the port of Freeport in the Megaports Initiative. Freeport has a high level of container traffic moving through the port. In particular, container traffic to the United States accounts for over 16 percent of the total annual container traffic through the port. Additionally, container traffic being shipped from Freeport accounts for a total of approximately 1.2 percent of all container traffic to the United States. In addition, CSI is not scheduled to be operational at Freeport. In addition to the work done by the Megaports Initiative at the port of Piraeus, Greece, DOE conducted three other efforts to increase security in Greece prior to the 2004 Summer Olympics. First, the Second Line of Defense-Core program installed radiation detection equipment at three land border crossings and at the Athens International Airport to assist Greek authorities in preventing nuclear smuggling. Second, the International Radiological Threat Reduction program helped secure 21 sites around Greece that contain radiological sources that could be used to make a radiological dispersion device (also known as a “dirty bomb”). Finally, the International Nuclear Materials Security program upgraded the physical security around Greece’s only nuclear reactor—a small research reactor used for research and training—located in Athens. The Second Line of Defense-Core program (SLD-Core) installed radiation portal monitors in four locations throughout Greece: three land border crossing and a large airport. According to DOE officials, the total cost of these projects was about $15 million. The projects began in October 2003 and were completed in July 2004. DOE and national laboratory officials also provided technical assistance and training to Greek customs officials during the period of the Olympic Games. Figure 6 shows an example of the radiation portal monitors DOE supplied through the SLD-Core program. In addition to the training provided through the Megaports Initiative to Greek customs officials working at the port of Piraeus, DOE provided detailed training to 20 Greek customs officials who work at land border crossings at the Hazardous Materials Management and Emergency Response center at Pacific Northwest National Laboratory. Additionally, about 400 Greek customs agents were trained at various sites around Greece. In fiscal year 2005, DOE plans to conduct sustainability work and additional training at these sites. Finally, DOE supplied over 450 pieces of handheld radiation detection equipment some of which were intended for use at Olympic venues. This equipment included handheld gamma radiation detectors, radioactive isotope identification devices, and radiation detection pagers (see figures 7 and 8). According to an agreement between the Greek Atomic Energy Commission and DOE, after the Olympic Games, these handheld devices were to be distributed to border locations throughout Greece that did not receive other DOE assistance. Through its International Radiological Threat Reduction program, DOE spent $780,000 to increase security at 21 sites throughout Greece that contained radiological sources of a type and size that could be used for a dirty bomb and to provide additional handheld radiation detection equipment for first responders in Greece. DOE secured sites that included facilities with blood irradiator units containing cesium chloride sources, a large industrial sterilization facility, and oncology clinics that had medical isotopes used in cancer therapy. Figure 9 shows a teletherapy unit containing a radiological source, which is used to treat cancer. Additionally, DOE provided handheld radiation detection equipment to Greece through the Cooperative Radiological Instrument Transfer project. Through this project, DOE donated 110 handheld radiological detection devices that DOE national laboratories had previously deemed surplus. DOE officials said that Greece was not high on the list of target countries for assistance through the International Radiological Threat Reduction program, but because of the increased security needs for the Olympic Games, DOE expedited assistance to Greece. DOE began this project in October 2003 and completed the upgrades in May 2004. DOE spent about $1 million to upgrade the physical security of Greece’s only nuclear reactor—a small, 5-megawatt research reactor located in Athens known as the Greek Research Reactor-1. DOE and the Greek Atomic Energy Commission believed that it was important to upgrade the physical security of this reactor primarily because the reactor is fueled with a mix of highly enriched uranium and low enriched uranium. This site is the only location in Greece with weapons-usable nuclear material. The Greek Atomic Energy Commission is in the process of converting the reactor to use only low enriched uranium fuel. To upgrade the physical security of the reactor, DOE installed a new perimeter detection system that included closed-circuit television, hardened windows and doors on the reactor building, a new central alarm station, and enhanced lighting of the building’s perimeter. As an additional security measure, the Greek Atomic Energy Commission shut down the research reactor during the period of the Olympics Games. Weapons of Mass Destruction: Nonproliferation Programs Need Better Integration. GAO-05-157. Washington, D.C.: January 28, 2005. Nuclear Nonproliferation: DOE Needs to Consider Options to Accelerate the Return of Weapons-Usable Uranium from Other Countries to the United States and Russia. GAO-05-57. Washington, D.C.: November 19, 2004. Nuclear Nonproliferation: DOE Needs to Take Action to Further Reduce the Use of Weapons-Usable Uranium in Civilian Research Reactors. GAO- 04-807. Washington, D.C.: July 30, 2004. Homeland Security: Summary of Challenges Faced in Targeting Oceangoing Cargo Containers for Inspection. GAO-04-557T. Washington, D.C.: March 31, 2004. Homeland Security: Preliminary Observations on Efforts to Target Security Inspections of Cargo Containers. GAO-04-325T. Washington, D.C.: December 16, 2003. Container Security: Expansion of Key Customs Programs Will Require Greater Attention to Critical Success Factors. GAO-03-770. Washington, D.C.: July 25, 2003. Container Security: Current Efforts to Detect Nuclear Material, New Initiatives, and Challenges. GAO-03-297T. Washington, D.C.: November 18, 2002. Customs Service: Acquisition and Deployment of Radiation Detection Equipment. GAO-03-235T. Washington, D.C.: October 17, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO- 02-426. Washington, D.C.: May 16, 2002. | Since September 11, 2001, concern has increased that terrorists could smuggle nuclear weapons or materials into this country in the approximately 7 million containers that arrive annually at U.S. seaports. Nuclear materials can be smuggled across borders by being placed inside containers aboard cargo ships. In response to this concern, since 2003, the Department of Energy (DOE) has deployed radiation detection equipment to key foreign seaports through its Megaports Initiative (Initiative). GAO examined the (1) progress DOE has made in implementing the Initiative, (2) current and expected costs of the Initiative, and (3) challenges DOE faces in installing radiation detection equipment at foreign ports. DOE's Megaports Initiative has had limited success in initiating work at seaports identified as high priority by DOE's Maritime Prioritization Model, which ranks ports in terms of their relative attractiveness to potential nuclear smugglers. Gaining the cooperation of foreign governments has been difficult in part because some countries have concerns that screening large volumes of containers will create delays that could inhibit the flow of commerce at their ports. DOE has completed work at 2 ports and signed agreements to initiate work at 5 other ports. Additionally, DOE is negotiating agreements with the governments of 18 additional countries and DOE officials told us they are close to signing agreements with 5 of these countries. However, DOE does not have a comprehensive long-term plan to guide the Initiative's efforts. Developing such a plan would lead DOE to, among other things, determine criteria for deciding how many and which lower priority ports to complete if it continues to have difficulties working at higher volume and higher threat ports of interest. Through the end of fiscal year 2004, DOE had spent about $43 million on Megaports Initiative activities. Of this amount, about $14 million was spent on completing installations at 2 ports. Although DOE currently plans to install equipment at a total of 20 ports by 2010, at an estimated cost of $337 million, this cost projection is uncertain for several reasons. For example, the projection is based in part on DOE's $15 million estimate for the average cost per port, which may not be accurate because it was based primarily on DOE's work at Russian land borders, airports, and seaports. Additionally, DOE is currently assessing whether the Initiative's scope should increase beyond 20 ports; if this occurs, total costs and time frames will also increase. DOE faces several operational and technical challenges in installing radiation detection equipment at foreign ports. For example, DOE is currently devising ways to overcome technical challenges posed by the physical layouts and cargo stacking configurations at some ports. Additionally, environmental conditions, such high winds and sea spray, can affect radiation detection equipment's performance and sustainability. |
After the terrorist attacks on the United States on September 11, 2001, federal agencies took immediate steps to secure U.S. airspace. FAA grounded all air traffic and DOD ordered Air Force fighter jets to fly patrols over selected U.S. cites to deter and respond to any additional attacks. In the months after the attacks, the President developed certain national strategies and directives, and Congress established TSA and gave it the responsibility to provide security for all modes of transportation. Congress also later passed and the President signed legislation to protect the homeland against air, land, and maritime threats, including creating the DHS to coordinate and lead the national homeland security effort. After the attacks, interagency coordination increased as FAA, NORAD, TSA, their parent cabinet departments, and other agencies with homeland air defense or security roles and missions worked together to meet the overall goal of protecting U.S. airspace. NORAD and the FAA have historically been the main contributors to protecting U.S. airspace. FAA’s primary mission is to safely manage the flow of air traffic in the United States, but it contributes to air security through its control of U.S. airspace. About 17,000 FAA controllers monitor and manage airspace, support the coordination of security operations, and provide information to military and law enforcement agencies when needed. Within NORAD, Continental North American Aerospace Defense Command Region personnel monitor radar data on aircraft entering and operating within continental U.S. airspace. NORAD also conducts air patrols in U.S. airspace. According to FAA, the agency divides airspace into four categories: controlled, uncontrolled, special use, and other. Controlled airspace may include special flight restrictions and will have specific defined dimensions, including altitude ranges, or vertical boundaries, and surface area, or horizontal boundaries. Any aircraft operating within controlled airspace must comply with rules governing that airspace or be subject to enforcement action. Controlled airspace is further divided into classes ranging from A through E. Each class of airspace has its own level of Air Traffic Control services and operational requirements that pilots must follow in order to enter and operate in it. For example, to operate in class A airspace, pilots must have air traffic controller clearance to enter and must have communication equipment on board to permit communication with air traffic controllers. In lesser-restricted airspace, pilots can navigate by landmarks. Controlled airspace can be further classified with special flight restrictions. In uncontrolled airspace, class G, air traffic controllers have no authority or responsibility to control air traffic. FAA also reserves airspace for special purposes, called Special Use Airspace, which is normally established to protect important infrastructure, including military installations. An Air Defense Identification Zone is restricted airspace in which the ready notification, location, and control of aircraft are required for national security reasons. FAA’s other airspace category includes national security areas, military training routes, and temporary flight restriction areas. A temporary flight restriction typically restricts flights over specified areas for a specified period of time. These zones can be established over critical infrastructure, military operations areas, National Security Special Events, and United States Secret Service protectees (e.g. such as the President, whose airspace is protected as he moves throughout the United States). FAA notifies pilots of temporary flight restrictions through its Notices to Airmen program. Pilots are required to check for notices before beginning their flights to avoid any temporary flight restriction zones during their flights. If pilots violate such a zone, FAA can take actions against them ranging from suspending the pilot’s certificate to fly in response to a one- time, first-time violation to revocation of the certificate when the violation is deliberate or otherwise shows a disregard for the regulations. Temporary flight restrictions are one component of a tiered security aviation system. The system includes ground procedures, such as TSA passenger screening procedures, and in-flight security procedures, including reinforced cockpit doors and Federal Air Marshals on selected domestic and international flights. Temporary flight restrictions are considered passive air space control measures intended to keep the flying public out of the protected airspace so that agencies can more readily identify and respond to pilots exhibiting hostile intent. A temporary flight restriction alone will not prevent pilots from entering the protected airspace. FAA monitors national airspace traffic to ensure safety and has established triggers to help identify suspicious aircraft and pilots. According to FAA procedures, FAA controllers are to advise the pilots to change their course or altitude if they are on a course toward prohibited or restricted airspace without authorization, or if they are circling or loitering over a sensitive area. Sensitive areas include airspace over dams, nuclear and electrical power plants, chemical storage sites, the location of the President, or military facilities. Various forms of suspicious pilot and aircraft activity are being monitored. If a violation is imminent or underway, responding agencies have only limited time in which to decide what actions to take. Nonetheless, the agencies need sufficient time to try to determine the pilot’s intent and, if necessary, to order, scramble, and launch DOD or DHS aircraft to intercept the violator. The response to a violation is managed using a process of recognition, assessment and warning, interdiction, recovery, and follow-up; which agency takes these actions depends on the specific nature of the violation. FAA can report a violation of restricted airspace based on radar tracking. If the offending aircraft deviates from its planned flight path but is not heading directly toward the protected asset, FAA may monitor the aircraft and try to contact the pilot but not interdict the aircraft. Conversely, if NORAD or FAA perceives the aircraft to be a threat based on its speed, direction, or other information, NORAD can alert its aircraft and attempt to intercept the violator. If successfully diverted away from the protected asset or restricted airspace, Secret Service, FAA, TSA, or local law enforcement officers may meet the aircraft and interview the pilot upon landing, to identify any hostile intent. On the other hand, if the offending pilot does not divert and proceeds to operate in a manner perceived as threatening, the NORAD pilot can be ordered by the appropriate authorities to engage the violating aircraft. Figure 1 shows an aircraft deviating from its planned flight path and shows more highly threatening and, conversely, less threatening violations of restricted airspace. Our review of an FAA database found about 3,400 reported violations of restricted airspace from September 12, 2001, to December 31, 2004, most of which were committed by general aviation pilots. According to FAA, violations occur because (1) pilots may divert from their planned flight path to avoid bad weather, or may make navigational errors and consequently enter restricted airspace; (2) FAA may establish airspace restrictions with little warning, and pilots already in the air may be unaware of the new restrictions; or (3) pilots may not check for notices of new restrictions as required by FAA and may consequently enter restricted airspace without authorization. In addition, terrorists might deliberately enter restricted airspace to observe the government’s response or to carry out an attack. FAA investigates pilot deviations into restricted airspace to determine the reasons for an incident and to determine whether the pilot’s certificate should be temporarily suspended or permanently revoked. As the scope of restricted airspace increases, the number of violations generally also increases. In addition, a greater concentration of air traffic, such as in the eastern United States, would affect the number of violations. FAA has worked with the aviation community to inform them of the additional restricted areas. Figure 2 shows the percentage of violations of restricted airspace by area of the United States. General aviation aircraft pilots accounted for about 88 percent of all violations of restricted U.S. airspace between September 12, 2001, and December 31, 2004. Figure 3 shows the percentage of incursions by type of aircraft. According to FAA data, pilot error is the biggest contributor to restricted airspace violations. Pilots may not check for FAA Notices to Airmen that indicate the location of restricted airspace, or FAA may establish such airspace with little warning, and pilots may consequently enter the airspace. Airspace restrictions can move, such as when the President travels. Notices on the location of newly restricted airspace may be issued quickly, and pilots may already be in their aircraft or in the air when the restriction is announced and implemented. Moreover, pilots may fly around bad weather or may experience equipment problems and consequently enter restricted airspace to maintain safe operations. To reduce violations, FAA has conducted safety seminars, provided a toll- free number for pilots to call and check for restricted airspace, identified the location of restricted airspace on its Web site, and encouraged pilots to check for and be attentive to notices on restricted airspace. When a pilot enters restricted airspace without authorization, FAA investigates and decides what actions to take against the pilot. After the September 2001 attacks, FAA strengthened the actions that it could take. For example, FAA no longer issues warning notices or letters of correction to pilots. Instead, FAA will now suspend a pilot’s certificate for 30 to 90 days for a single, inadvertent, first-time violation of a temporary flight restriction area that was established with a notice. The temporary suspension’s length depends on the degree of danger to other aircraft and persons or property on the ground, the pilot’s level of experience, prior violations record, and certain other factors. If a pilot deliberately enters restricted airspace without authorization, FAA will revoke the pilot’s certificate. Federal agencies have undertaken individual and coordinated initiatives to secure U.S. aviation by trying to ensure that only authorized personnel gain access to aircraft or airports, expanding efforts to educate pilots about the location of restricted airspace and the circumstances under which they may enter such airspace, improving the monitoring of domestic airspace, enhancing their ability to enforce airspace restrictions, and trying to effectively coordinate a response to each restricted airspace violation in the event that prevention fails. TSA, FAA, and DOD have individually and in a coordinated way directed resources to mitigate the risk of terrorists using commercial aircraft as weapons or targets. Some of the most publicly visible changes are the advent of TSA operations at over 400 airports, which include more rigorous passenger screening procedures. The agencies have recognized that individual actions alone are not sufficient to respond to violations of restricted airspace, and consequently they have also coordinated their efforts to try and enhance the response to each violation. The agencies have established the National Capital Region Coordination Center to enhance the effectiveness of air security and air defense operations in the national capital region. The center’s primary mission is to facilitate rapid coordination and information sharing among participating agencies in preventing, deterring, and interdicting air threats to the region. To facilitate center operations, the participating agencies approved a concept of operations plan in May 2005 that identifies agency roles and missions in securing and defending national capital region airspace and specifies certain interagency operating protocols. The individual and coordinated agencies’ actions represent noteworthy efforts to counter the threat to U.S. aviation and the homeland. However, it is important to recognize that it may not be possible to prevent all restricted airspace violations or to deter all attacks. Airspace security measures could be challenged. In addition, in some cases, some pilots do not consult FAA notices on the location of restricted airspace as required by FAA, and consequently sometimes inadvertently enter restricted airspace without authorization. Although FAA has established stricter sanctions against pilots and stepped up its outreach efforts, violations continued at the time of our review. Consequently, the interagency management of the response to airspace violations could benefit from filling gaps in policies and procedures. We also identified gaps in TSA’s risk assessment of the aviation sector. TSA has made improvements in airspace security; however, TSA does not have complete knowledge of the level of risk existing in the commercial aviation sector. While agency officials told us that they conducted vulnerability assessments, a component of risk assessments, at many of the commercial airports, they had not assessed all of them. TSA officials explained that they had not yet established milestones for specific actions needed to complete the risk assessments. As a result, TSA lacks assurance that some airport managers have taken reasonable steps to enhance security. General aviation airports and aircraft are also a concern because TSA has generally not assessed the level of security existing at these airports. About 19,000 general aviation airports operate in the United States, and TSA’s overall vulnerability assessments at these airports have been limited. Most general aviation airports are not required to provide the same level of screening for pre-boarding passengers as at commercial airports. TSA has reviewed some general aviation airports for vulnerabilities and developed risk assessment tools to enable managers to conduct self-assessments. Nonetheless, the assessments are voluntary, and the completion of these assessments has been limited. Thus, TSA plans to outreach to airport managers to promote use of the tool. In a November 2004 report, we recommended that the Secretary of Homeland Security direct the Assistant Secretary of TSA to develop an implementation plan with milestones and time frames to execute a risk management approach for general aviation, and the agency concurred with our recommendation. While improvements have been made in the overall management response to airspace violations, the interagency response to airspace violations suggests that there are opportunities for further improvement, because these agencies have not formally developed an interagency program to institutionalize the defense of restricted airspace. Specifically, the agencies do not have: an organization in charge, interagency policies and procedures, protocols for information sharing, and common definitions of restricted airspace violations. Each agency simultaneously acts and commands and controls its own resources in responding to a violation of restricted airspace. At the same time, TSA, FAA, and DOD officials told us that, at the National Capital Region Coordination Center, determining who leads the interagency response is difficult, may change depending on the nature of the airspace violation, and may shift during the course of a violation, as the agencies monitor the intruder’s flight and consider the appropriate response. TSA is the executive agency for the center, but TSA officials said that they only resolve or “deconflict” agency issues and do not see themselves as being in charge of the interagency process for responding to violations of restricted airspace. At the same time, DOD pointed out that the response at the center has little or no effect on NORAD’s response, because NORAD and FAA control National Capital Region airspace. Without central leadership, the potential exists for a somewhat slower response to a violation as the agencies decide who is in charge while the violating aircraft continues to operate in restricted airspace. While the interagency coordination achieved at the time our report was noteworthy, TSA, FAA, DOD, and other agencies had not implemented certain key policies and procedures that are critical to multi-organizational success, particularly when they are acting simultaneously in a time-critical operation. For example, the agencies had not agreed on policies and procedures to specify who has access to Domestic Events Network- initiated conferences, and under what circumstances. Additionally, according to FAA, during a violation FAA personnel may not have access to DOD’s classified teleconference systems if the interagency response goes beyond a certain national security classification, because FAA officials may lack appropriate security clearances. In other cases, according to DOD officials, when a secure conference is taking place, FAA officials cannot connect themselves into the conference, the originating party must call them and FAA must subsequently answer the call, in order to participate. If unable to participate, FAA officials told us that they may be unable to effectively manage other aircraft in the area in a timely manner, potentially resulting in aircraft collisions or exposing aircraft transiting the area to danger if the decision is made to shoot down the violator. In April 2005, the agencies completed their interagency concept of operations plan for the National Capital Region Coordination Center, but the concept of operations plan does not address when and how responsibility for response is passed from agency to agency during a violation. Also, the agencies have not begun to develop a plan covering any other U.S. airspace. Such plans outline the general concept of program operations with specific actions and responsibilities to be assigned to participating agencies in a separate, more detailed plan. Without a concept of operations plan, the effective passing of responsibility from one agency to another to respond to a restricted airspace violation cannot be ensured, potentially leading to confusion and a slower response. Information sharing protocols and procedures have not been established by the agencies or within some parts of FAA. After the agencies complete the response to an airspace violation, FAA and NORAD officials record the violation in separate databases. These databases consist of records of violations that, taken together, could reveal trends indicating testing or training for an attack. However, neither FAA nor NORAD routinely shares even parts of its data with the other. Furthermore, the FAA database was not routinely shared with the agency’s own Strategic Operations Security Manager, despite the manager’s repeated attempts to obtain access. In May 2005, FAA finally agreed to share parts of the database with its own Strategic Operations Security Manager. Although the FAA database was set up for a different purpose, the manager had previously indicated that he could use information to enhance security; however, he told us that the FAA department that maintains the database had previously refused to provide the information, citing the need to protect pilot information. We also obtained access to key elements of the database and found information that could suggest approaches to reducing violations of restricted airspace. For example, we could identify aircraft that repeatedly violated restricted airspace and the airports from which the flights originated. Specifically, we found 2 general aviation aircraft that had accounted for 6 violations each, and 29 airports, 17 of which are in Maryland and Virginia, that had accounted for about 30 percent of all airspace violations nationwide. This is the type of information that was not shared with the FAA Strategic Operations Security Manager, but which such an office might find useful in light of intelligence agency threat assessments about the potential for terrorist use of general aviation aircraft. Additionally, FAA enforcement actions taken on airspace violations are not routinely shared with other agencies. Since agencies do not have this information, they have little knowledge as to the disposition and effectiveness of their collective efforts, and they may be hampered in their ability to target limited resources effectively. For example, NORAD air defense-sector personnel did not have aggregated or general information about FAA’s administrative enforcement actions against pilots who had violated restricted airspace in their sectors. Finally, the potential for confusion exists about what constitutes a restricted airspace violation because no common definition has been accepted. FAA and NORAD, the primary agencies collecting airspace violations data, define it differently. NORAD uses the term “incursion” and defines different types of incursions depending on various factors, including airspeed and direction. FAA uses the term “pilot deviation” and defines it as the actions of a pilot that result in the violation of a Federal Aviation Regulation or a NORAD Air Defense Identification Zone, a category of restricted airspace. However, the terms are not synonymous, and a violation can trigger a response in one agency but not another, even though multiple agencies share the responsibility for restricted airspace security and an appropriate, timely response is critical. Moreover, without a common definition that can be used as a basis for collecting nationwide data, the agencies may not be aware of the scope and magnitude of violations, making it potentially more difficult to target resources efficiently and enhance security. After the September 11, 2001, attacks, the fragmented missions of agencies involved in securing and defending U.S. airspace converged into a broader interagency mission to protect the airspace. Since September 11, 2001, several involved agencies took actions that represent noteworthy efforts to counter the threat to U.S. aviation and the homeland. TSA has attempted to identify vulnerabilities of aircraft and airports and consequently implemented and continues to implement security enhancements. Although TSA is finishing the development of a risk- assessment tool to assess general aviation threats, TSA has not established milestones with specific actions needed to complete a similar risk assessment for the commercial aviation sector. Until the assessment is completed, TSA may lack complete knowledge as to the level of risk in commercial aviation, and it cannot be assured that commercial aircraft owners and operators at some airports are effectively targeting resources to mitigate the risk of terrorists’ using commercial aircraft to attack population centers and critical infrastructure. Because the interagency process to manage the response to restricted airspace violations is a time- critical operation, the implications of not having well-developed policies, procedures, information sharing protocols, and common definitions are serious. In addition, if information and databases are not appropriately shared, opportunities to better target limited resources and proactively identify emerging threats could be missed. We recommend that the Secretary of Homeland Security direct the Assistant Secretary of TSA to establish milestones with specific actions needed to complete risk assessments applicable to the commercial aviation sector. We further recommend that the Secretaries of Defense, Homeland Security, and Transportation work together to determine the extent to which one agency should be in charge of leading the interagency process of responding to violations of restricted airspace as they occur; determine the degree to which interagency policies, procedures, and other guidance on the Domestic Events Network are needed to evaluate its effectiveness and identify potential improvements; develop a concept of operations plan or other relevant document to guide the interagency process of responding to violations in all U.S. airspace; establish information sharing requirements and protocols; and establish common definitions. In addition, we recommend that the Secretaries of Defense and Transportation work together to determine the extent to which key elements of FAA’s pilot deviations database could be shared with NORAD. We also recommend that the Secretary of Transportation direct the Administrator of FAA to take the following actions: Obtain necessary security clearances for appropriate FAA personnel to ensure that they are not excluded from airspace violations conferences that require such clearances; and Ensure that FAA shares sufficient data from its airspace violation database (also known as its pilot deviations database) with FAA’s office of the Strategic Operations Security Manager to meet the needs of that office. We received unclassified written comments from DHS, classified written comments from DOD, and unclassified oral comments from the Department of Transportation on the classified draft report that we will issue to you in September 2005. We have included the DHS comments in their entirety in appendix II and the unclassified portion of DOD’s comments in appendix III. Each agency also provided technical comments, and we incorporated them in our draft report and this statement where appropriate. DHS and DOD disagreed with our draft report recommendation that the secretaries of the three departments work together to appoint an organization responsible for determining the extent to which one agency should be in charge of countering violations of restricted airspace as they occur. DHS maintains that each agency should maintain full authority to execute its own portion of the mission that contributes to the interagency effort. DHS and DOD both pointed out that the Interagency Airspace Protection Working Group in the Homeland Security Council addresses interagency coordination issues, and DHS indicated that the working group may be a vehicle for addressing the gaps we identified. We note that, to date, the issues we highlighted in our testimony remain unresolved. Nevertheless, we revised our recommendation to suggest that the secretaries of the three departments work together to determine the extent to which one agency should be in charge of leading the interagency process of responding to violations of restricted airspace. Ultimately, we believe that if the agencies can collectively resolve the issues and gaps we identified in our report, which they acknowledged, then an organization in charge may not be needed. As discussed above, DHS agreed or partially agreed with the rest of our recommendations, while DOD disagreed with most of the recommendations and agreed with some. Department of Transportation officials agreed with the recommendations in our draft report. DHS generally concurred with our recommendation to establish milestones with specific actions needed to complete risk assessments applicable to the commercial aviation sector. In its response, DHS said that it continues to conduct assessments as part of its risk-based management approach. While these are good first steps, we still believe it is also important to establish milestones with specific actions needed to ensure that the assessments are completed within a reasonable time period and are effectively managed. While DHS disagreed with having a lead agency, its comments stated that more could be done to coordinate efforts during violations, but that the focus should be on open communications to ensure flexibility in responding to the violation. DHS told us that the Interagency Airspace Protection Working Group meets regularly and addresses relevant national airspace issues, but we noted that there is still an absence of an air security strategy, plan, or concept of operations, and the issues we found that could enhance air security such as information sharing and common definitions still need to be addressed. DHS concurred with our recommendations to determine the degree to which interagency policies and procedures on the Domestic Events Network are needed; develop a concept of operations for management of the interagency response to violations in all U.S. airspace; and establish information sharing requirements and protocols. With regard to our recommendation to establish common definitions, DHS concurred in part, citing that each agency’s mission and command and control processes require that it develop its own definitions for airspace violations. However, DHS agreed to share its definitions with other agencies. We agree that sharing definitions is important; however, it is unclear to us whether simply sharing and not harmonizing definitions would sufficiently reduce confusion during the interagency operation responding to violations of restricted airspace. This is especially a concern in a time-critical function where clear decisions are imperative. DOD concurred or partially concurred with some of our recommendations and nonconcurred with others. DOD also noted that we omitted from our draft report certain DOD procedures officials supplied to us that integrate DOD’s response to violations of restricted airspace with those of other agencies. We acknowledge that DOD has internal procedures that discuss the way DOD interacts with other agencies, and we considered those procedures as part of our analysis. DOD’s procedures notwithstanding, we identified a number of potential gaps in the interagency process of responding to violations of restricted airspace that remain unaddressed. We recommended that the Secretaries of Homeland Security, Defense, and Transportation work together to accomplish five initiatives. First, DOD nonconcurred with our recommendation that the three secretaries work together to identify an organization that would be responsible for addressing interagency coordination issues. As did DHS, DOD pointed out that the Interagency Airspace Protection Working Group already addresses interagency coordination for homeland air defense. Nonetheless, problems remain. For example, as we point out in our report, information sharing protocols and procedures have not been established, a concept of operations plan for airspace outside the national capital region has not been developed, and common definitions have not been adopted. DOD also pointed out that TSA hosts agencies at the National Capital Region Coordination Center. While true, TSA officials told us that they view their role as one of deconflicting rather than of leading interagency efforts. As stated earlier, we believe that if the agencies can effectively resolve the issues and gaps we identified in the interagency process of responding to violations of restricted airspace without having an organization in charge, then an organization in charge may not be needed. Second, DOD nonconcurred with our recommendation that the three secretaries work together to determine the extent to which one agency should be in charge of leading the interagency process of responding to violations of restricted airspace as they occur. DOD stated that our report is misleading because it implies that having someone in charge would prevent some airspace violations. DOD also stated that DHS has managed air security by hardening commercial aircraft cockpit doors, placing armed Federal Air Marshals on some flights, and taking other actions. DOD also pointed out that FAA manages airspace for flight safety and DOD defends domestic airspace. DOD stated that all of these missions occur at all times and there is never a “lead change.” As discussed above, we revised and clarified our recommendation to suggest that the secretaries of the three departments determine the extent to which one agency should be in charge of leading the interagency process of responding to restricted airspace violations. Our recommendation is intended to enhance the response to violations of restricted airspace and is not premised on the notion that its adoption would prevent the violations from occurring. Moreover, while steps taken by DHS, FAA, and DOD to secure aviation, ensure flight safety, and defend homeland airspace are important contributions, they generally do not contribute to knowing who is in charge of the response as a violation is occurring. Also, we agree with DOD that there is never a “lead change,” because the interagency process lacks central leadership. Finally, we did not recommend that a specific agency or individual be in charge. We recommended that the departments study the question of whether it would be advantageous to have someone in the lead. If the departments determined that such a change would be beneficial, they would presumably also determine what, if any, changes in law would be needed. We acknowledge, however, that if the agencies can effectively resolve the issues and gaps we identified in the interagency process of responding to restricted airspace violations, then an organization in charge may not be needed. Third, we recommended that the three secretaries determine whether interagency policies, procedures, or other guidance is necessary to evaluate Domestic Events Network performance and identify improvements. DOD nonconcurred and stated that the Domestic Events Network is not designed for decision making. We note that the network is a telephone conferencing system that permits communication between the agencies responding to violations of restricted airspace for the purpose of deciding on the coordinated response. We are not aware that the agencies have evaluated network performance to determine whether enhancements are possible, and our recommendation was intended to promote such an evaluation. We continue to believe that government initiatives benefit from appropriate evaluation of performance, and consequently we stand by our recommendation. Fourth, we recommended that the secretaries work together to develop a concept of operations plan for management of violations in all U.S. airspace. DOD nonconcurred on the basis that the agencies do not manage violations but respond to them. Nonetheless, DOD agreed that an overall air strategy and identification of roles and missions for each agency should be considered. We agree that an overall strategy for securing U.S. air space would be beneficial, and we believe that if such a strategy is developed, a concept of operations plan or other relevant document would follow. As a result of DOD’s comment, we have revised our recommendation to one of developing a concept of operations plan or other relevant document to guide the interagency response to violations of restricted airspace. Finally, DOD concurred with our recommendations that the secretaries work together to establish information sharing protocols and procedures and establish common definitions. We had also recommended that the Secretaries of Defense and Transportation work together to determine the extent to which key elements of the FAA’s pilot deviation database could be shared with NORAD, and DOD nonconcurred. In its comments, DOD stated that it does not require access to private citizen data contained in the FAA database. We agree that DOD does not require such information. However, we recommended that DOD meet with the Department of Transportation to determine whether any elements would be useful, and if so, to pursue a means to obtain them. Consequently, we stand by our recommendation. Department of Transportation officials told us that they agreed with our recommendations and indicated that a national air security policy should be established to outline major goals and responsibilities for each of the agencies with responsibilities for the protection of U.S. airspace. Department officials also stated that without a national policy, the agencies would continue to work without unified, common goals. Transportation officials suggested that a policy coordinating committee be established for air security to address interagency issues. They also agreed that information sharing is critical to enhance air security and told us that they had begun sharing pilot deviations data with the FAA Strategic Operations Security Manager as we had recommended. We agree with the Department’s overall comments and believe that this is the type of dialogue that should take place between the Departments of Homeland Security, Defense, and Transportation. Mr. Chairman, this concludes my testimony. Thank you again for the opportunity to discuss these issues. At this time, I would be happy to address any questions. In conducting our review of the response to violations of restricted airspace, we visited key offices within DOD, DHS, and FAA that have responsibility for oversight and management of U.S. airspace. We conducted our review in the Washington, D.C., area, at DOD, including the Office of the Assistant Secretary of Defense (Homeland Defense), Defense Intelligence Agency, and Joint Theater Air and Missile Defense Office; DHS, including the Office of Immigration and Customs Enforcement, United States Secret Service, and the Transportation Security Administration, including the National Capital Region Coordination Center; FAA Headquarters, Domestic Events Network, Air Traffic Control System Command Center, and the Potomac Consolidated Terminal Radar Approach Control facility. We also met with the Federal Bureau of Investigation, the Central Intelligence Agency, the National Counterterrorism Center, the National Aeronautics and Space Administration, and the Aircraft Owners and Pilots Association. We did not review ground-based air defense batteries that are also part of the homeland air defense system. We conducted fieldwork at U.S. Northern Command and NORAD, Colorado Springs, Colorado, as well as NORAD’s Northeast Air Defense Sector, Rome, New York; Western Air Defense Sector, Tacoma, Washington; and the Continental U.S. NORAD Region and Southeast Air Defense Sector near Panama City, Florida. In addition, we visited the Air Force’s Air Combat Command, Langley, Virginia, and 84th Radar Evaluation Squadron, Ogden, Utah; Immigration and Customs Enforcement’s Air and Marine Operations Center, Riverside, California; and FAA’s Air Traffic Control Center, Fort Worth, Texas. To determine the extent to which violations of restricted airspace have occurred since September 11, 2001, we met with NORAD and FAA officials to obtain relevant data from their incursion and pilot deviation databases, respectively, and discussed their methods for determining what constitutes an incursion/pilot deviation. After determining that NORAD’s database was not adequate to accurately identify the number of violations of restricted airspace, we obtained relevant portions of FAA’s pilot deviation database and performed the analysis necessary to develop the data provided in the report. We reviewed the reliability of the FAA database to determine the numbers of incursions. We (1) performed electronic testing of the data elements needed for our analysis and looked for obvious errors in accuracy and completeness, (2) reviewed related documentation, and (3) interviewed officials knowledgeable about the data. We noted several limitations in the data, including missing values for key data elements and the fact that events might be both over- and under- reported due to varying definitions of pilot deviations. We were able to partially correct for these problems and consequently determined that the data were sufficiently reliable to illustrate analyses for tracking violations of restricted airspace. However, because we could not fully correct for data errors, the data presented should be considered estimates rather than precise numbers. To identify the actions taken individually or in coordinated fashion to secure U.S. airspace and aviation and to mitigate the threat since September 11, 2001, we interviewed officials at the National Capital Region Coordination Center; the headquarters of NORAD and its Continental U.S. NORAD Region and the three continental U.S. based air defense sectors, TSA, FAA, and Air Combat Command; and the Air and Marine Operations Center. We discussed and reviewed changes in operational responsibilities and plans of these organizations both pre- and post- September 11, 2001. To better understand these actions, we toured and observed the workings of the National Capital Region Coordination Center, the air defense sectors, the Domestic Events Network, and the Air and Marine Operations Center. While at some of these centers, we observed the agencies’ responses to actual violations of restricted airspace, the interaction of the agencies involved in responding, and the steps taken by the various agencies involved to address the violation. We discussed with agency officials the procedures for responding to incursions into restricted airspace and reviewed pertinent documentation relating to those procedures where they existed. In examining interagency policies and procedures that govern the management of airspace violations, we first reviewed existing GAO work that found that the success of interagency efforts depends on melding multi-organizational efforts through central leadership, an overarching strategy, effective partnerships, and common definitions. We then compared the extent to which agencies with responsibility for preventing or responding to violations of restricted airspace have established an organization in charge, interagency policies and procedures, protocols for the sharing of database records documenting violations of restricted airspace, and common definitions of restricted airspace. We conducted our review from June 2004 through April 2005 in accordance with generally accepted government auditing standards. Brian J. Lepore, Lorelei St. James, James F. Reid, James R. Nelson, Carissa D. Bryant, Ronald La Due Lake, Rebecca Shea, Michael C. Zola, Cheryl Weissman, and R.K. Wild made key contributions to this statement. General Aviation Security: Increased Federal Oversight Is Needed, But Continued Partnership with Private Sector is Critical to Long-Term Success. GAO-05-144. Washington, D.C.: September 30, 2004. Homeland Defense: Progress Made in Organizing to Achieve Northern Command’s Mission, but Challenges Remain. GAO-04-622C. Washington, D.C.: September 8, 2004. Homeland Security: Efforts to Improve Information Sharing Need to be Strengthened. GAO-03-760. Washington, D.C.: August 27, 2003. Homeland Defense: DOD Needs to Assess the Structure of U.S. forces for Domestic Military Missions. GAO-03-670. Washington, D.C.: July 11, 2003. Homeland Security: Effective Intergovernmental Coordination is Key to Success. GAO-02-1013T. Washington, D.C.: August 23, 2002. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. 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. | Securing and defending U.S. airspace is an interagency mission that depends on close interagency coordination and information sharing. GAO was asked to review (1) the threat assessment for U.S. aviation, (2) violations of restricted airspace since September 11, 2001, (3) agencies' individual or coordinated steps to secure U.S. aviation, and (4) interagency policies and procedures to manage the response to restricted airspace violations. GAO will issue a classified report responding to this request later this year. To keep this testimony unclassified, GAO focused on the latter three questions. The Federal Aviation Administration reported about 3,400 violations of restricted airspace from September 12, 2001, to December 31, 2004, most of which were committed by general aviation pilots. Violations can occur because (1) pilots may divert from their flight plan to avoid bad weather, (2) the Administration may establish newly restricted airspace with little warning, and pilots in the air may be unaware of the new restrictions, or (3) pilots do not check for notices of restrictions, as required. Also, terrorists may deliberately enter restricted airspace to test the government's response or carry out an attack. Federal agencies have acted individually or have coordinated to enhance aviation security. For example, the Transportation Security Administration (TSA) established a national operations center that disseminates operational- and intelligence-related information, and has enhanced passenger and checked baggage screening, secured cockpit doors, and assessed the risk to some, but not all, commercial airports. Also, few general aviation airport owners have conducted risk assessments. The North American Aerospace Defense Command's mission was expanded to include monitoring domestic air traffic and conducting air patrols. Collectively, the agencies are operating the National Capital Region Coordination Center to secure the National Capital Region. GAO identified gaps in the simultaneous, time-critical, multi-agency response to airspace violations. While it may not be possible to prevent all violations or deter all attacks, GAO identified some gaps in policies and procedures. Specifically, the agencies were operating without (1) an organization in the lead, (2) fully developed interagency policies and procedures for the airspace violations response teleconferencing system, (3) information sharing protocols and procedures, or (4) accepted definitions of a violation. As a result, opportunities may be missed to enhance the security of U.S. aviation. |
The federal government faces a series of challenges that in many instances are not possible for any single agency to address alone. Many federal program efforts, including those related to ensuring food safety, providing homeland security, monitoring incidence of infectious diseases, or improving response to natural disasters, transcend more than one agency. Agencies face a range of challenges and barriers when they attempt to work collaboratively. GPRAMA establishes a new framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. It requires the Office of Management and Budget (OMB), in coordination with agencies, to develop—every 4 years—long-term, outcome-oriented goals for a limited number of crosscutting policy areas. On an annual basis, OMB is to provide information on how these long-term crosscutting goals will be achieved. Also, we recently reported that a system of key national indicators currently under development in the U.S. could contribute to the implementation of the act’s requirements for establishing crosscutting goals as well as agency-level goals. Such a system aims to aggregate essential statistical measures of economic, social, and environmental issues to provide reliable information on a country’s condition, offering a shared frame of reference that enables collective accountability. Federal officials could look to measures included in a system of key national indicators to highlight areas in need of improvement and could use this information to inform the selection of future crosscutting and agency-level goals. Also, by providing information on economic, social, and environmental conditions and trends across the nation, a key indicator system may help provide context and a broader perspective for interpreting how the federal government’s efforts contribute to national outcomes. The crosscutting approach required by the act will provide a much needed basis for more fully integrating a wide array of federal activities as well as a cohesive perspective on the long-term goals of the federal government that is focused on priority policy areas. It could also be a valuable tool for governmentwide reexamination of existing programs and for considering proposals for new programs. Our recent report on duplication, overlap, and fragmentation highlights a number of areas where a more crosscutting approach is needed—both across agencies and within a specific agency. We found that duplication and overlap occur because programs have been added incrementally over time to respond to new needs and challenges, without a strategy to minimize duplication, overlap, and fragmentation among them. Also, there are not always interagency mechanisms or strategies in place to coordinate programs that address crosscutting issues, which can lead to potentially duplicative, overlapping, and fragmented efforts. Effective GPRAMA implementation could help inform reexamination or restructuring efforts related to these and other areas by identifying the various agencies and federal activities—including spending programs, regulations, and tax expenditures—that contribute to each crosscutting goal. These efforts could also be supported by a system of key national indicators. For example, to influence positive movement in certain indicators, federal officials could look at all the programs that contribute to improving outcomes related to those indicators, examine how each contributes, and use this information to streamline and align the programs to create a more effective and efficient approach. Examples from our work on duplication, overlap, and fragmentation include: Teacher quality programs: In fiscal year 2009, the federal government spent over $4 billion specifically to improve the quality of our nation’s 3 million teachers through numerous programs across the government. Federal efforts to improve teacher quality have led to the creation and expansion of a variety of programs across the federal government; however, there is no governmentwide strategy to minimize fragmentation, overlap, or duplication among these many programs. Specifically, we identified 82 distinct programs designed to help improve teacher quality, either as a primary purpose or as an allowable activity, administered across 10 federal agencies. The proliferation of programs has resulted in fragmentation that can frustrate agency efforts to administer programs in a comprehensive manner, limit the ability to determine which programs are most cost effective, and ultimately increase program costs. Department of Education (Education) officials believe that federal programs have failed to make significant progress in helping states close achievement gaps between schools serving students from different socioeconomic backgrounds, because in part, federal programs that focus on teaching and learning of specific subjects are too fragmented to help state and district officials strengthen instruction and increase student achievement in a comprehensive manner. Education has established working groups to help develop more effective collaboration across Education offices, and has reached out to other agencies to develop a framework for sharing information on some teacher quality activities, but it has noted that coordination efforts do not always prove useful and cannot fully eliminate barriers to program alignment. Congress could help eliminate some of these barriers through legislation, particularly through the pending reauthorization of the Elementary and Secondary Education Act of 1965 and other key education bills. Specifically, to minimize any wasteful fragmentation and overlap among teacher quality programs, Congress may choose either to eliminate programs that are too small to evaluate cost effectively or to combine programs serving similar target groups into a larger program. Education has already proposed combining 38 programs into 11 programs in its reauthorization proposal, which could allow the agency to dedicate a higher portion of its administrative resources to monitoring programs for results and providing technical assistance. Military health system: The Department of Defense’s (DOD) Military Health System (MHS) costs have more than doubled from $19 billion in fiscal year 2001 to $49 billion in 2010 and are expected to increase to over $62 billion by 2015. The responsibilities and authorities for the MHS are distributed among several organizations within DOD with no central command authority or single entity accountable for minimizing costs and achieving efficiencies. Under the MHS’s current command structure, the Office of the Assistant Secretary of Defense for Health Affairs, the Army, the Navy, and the Air Force each has its own headquarters and associated support functions. DOD has taken limited actions to date to consolidate certain common administrative, management, and clinical functions within its MHS. To reduce duplication in its command structure and eliminate redundant processes that add to growing defense health care costs, DOD could take action to further assess alternatives for restructuring the governance structure of the military health system. In 2006, if DOD and the services had chosen to implement one of the reorganization alternatives studied by a DOD working group, a May 2006 report by the Center for Naval Analyses showed that DOD could have achieved significant savings. Our adjustment of those savings from 2005 into 2010 dollars indicates those savings could range from $281 million to $460 million annually, depending on the alternative chosen and the numbers of military, civilian, and contractor positions eliminated. The Under Secretary of Defense for Personnel and Readiness has recently established a new position to oversee DOD’s military healthcare reform efforts. Employment and training programs: In fiscal year 2009, 47 federal employment and training programs in nine agencies spent about $18 billion to provide services, such as job search and job counseling, to program participants. Most of these programs are administered by the Departments of Labor, Education, and Health and Human Services (HHS). Forty-four of the 47 programs we identified, including those with broader missions such as multipurpose block grants, overlap with at least one other program in that they provide at least one similar service to a similar population. As we reported in January 2011, nearly all 47 programs track multiple outcome measures, but only five programs have had an impact study completed since 2004 to assess whether outcomes resulted from the program and not some other cause. We examined potential duplication among three selected large programs—HHS’s Temporary Assistance for Needy Families (TANF) and the Department of Labor’s Employment Service, and Workforce Investment Act of 1998 (WIA) Adult programs—and found they provide some of the same services to the same population through separate administrative structures. Colocating services and consolidating administrative structures may increase efficiencies and reduce costs, but implementation can be challenging. Some states have colocated TANF employment and training services in one-stop centers where Employment Service and WIA Adult services are provided. An obstacle to further progress in achieving greater administrative efficiencies is that little information is available about the strategies and results of such initiatives. In addition, little is known about the incentives that states and localities have to undertake such initiatives and whether additional incentives are needed. To facilitate further progress by states and localities in increasing administrative efficiencies in employment and training programs, we recommended in 2011 that the Secretaries of Labor and HHS work together to develop and disseminate information that could inform such efforts. As part of this effort, Labor and HHS should examine the incentives for states and localities to undertake such initiatives and, as warranted, identify options for increasing such incentives. Labor and HHS agreed they should develop and disseminate this information. HHS noted that it does not have the legal authority to mandate increased TANF-WIA coordination or create incentives for such efforts. As part of its proposed changes to the Workforce Investment Act of 1998, the administration proposes consolidating nine programs into three. In addition, the budget proposal would transfer the Senior Community Service Employment Program from Labor to HHS. Sustained oversight by Congress could also help ensure progress is realized. Although agencies have made progress improving their operations in recent years, they need more effective management capabilities to better implement new programs and policies. As part of the new governmentwide framework created by GPRAMA, OMB is required to develop long-term goals to improve management functions across the government. The act specifies that these goals should include five areas: financial management, human capital management, information technology management, procurement and acquisition management, and real property management. All five of these areas have been identified by GAO as key management challenges across the government. Moreover, some aspects of these areas have warranted our designation as high risk, either governmentwide or at certain agencies. For example, although significant improvements have been made since we initially designated it as high risk in 2001, strategic human capital management in the federal government remains high risk because of a need to address current and emerging critical skills gaps that are undermining agencies’ abilities to meet their vital missions. Another example is financial management at DOD, which we designated as high risk in 1995 due to pervasive financial and related business management systems and control deficiencies. In addition, a number of the cost-savings or revenue-enhancement opportunities we recently identified touch on needed improvements to management functions. Examples include: Noncompetitive contracts: Federal agencies generally are required to award contracts competitively, but a substantial amount of federal money is being obligated on noncompetitive contracts annually. Federal agencies obligated approximately $170 billion on noncompetitive contracts in fiscal year 2009 alone. While there has been some fluctuation over the years, the percentage of obligations under noncompetitive contracts recently has been in the range of 31 percent to over 35 percent. Although some agency decisions to forego competition may be justified, we found that when federal agencies decide to open their contracts to competition, they frequently realize savings. For example, the Department of State (State) awarded a noncompetitive contract for installation and maintenance of technical security equipment at U.S. embassies in 2003. In response to our recommendation, State subsequently competed this requirement, and in 2007 it awarded contracts to four small businesses for a total savings of over $218 million. In another case, we found in 2006 that the Army had awarded noncompetitive contracts for security guards, but later spent 25 percent less for the same services when the contracts were competed. In July 2009, OMB called for agencies to reduce obligations under new contract actions that are awarded using high-risk contracting authorities by 10 percent in fiscal year 2010. These high-risk contracts include those that are awarded noncompetitively and those that are structured as competitive but for which only one offer is received. While sufficient data are not yet available to determine whether OMB’s goal was met, we are currently reviewing the agencies’ savings plans to identify steps taken toward that goal, and will continue to monitor the progress agencies make toward achieving this and any subsequent goals set by OMB. Undisbursed grant balances: Past audits of federal agencies by GAO and Inspectors General, as well as agencies’ annual performance reports, have suggested grant management challenges, including failure to conduct grant closeouts and undisbursed balances, are a long-standing problem. In August 2008, we reported that during calendar year 2006, about $1 billion in undisbursed funding remained in expired grant accounts in HHS’s Payment Management System—the largest civilian grant payment system, which multiple agencies use. In August 2008, we recommended that OMB instruct all executive departments and independent agencies to track undisbursed balances in expired grant accounts and report on the resolution of this funding in their annual performance plan and Performance and Accountability Reports. As of April 2011, OMB had not issued guidance to all agencies to track and report on such balances. Unneeded real property: Many federal agencies hold real property they do not need, including property that is excess or underutilized. Excess and underutilized properties present significant potential risks to federal agencies because they are costly to maintain. For example, in fiscal year 2009, agencies reported underutilized buildings accounted for over $1.6 billion in annual operating costs. In a June 2010 Presidential Memorandum to federal agencies, the administration established a new target of saving $3 billion through disposals and other methods by the end of fiscal year 2012; the President reiterated this goal in his 2012 budget. However, federal agencies continue to face obstacles to disposing of unneeded property, such as requirements to offer the property to other federal agencies, then to state and local governments and certain nonprofits at no cost. If these entities cannot use the property, agencies may also need to comply with costly historic preservation or environmental cleanup requirements before disposing of the property. Finally, community stakeholders may oppose agencies’ plans for property disposal. OMB could assist agencies in meeting their property disposal target by implementing our April 2007 recommendation of developing an action plan to address key problems associated with disposing of unneeded real property, including reducing the effect of competing stakeholder interests on real property decisions. The President’s fiscal year 2012 budget proposed the Civilian Property Realignment Act (CPRA), which was recently introduced in the House of Representatives. The act would establish a Civilian Property Realignment Board modeled on the Base Closure and Realignment Commission. We are engaged in discussions with Congress to determine how we can best support Congress, should the act become law. Agencies need to consider the differing information needs of various users—such as agency top leadership and line managers, OMB, and Congress—to ensure that performance information will be both useful and used in decision making. We have previously reported that to be useful, performance information must meet diverse users’ needs for completeness, accuracy, validity, timeliness, and ease of use. GPRAMA puts into place several requirements that could address these needs. Completeness: Agencies often lack information on the effectiveness of programs; such information could help decision makers prioritize resources among programs. Our work on overlap and duplication has found crosscutting areas where performance information is limited or does not exist. For example, not enough is known about the effectiveness of many domestic food assistance programs—an area where three federal agencies administer 18 programs, covering more than $62.5 billion in spending in fiscal year 2008. Research suggests that participation in 7 of the 18 programs—including the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), the National School Lunch Program, the School Breakfast Program, and SNAP—is associated with positive health and nutrition outcomes consistent with programs’ goals, such as raising the level of nutrition among low-income households, safeguarding the health and well-being of the nation’s children, and strengthening the agricultural economy. Yet little is known about the effectiveness of the remaining 11 programs because they have not been well studied. In another area, economic development, where four agencies administer 80 programs, a lack of information on program outcomes is a current and long- standing problem. In shedding light on these and other areas, the new crosscutting planning and reporting requirements could lead to the development of performance information in areas that are currently incomplete. Accuracy and validity: Agencies are required to disclose more information about the accuracy and validity of their performance information in their performance plans and reports, including the sources for their data and actions to address limitations to the data. Timeliness and ease of use: While agencies will continue to report annually on progress towards the rest of their goals, GPRAMA requires reporting for governmentwide and agency priority goals on a quarterly basis. By also requiring information to be posted on a governmentwide Web site, the act will make performance information more accessible and easy to use by stakeholders and the public, thus fostering transparency and civic engagement. In addition, to help ensure that performance information is used—not simply collected and reported as a compliance exercise—GPRAMA requires top leadership and program officials to be involved in quarterly reviews of priority goals. During these sessions, they are expected to review the progress achieved toward goals; assess the contributions of underlying federal organizations, programs, and activities; categorize goals by their risk of not being achieved; and develop strategies to improve performance. To be successful, these officials must have the knowledge and experience necessary to use and trust the information they are gathering. Building analytical capacity to use performance information and to ensure its quality—both in terms of staff trained to do the analysis and availability of research and evaluation resources—is critical to using performance information in a meaningful fashion and will play a large role in the success of government performance improvements. Federal officials must understand how the performance information they gather can be used to provide insight into the factors that impede or contribute to program successes; assess the effect of the program; or help explain the linkages between program inputs, activities, outputs, and outcomes. Our periodic surveys of federal managers on government performance and management issues have found a positive relationship between agencies providing training and development on setting program performance goals and the use of performance information when setting or revising performance goals. These surveys have also found a significant increase in training between our initial survey in 1997 and our most recent one in 2007. However, only about half of our survey respondents in 2007 reported receiving any training that would assist in strategic planning and performance assessment. We previously recommended that OMB ensure that agencies are making adequate investments in training on performance planning and measurement, with a particular emphasis on how to use performance information to improve program performance. Consistent with this, according to the President’s Fiscal Year 2012 Budget, in the coming year OMB and the Performance Improvement Council intend to help agencies strengthen their employees’ skills in analyzing and using performance information to achieve greater results. To further develop this capacity, within 1 year of enactment, GPRAMA requires the Office of Personnel Management (OPM), in consultation with the Performance Improvement Council, to identify the key skills and competencies needed by federal employees to carry out a variety of performance management activities including developing goals, evaluating programs, and analyzing and using performance information. Once those key skills and competencies are identified, OPM is then required to incorporate those skills and competencies into relevant position classifications and agency training no later than 2 years after enactment. Perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders. This commitment is most prominently shown through the personal involvement of top leaders in developing and directing reform efforts. Organizations that successfully address their long-standing management weaknesses do not “staff out” responsibility for leading change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming organizations’ natural resistance to change, marshalling the resources needed in many cases to improve management, and building and maintaining the organizationwide commitment to new ways of doing business. GPRAMA creates several new leadership structures and responsibilities aimed at sustaining attention on improvement efforts at both the agency and governmentwide levels. The act designates the deputy head of each agency as Chief Operating Officer (COO), with overall responsibilities for improving the management and performance of the agency. In addition, the act requires each agency to designate a senior executive as Performance Improvement Officer (PIO) to support the COO. The act also establishes a Performance Improvement Council—chaired by the OMB Deputy Director for Management and composed of PIOs from various agencies—to assist the Director of OMB in carrying out the governmentwide planning and reporting requirements. GPRAMA also creates individual and organizational accountability provisions that have the potential to keep attention focused on achieving results. For each governmentwide performance goal, a lead government official is to be designated and held responsible for coordinating efforts to achieve the goal. Similarly, at the agency level, for each performance goal, an agency official, known as a goal leader, will be responsible for achieving the goal. To promote overall organizational accountability, the act requires OMB to report each year on unmet agency goals. Where a goal has been unmet for 3 years, OMB can identify the program for termination or restructuring, among other actions. In order for performance improvement initiatives to be useful to Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. In past reviews, we have noted the importance of considering Congress a partner in shaping agency goals at the outset. Congressional committee staff, in discussing the Program Assessment Review Tool (PART) developed by the previous administration, told us that communicating the PART assessment results was not a replacement for the benefit of early consultation between Congress and OMB about what they consider to be the most important performance issues and program areas warranting review. While GPRA called for agencies to consult with Congress on their strategic plans, the act did not provide detailed or specific requirements on the consultation process or how agencies were to treat information obtained. GPRAMA significantly enhances requirements for agencies to consult with Congress when establishing or adjusting governmentwide and agency goals. OMB and agencies are to consult with relevant committees, obtaining majority and minority views, about proposed goals at least once every 2 years. In addition, OMB and agencies are to describe on the governmentwide Web site or in their strategic plans, respectively, how they incorporated congressional input into their goals. Beyond this opportunity to provide input to OMB and agencies as they shape their plans, Congress can also play a decisive role in fostering results-oriented cultures in the federal government by using information on agency goals and results as it carries out its legislative responsibilities. For example, authorizing, appropriations, and oversight committees could schedule hearings to determine if agency programs have clear performance goals, measures, and data with which to track progress and whether the programs are achieving their goals. Where goals and objectives are unclear or not results oriented, Congress could articulate the program outcomes it expects agencies to achieve. This would provide important guidance to agencies that could then be incorporated in agency strategic and annual performance plans. Most important, congressional use of agency goals and measured results in its decision making will send an unmistakable message to agencies that Congress considers agency performance a priority. Over the years, the Committee on Homeland Security and Governmental Affairs and its predecessors have done commendable work focusing attention on improving government management and performance—by reporting out legislation, such as the original GPRA and GPRAMA, and through hearings, such as this one. Moving forward, congressional oversight and sustained attention by top administration officials will be essential to ensure further improvement in the performance of federal programs and operations. In fact, as we noted in our recent high-risk issues report, these two factors were absolutely critical to making the progress necessary for the DOD Personnel Security Clearance Program and the 2010 Census to be removed from our high-risk list. Realizing the promise of GPRAMA for improving government performance and accountability and reducing waste will require sustained oversight of implementation. GAO played a major role in evaluating the implementation of the original GPRA’s strategic and annual performance planning requirements including various pilot provisions. For example, by evaluating agency plans during a pilot phase, we were able to offer numerous recommendations for improvement that led to more effective final plans. We further supported implementation by reporting on leading management practices that agencies should employ as they implemented GPRA. It is worth noting that much of our work on government performance has been conducted at the request of the Committee on Homeland Security and Governmental Affairs and your two subcommittees, showing a sustained commitment to ensure GPRA was effectively implemented. Similarly, GPRAMA includes provisions requiring GAO to review implementation of the act at several critical junctures, and provide recommendations for improvements to implementation of the act. First, following a period of initial implementation, by June 2013, GAO is to report on implementation of the act’s planning and reporting requirements—at both the governmentwide and agency levels. Subsequently, following full implementation, by September 2015 and 2017, GAO is to evaluate whether performance management is being used by federal agencies to improve the efficiency and effectiveness of agency programs. Also in September 2015 and 2017—and every 4 years thereafter—GAO is to evaluate the implementation of the federal government priority goals and performance plans, and related reporting required by the act. Looking ahead, a number of other required recurrent reports will help to inform Congress about government management and performance. For example, GAO has an ongoing statutory requirement to report each year on federal programs, agencies, offices, and initiatives, either within departments or governmentwide, which have duplicative goals or activities. In addition, each year GAO reports on its audit of the consolidated financial statements of the U.S. government and the condition of federal financial management systems. GAO continues to report periodically to Congress on the adequacy and effectiveness of agencies’ information security policies and practices and other requirements of the Federal Information Security Management Act of 2002. Additionally, the Presidential Transition Act of 2000 identifies GAO as a source of briefings and other materials to help inform presidential appointees of the major management issues, risks, and challenges they will face. During the last presidential transition, we identified for Congress and the new administration urgent issues and key program and management challenges in the major departments and across government. Finally, GAO reports to each new Congress on government operations that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for broad-based transformation to address economy, efficiency, or effectiveness challenges. In conclusion, everything must be on the table as we address the federal long-term fiscal challenge. While the long-term outlook is driven on the spending side of the budget by rising health care costs and demographics, other areas of the budget should not be exempt from scrutiny. All areas should be reexamined in light of the contributions they make to achieving outcomes for the American public. If programs are overlapping, fragmented, or duplicative, they must be streamlined. Programs and management functions at significant risk of waste, fraud, and abuse must be corrected. GPRAMA provides the administration and Congress with new tools to identify strategies that are achieving results as well as those that are ineffective, duplicative, or wasteful that could be eliminated. GAO stands ready to help Congress ensure that the act’s promises are met. Thank you, Chairmen Akaka and Carper, Ranking Members Johnson and Brown, and Members of the Subcommittees. This concludes my prepared statement. I would be pleased to answer any questions you may have. For further information on this testimony, please contact Bernice Steinhardt, Director, Strategic Issues, at (202) 512-6543 or [email protected]. Key contributions to this testimony were made by Elizabeth Curda (Assistant Director), and Benjamin T. Licht. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Agency quarterly priority progress reviews, consistent with the requirements of the act, begin for the goals contained in the Fiscal Year 2011 Budget of the United States Government. OMB publishes interim federal government priority goals and prepares and submits a federal government performance plan consistent with the requirements of the act. Agencies adjust their current strategic plans, prepare and submit performance plans, and identify new or update existing agency priority goals to make them consistent with the requirements of the act. Agencies make performance reporting updates on their fiscal year 2011 performance consistent with the requirements of the act. OMB begins federal government quarterly priority progress reviews. OMB launches a single governmentwide performance website. Full implementation of the act with a new strategic planning cycle. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The federal government is the world's largest and most complex entity, with about $3.5 trillion in outlays in fiscal year 2010 that fund a broad array of programs and operations. GAO's long-term simulations of the federal budget show--absent policy change--growing deficits accumulating to an unsustainable increase in debt. While the spending side is driven by rising health care costs and demographics, other areas should also be scrutinized. In addition, there are significant performance and management challenges that the federal government needs to confront. GAO was asked to testify on the Government Performance and Results Act (GPRA) Modernization Act of 2010 (GPRAMA), as the administration begins implementing the act. This statement is based on GAO's past and ongoing work on GPRA implementation, as well as recently issued reports (1) identifying opportunities to reduce potential duplication in government programs, save tax dollars, and enhance revenue; and (2) updating GAO's list of government operations at high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement, or the need for transformation. As required by GPRAMA, GAO will periodically evaluate implementation of the act and report to Congress on its findings and recommendations. GAO's past and ongoing work illustrates how GPRAMA could, if effectively implemented, help address government challenges in five areas: Instituting a more coordinated and crosscutting approach to achieving meaningful results. GPRAMA could help inform reexamination or restructuring efforts and lead to more effective, efficient, and economical service delivery in overlapping program areas by identifying the various agencies and federal activities--including spending programs, regulations, and tax expenditures--that contribute to crosscutting outcomes. These program areas could include numerous teacher quality initiatives or multiple employment and training programs, among others. Focusing on addressing weaknesses in major management functions. Agencies need more effective management capabilities to better implement their programs and policies. GPRAMA requires long-term goals to improve management functions in five key areas: financial, human capital, information technology, procurement and acquisition, and real property management. GAO's work has highlighted opportunities for improvements in each of these areas and aspects of all of them are on the GAO high risk list. Ensuring performance information is both useful and used in decision making. Agencies need to consider the differing needs of various stakeholders, including Congress, to ensure that performance information will be both useful and used. For performance information to be useful, it must be complete, accurate, valid, timely, and easy to use. Yet decision makers often do not have the quality performance information they need to improve results. To help address this need, GPRAMA requires (1) disclosure of information about accuracy and validity, (2) data on crosscutting areas, and (3) quarterly reporting on priority goals on a publicly available Web site. Sustaining leadership commitment and accountability for achieving results. Perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders, as shown by their personal involvement in reform efforts. GPRAMA assigns responsibilities to a Chief Operating Officer and Performance Improvement Officer in each agency to improve agency management and performance. Engaging Congress in identifying management and performance issues to address. In order for performance improvement initiatives to be useful to Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. GAO has previously noted the importance of considering Congress a partner in shaping agency goals at the outset. GPRAMA significantly enhances requirements for agencies to consult with Congress. |
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